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SECURE Act 2.0: next steps for retirement legislation
next issue no. 7: Fiduciary perspective
The Setting Every Community Up for Retirement Enhancement Act of 2019 (hereafter referred to as SECURE Act 1.0) was signed into law almost two years ago. It was a significant milestone in cementing the legislative structure around retirement savings and included a number of key provisions that would make it easier for people to achieve lifetime income.
However, as with any piece of legislation, there were provisions that did not make the final cut, and areas where the new legislation opened up areas of inconsistencies that the retirement industry wanted closed. As such, even before SECURE Act 1.0 was signed into law, follow-up legislation was already being contemplated and drafted to continue building that framework and address remaining holes.
System update in progress
In May 2021 the House Ways and Means Committee unanimously approved H.R. 2954, the Securing a Strong Retirement Act, which has been dubbed SECURE Act 2.0. There is also a legislative proposal in the Senate called the Retirement Security & Savings Act, which is seen as the partner to the House bill.
For those who are not familiar with the Washington D.C. legislative process, it should be known that it is not uncommon for law to be generated in such a way. Varying members of the House or Senate take on the responsibility for drafting new legislation and walking it through various relevant committees, before passing the bills on the floors of the respective chamber. The draft legislation then goes into a process whereby the two varying drafts become one final proposed piece of law, before being voted on one final time and going off to the White House for the President’s signature (or veto).
Around 30 provisions overlap between the two drafts, but many more do not. Thankfully, retirement is one area where the usual partisan political process falls somewhat by the wayside and despite the lack of overlap, almost all of the provisions between the two bills have bipartisan support and are considered noncontroversial. For example, SECURE Act 1.0 passed in the House by a vote of 417-3 in May 2019. The House bill was passed by the Ways and Means Committee unanimously, underlining that point, and the Senate bill would be expected to receive similar support.
Yet strong bipartisan support does not translate to swift action. Due to the packed congressional calendar, there are other legislative priorities vying for time on the Congressional floors. This year the President wishes to drive infrastructure spending through Congress, there is an impending scuffle over the debt ceiling, and other priorities always emerge at the last minute. While they were more optimistic earlier in the year, our TIAA Government Relations team now thinks the path to enactment of SECURE Act 2.0 in 2021 is a narrow one. While 2022 is a midterm year, which throws an additional wrench in the works, the bipartisan support for retirement reform should make this less of a hurdle than it could otherwise be in a time of heightened bipartisan obstinacy.
Version 2.0 Fixes
CITs in 403(b) plans
Collective Investment Trusts (CITs) have been available in 401(k) plans for a fairly long amount of time, and much ink has been spilled over the benefits of CITs in those plans. While CITs currently make up over a quarter of the assets in 401(k)s and are set to continue growing, CITs currently remain unavailable in 403(b) plans. The reason is quite simply a regulatory anomaly that goes back a long way. There is no underlying policy rationale for the difference in treatment. It has however taken a long time to get this anomaly fixed. The governing rules are part investment regulation, part ERISA and while initial legislative fixes were first introduced in 2018, little progress has been made since. A provision to fix this differentiated treatment is now in both drafts moving through Congress.
MEPs and PEPs
- MEPs (multiple employer plans): Old-style MEPs, which existed before SECURE Act 1.0 was passed and can remain in place, allow related businesses, such as those in the same industry or region, to band together under one plan.
- PEPs (pooled employer plans): allow unrelated employers that don’t share a common industry or location to participate in a single, shared 401(k) plan.
Increasing access to retirement plans for employees remains critical. SECURE Act 1.0 made some significant improvements to the legislative structure around Multiple Employer Plans (MEPs). Prior to SECURE Act 1.0 MEPs were limited as to the types of employers that could join a MEP, the with the most restrictive limitations being the commonality clause and the ‘one bad apple’ rule. The initial Act removed these restrictions to make it easier for employers to sponsor a retirement plan for their employees.
An extension of the MEP rules, Pooled Employer Plans (PEPs) are a slightly broader category of MEP that allow more unrelated employers to group together to form a plan, as long as it is sponsored by a Pooled Plan Provider. However, 403(b) plans were left out of the original SECURE Act 1.0, and as such are still constricted by the old rules. SECURE Act 2.0 would clarify that 403(b) plans may be maintained as a PEP under the same rules that apply to 401(k) plans even if participating employers share a common interest other than having adopted the 403(b) plan.
Student loans payment provision
Record-level student loan debt can be a major obstacle to saving for retirement. Under current law, a payment made on student loan debt cannot be matched by an employer in terms of retirement savings contributions. The proposed legislation would treat student loan payments as elective deferrals to the participant’s retirement plan. As such, an employer could make matching contributions to the retirement plan as though the student loan repayment had instead gone into a retirement plan. This provision in SECURE Act 2.0 will help younger people build their initial retirement plans at a time when they are otherwise making the most significant contributions to paying down student loans. We all know the benefits of saving early and the compound interest calculations that follow, and allowing employers to make matching contributions at a time when the participant may not have the excess liquidity to do so can provide an early start on building that retirement nest egg. This combined with the provision for employers to auto-enroll new employees in retirement plans could have a significant impact on those all-important early years of savings.
Increase in the RMD age
Increased longevity has major implications for retirement plan design. SECURE Act 1.0 established that Required Minimum Distributions (RMD) must begin by the age of 72. Prior to the original Act passing, the RMD age was 70 ½ years old. The current drafts for SECURE Act 2.0 continue the trend of raising the RMD age, but they take slightly different approaches. The House bill raises the RMD age by single-year increments at various stages over the 10 years following the bill becoming law, up to 75 years of age beginning in 2032. The Senate bill, however, simply looks to year 11 after the statute is passed, and raises the RMD age to 75 in a single leap. However, the impact should be relatively minimal on retirees, as some 80% elect to take more than their RMD amounts. But for the 20% remaining, the additional time allows for additional planning and asset growth.
Higher catchup limits
Under current legislation, workers that are at least 50 years old can make a number of catch-up contributions to retirement accounts. For 2021 those limits are $6,500 above the $19,500 limit that can otherwise be contributed to a 401(k) or a 403(b) plan. Under the House’s proposal workers between the ages of 62 and 64 would be able to contribute an additional $3,500 to their plan, making the catch-up contribution limit $10,000 above the $19,500 for each of those three years. The draft Senate text would simply lift the additional catch-up contributed limit to the $10,000 limit (again above the $19,500 limit) at age 60.
Of note though, in the House bill, all catch-up contributions (participants age 50 and above) must be made on a Roth basis, i.e., after tax. Another Roth provision in SECURE Act 2.0 says that a plan may permit an employee to designate matching contributions as Roth as well. However, as this is on a Roth basis, this is considered a proposal that would actually raise revenue. It would also mean that a plan sponsor offering a retirement plan would have to be able to take Roth contributions. The current version of the Senate bill does not legislate that the catch-ups must be made on a Roth basis.
How this impacts plan fiduciaries
It is critical to have an understanding of these provisions and their potential impacts on your plan today, even prior to legislation passing. Retirement benefits are increasingly viewed as a component of an organization’s benefits package or an employee financial wellness strategy. As employers commence their annual plan reviews, they can work with service providers to understand how they can help implement best practices related to student loan repayments, participant communications and engagement plans, financial wellness tool upgrades and investment vehicle availability. There may even be time to help design offerings that would help meet the specific needs of a plan in order to keep retirement and wellness benefits competitive and best in class, while helping to ensure a smooth transition and compliance once legislation is passed.
In this issue
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A word on risk
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