SECURE 2.0: A Participant’s View
To say that there are a lot of changes to the retirement landscape is an understatement. At BPAS, we're on it!
May 30, 2023
The SECURE 2.0 Act of 2022 (the Act) was signed into law by President Biden on December 29, 2022. To say that there are a lot of changes to the retirement landscape is an understatement. So much so that our resident experts at BPAS divided a blog post into five digestible segments and conducted a webinar to further explain. I highly encourage you to review those blog posts and the recording for a comprehensive view.
I’ve opted to look at the provisions that have the greatest impact on participants, as well as the things that an employer might consider when reviewing some of the features of the Act. I’ve been working with retirement plan participants for over two decades and have been a participant for 25 years, and I’ve been fortunate enough to onboard brand new employees and watch tenured employees retire. I’ve included my take on employee hot topics below.
Your mileage may vary; opinions included here are entirely my own and not those of BPAS. I recommend talking to your Financial Intermediary and/or your BPAS representative for additional details on implementing changes of the Act.
Automatic Enrollment & Escalation
Starting in 2025 or later, an automatic enrollment and escalation schedule is required for any retirement plan created after December 29, 2022. The initial amount must be between 3% – 10% and the escalation requires a 1% or more annual increase until a maximum 15% contribution rate is reached.
When I go to the dentist, the blood drive, or even my hair stylist, I’m always asked to schedule my next appointment when leaving. For me, it’s a convenient way not to forget or procrastinate. I tend to work my schedule around that appointment and reschedule instead of outright cancelling. Automatic features are along the same lines. If an employee gets automatically enrolled, they’re more likely to stay in the plan—and they’re more likely to stick with the scheduled increases. How many of us have something on our to-do list that just keeps getting pushed to the back as other priorities come in? As much as I’d love retirement accounts to be someone’s number one priority, that’s usually not the case. And in this circumstance, it works to the employee’s advantage – they’re more likely to start and continue saving.
From an employer standpoint, a hard part of activating automatic features is the concern that it’s too paternalistic, that it will upset employees. While I understand that you care about your employees, keep in mind that getting them started on their retirement journey is also a caring consideration. I’ve talked to thousands of employees during my career so far. In that time, I had just one employee complain about me and his employer “taking his money.” One! And, after helping him look at his paycheck and his recent statement, he not only remained in the plan, he increased his contribution amount! If an employee really doesn’t want to contribute or have the automatic increases occur, they’ll access their account and update accordingly. But human behavior means that the majority of participants are likely to just let the changes ride and it works out to their advantage when they retire with a healthy account balance. If you are considering implementing automatic features, plan for a few dropouts—and plan for a few complaints. Don’t let that derail the strategy for the larger employee population that wants to save and just needs that push to get started. And, even if your plan is established and not impacted by the 2025 change, consider making automatic enrollment, escalation and re-enrollment features a priority.
Additional Incentives to Save
The Act also incorporates additional provisions to make saving more attractive to employees. A saver’s match (not credit), optional emergency savings account, and accessibility for long-term, part-time employees may draw additional participants. Beginning in 2024, the optional feature for employees repaying student loans to be eligible for employer matching contributions can be a game changer for those trying to balance both debt and saving.
It may seem silly, or inconsequential compared to the other incentives, but one of the immediate provisions you can implement is a small incentive to participate. And I kind of love it! As consumers, don’t we gravitate to the item with 20% more for free? If you’re shopping at Costco on the weekend, you know that the logjam at the end of the aisle is a sample! People like free—and people like money. As an employer, a way to spin this might be a small gift card to encourage enrollment in the plan or a stepped-up contribution. If a one or 2% increase in an employee’s contribution is $20 more out of their paycheck and their employer is giving them a $20 gift card, that first payroll contribution could be a wash. And the best part? No need to overthink or amend your plan for this incentive.
Required Minimum Distributions (RMDs)
If you’ve ever talked to a very young child, or a very old adult, they might tell you their age in fractions. “I’m not 4, I’m 4 and a half!” my neighbor told me, offended by presumption that he was so young. Similarly, once my great-aunt hit her late 90s, every three months was a milestone: 98 ½, 101 ¼; we were fortunate to have her with us for 106 and ¾ years.
It used to be that there was a third party to these fractional years – the government. For years, investors in retirement accounts had to start taking required minimum distributions at age 70 ½. With the SECURE Act of 2019, legislation added a nice, even age of 72 to the mix. Now, SECURE 2.0 has again updated the RMD charts to include ages 73 and 75. Confused yet? Because I am. Fortunately, one of our BPAS educators, Kate Meiman, took the complicated and broke it down into two easy to understand videos that you can view and share with your participants.
WATCH: Required Minimum Distributions and RMD Considerations
Let’s talk Roth!
SECURE 2.0 included a lot of updates to the Roth.
Beginning next year, Roth balances held in a Workplace Retirement Plan will no longer be subject to Required Minimum Distributions (RMD). This eliminates the previous strategy of contributing to a Roth 401(k) or Roth 403(b) and then transferring to a Roth IRA upon retirement, a completely legal, yet tedious way to avoid RMDs on those Roth balances. Now, terminated participants will have the opportunity to remain in the plan if they prefer the investment options, or at least not have the time crunch of completing a transfer before they reach RMD age. In addition, employer matching contributions can now be made to the Roth and are the required method for catch-up matches.
All of this is great news for the savvy participants, as it broadens their opportunity to capitalize on a tax-efficient savings strategy that works for them. But for the majority of participants, all of this Roth talk doesn’t mean much because they don’t understand the Roth. Between different rules and regulations for Roth IRAs and Roth contributions in a Workplace Retirement Plan, to the instant gratification of getting a tax break now, to the concern that the government will pull out the rug and change the taxation, there’s still apprehension about the Roth. People don’t like new things, especially if they don’t understand them. And while Workplace Retirement Plans have been around since the late 70s and the Roth feature isn’t universal, it’s still an option. If your plan does not have a Roth feature yet, I’d encourage you to talk to your Financial Intermediary and your BPAS representative about adding it. With little education or information about it, you’ll see a few employees trickle in, whether out of curiosity or based upon conversations with a financial or tax professional. By increasing awareness and education on the feature, you may see even more traction. And, having a Roth component to your plan is a subtle way to let participants know that you are staying up-to-date with plan features and enhancements.
SECURE stands for Setting Every Community Up for Retirement Enhancement and SECURE 2.0 is really stepping up to the plate to make retirement savings affordable and convenient for all. There’s still a lot to navigate, from understanding and implementing all of the changes. At BPAS, we’re on it. Committees have been established to ensure a seamless transition for the changes that require plan amendments, system programing and more. On the participant front, the Participant Education team is working on communication pieces for the components that impact participants. Check BPAS University periodically for videos, articles or flyers that help clarify complex topics for your employee audience.