The federal government’s omnibus spending bill passed in the closing days of 2022 includes the final version of the Securing a Strong Retirement Act of 2022, known as Secure 2.0.
Plan sponsors now have important new tools and more encouragement to make defined contribution (DC) plans retirement savings vehicles, providing common-sense solutions which address the obstacles that continue to inhibit saving for and producing income during retirement, such as limited contribution levels, and minimum distributions that depleted savings too quickly.
What the bill does
SECURE 2.0 builds on the momentum of the SECURE Act of 2019 and the Pension Protection Act of 2006 and will undoubtedly help more Americans save for retirement and increase their confidence in achieving their overall financial goals.
Key provisions include:
- Most new 401(k) and 403(b) plans will be required to automatically enroll participants
- 403(b) plans can participate in multiple employer plans and invest in collective investment trusts
- Employers can now match employee payments of student loans with employer contributions to the retirement plan
- “Catch-up” rules for older participants and required minimum distribution requirements have been revised
- Creation of a national online database of lost retirement accounts to reduce the number of missing participants
- Changes to qualified longevity annuity contracts, or QLACs, by removing the 25% cap — currently, retirement savers can spend up to 25% of their account on a QLAC
These provisions will help more Americans save for retirement and increase their confidence in achieving their overall financial goals.
Making DC plans more effective
For a long time, DC plans needed more regulatory support to be an effective vehicle for wealth accumulation. When the Employee Retirement Income Security Act (ERISA) 1974 passed, DC plans were viewed as “supplemental” to more traditional defined benefit pension plans. However, they quickly evolved to be the primary way Americans working for private employers accumulate wealth for retirement.
Unfortunately, the regulatory framework provided few tools for plan sponsors to enhance DC plans to function as the primary retirement savings vehicle. Contributions were limited, plan sponsors did not have a safe harbor to default participants into a risk-bearing strategy, such as an age-appropriate target date fund, and investments that may not have been suitable for primary retirement wealth accumulation were often the largest investments in the DC plan – these included company stock and stable value funds, both of which were more suitable as large investments in supplemental savings plans.
This changed with the enactment of the Pension Protection Act of 2006 (“PPA”). Among other things, PPA allowed plan sponsors to default participants into suitable risk-bearing retirement savings funds and provided support for “auto” features, such as auto-enrollment and auto-escalation, that can be designed to encourage participation and improve savings rates. Today we recognize that these tools are essential for building adequate retirement savings.
The Secure Act of 2019 built on the PPA Act by improving safe harbors for small businesses to participate in DC plans that are less expensive and may be easier to administer, extending the age for required minimum distributions, and allowing 401(k) plans to offer annuities. These changes further improved the potential for defined contribution plans to provide many participants with the tools to accumulate sufficient retirement savings and a stable source of retirement income.
What’s next for plan sponsors?
SECURE 2.0 continues the focus on making DC plans work well as the primary way people accumulate wealth for retirement. Notably, the Act strongly encourages plan sponsors to adopt and use these important tools by requiring most new plans to include auto-enrollment as the default.
Plan sponsors will now have more freedom to enhance retirement savings and distribution. Some examples include:
- Allowing employer contributions to a 401(k) plan to be made in the form of non-elective contributions as opposed to matched employee deferrals
- For participants paying off student loans, making a 401(k) plan “matching” contribution that is based on student loan repayments
- Increasing savings rates by adjusting the auto-increase formula to a higher level, helping plan members meet the level needed to accumulate sufficient retirement savings.
- Adding lower-cost annuities to the plan or other income features that serve differing participant needs for retirement income?
While some of the provisions are discretionary rather than mandatory, plan sponsors have a vested interest in making DC plans work better so their members can accumulate wealth for retirement and enjoy a stable source of income in retirement. A competitive total rewards program that offers employees the tools to retire with reasonable financial security makes good business sense. Employer sponsored retirement plans are perceived as a valuable employee benefit. Now, depending on the needs of participants and sponsors, DC plans can expand their range of choices and include customizable options based on the changing needs of both sponsors and participants.
Next frontier: Removing inequities
According to the U.S. Department of Labor, over $545 billion in new investments went into private defined contribution plans in 2020. This was in addition to almost $7.8 trillion already invested in these plans. Secure 2.0, along with the regulatory reform that came before it, recognizes that these plans are the primary way that most Americans who are in a retirement plan are saving for retirement.
The next frontier is for plan sponsors to adopt the tools and strategies that are now available to help design and implement defined contribution plans that will meet the needs of participants to accumulate sufficient wealth to retire in comfort and to stable and predictable income in retirement. These include strategies for maximizing participant enrollment, encouraging adequate savings rates, and having savings and distribution options that meet the needs of a broad variety of plan participants. They also require plan sponsors to maintain a consistent effort and commitment to adopting engagement, enrollment, and communication strategies that encourage broad participation in the DC plan.
This new regulatory support should help more Americans accumulate adequate savings for retirement, which may result in stable and predictable income in retirement.