SECURE 2.0 Insecurities

PLANADVISER: How has SECURE 2.0 affected your business and the retirement plan landscape so far?

Kelli Send: There hasn’t been a huge impact yet, because very little has really happened at this point. The participants who are more engaged with their plan are very interested in the concept of being able to designate employer contributions as Roth. … There’s huge interest in being able to move those employer contributions over into Roth, and that’s one thing that’s supposed to happen this year, but it’s wait and see at this point.

Send: I think we’re hearing about it because participants are interested in it. We’ve been big Roth fans all along. Every single one of the plans we consult on is Roth, and there are some recordkeepers that didn’t get heavily into Roth until recently. Everybody will have to have Roth now, due to the mandatory catch-up requirement [for people earning $145,000 or more]. So we know that’s going to happen. But I think there’s hesitancy among the plan sponsors, because these poor HR [human resources] folks are like, “OK, now it’s one more thing I’ve got to figure out.” So I think there’s a hesitancy in the industry. But I think the participants will generally be interested, and that’s partly because, when you talk about doing a Roth conversion, you’re talking about having to pay tax on a big chunk of money. It feels less painful to do it if it’s just 10 bucks a paycheck.

Dawn McPherson: We’ve hardly had anything go into effect; so much of it is coming next year. But I think that’s exactly what people are feeling right now, which is overwhelmed. … People are trying to sort through, “What do I have to do? What am I going to be required to do versus what’s optional?” So there are multiple layers. [Folks are wondering:] “How do I stay competitive in this current environment we’ve been in with the type of employment market we have and people fighting over good employees? How do we keep ourselves competitive, and what benefits should we be offering?” Then, there are the various effective dates and the staggered timeline. While that’s nice because it gives you a little time, it’s also daunting. So how do you keep track of it?

PLANADVISER: That’s a good segue into the next question, which is: What are some of the biggest concerns with or questions about SECURE 2.0?

Epstein: The first is the long-term/part-time employee provision, which becomes effective in 2024 with the three-year look-back, and then SECURE 2.0 makes it a two-year look-back in 2025. People have to have coverage for long-term/part-time employees, and we need some guidance on some of the details of that. … I’m certainly getting anxious about it, because people have to make decisions about how they’re going to give those long-term/part-time employees plan access. Are you just going to have them on a separate track? You know—at least 500 hours for three consecutive 12-month periods, and, boom, you’re in. But you get no match, no profit-sharing, and we can exclude you from testing. Which raises the question, is it all separate? … If you have them on these two separate tracks, what happens if the employee goes up to working 1,000 hours? Then, I think, they’re in the regular way, but what if they toggle back and forth [in terms of hours worked]? So there are several open questions.

There are also many questions on the mandatory Roth catch-ups for the higher-income people. … Some plans don’t have a Roth money type. Well, they need to add it and to implement the catch-up—there are a lot of questions on that, as well as, “Can you mandate that all catch-ups are Roth?” That question keeps coming up. That’s got to be an IRS answer. I don’t think the statute or the regs get you to “yes” right now.

Then the third area where we’re getting a lot of interest or questions is the provision about matching in the 401(k) plan, the student loan repayments. One question that comes up with almost every committee I talk to: “What about the student loans I have for my kids? Does it have to be the student? I have the loans; I’m on the hook.” I don’t think we have an answer. I can read the statute to say, “Yes, those would count.” But then I read the legislation history, and it doesn’t really seem like that was the intent. So I don’t know the answer, and I think we need guidance on that. Those are three about which I’m definitely getting the most questions.

McPherson: We’ve had lots of questions on catch-ups, on the Roth mandates, on the long-term/part-time workers, and on how onerous many of the administrative duties related to these provisions are going to be. Even some sponsors trying to think through whether they need to hire some additional folks in their HR department. … The other thing that’s come up is whether their payroll provider can accommodate some of the functionality they’ll need because of provisions they’ll be adding; there is much consideration on that front, as well. Will they need to reevaluate providers and add that to their list of time-consuming and administratively onerous functions right now?

Send: That’s exactly what I thought of when this question was posed. Right now, it’s this giant black hole, about which the people who administer these plans are thinking, “How in the world do we do all this? And will my provider be able to do this?”—whether it’s the payroll provider or the recordkeeper. I think the feeling, in general, in the HR circles is, “Oh, man, there’s one more thing I have to be responsible for, and if it’s not going to be me, can the other ones really do it?”

I think, long term, some questions could arise in HR circles as to, “Well, OK among the companies I compete with in the market for employees, for staff, if they add these benefits and I don’t, will our benefits package still be attractive?” I think that’s a long-term question. I can see the HR person saying, “Now, do I have to do this for retention and recruitment, or can I get away with not doing it?”

I’m not at all saying that HR folks don’t want to offer state-of-the-art benefits, but I do think that’s a natural outcome of feeling like this is an awful lot of work for them to take on.

PA: Those are some pain points that need further clarity. How about the areas you’re excited about and see potential to increase retirement savings nationally?

McPherson: I’m excited about the automatic portability provision and the consortium that’s been created in the market to support that. I think it’s really great that we’ve seen some major recordkeepers working together to keep more assets in qualified plans, which ultimately speaks to all of our goals, which is helping people be ready for retirement however that’s defined for them. Any features that make it easier for individuals to contribute, and that increase the amounts they can contribute, are amazing. Then, anything that helps you track it or allows it to follow you—like the DOL [Department of Labor] lost and found, and these things coming into play that not only help to increase participation and the amount people are saving, but also help to prevent those assets from coming out, or just make it a lot easier for individuals to keep track of their accounts—is really beneficial.

Send: One thing I think is a really good, though probably not a key, provision is the fact that now there will be a mandate to at least do an occasional paper statement. It’s really so important, since we meet with so many participants who say, “I used to work at ABC company, 20 years ago, and, gosh, I thought I saved in its plan, but I have no idea where that money is.” … You really hope that that will reduce the amount of abandoned 401(k)s, by having, at least once in awhile, someone getting a form in the mail. Another that I’m excited about, as part of a financial planning team, has nothing to do with qualified plans, but the fact that [the government] will now permit leftover 529 assets to be moved into that individual’s Roth really will knock down that barrier, because a typical barrier for a parent who’s wondering, “What if I don’t need [all the money in it for their college]?” That will help, because it’ll be a wonderful gift that they can take their leftover dollars there. I have to admit, one of my disappointments is that I love this concept of a sidecar emergency savings account, because I think that’s going to help participants put 2% there, and 10% into their 401(k)—the average participant will do that pretty painlessly. I’m kind of bummed that that $2,500 cap is in place because it’s not going to feel like very much. It’s a great start, but it would be nice if they could raise that.

Epstein: I have two things I’m excited about, which are also small but I feel like, for some clients, will move the needle or just make them happy. … One is that you have to send one paper statement a year, which I think is fair and good. But the other that I was very happy to see is that unenrolled participants don’t need to get one. Because we’re sending so many required notices to everyone who has a plan account and everyone who’s eligible, and it’s just a lot of paper we know they’re not reading. … It’s just a waste of paper or email, so I like that.

The other one was that you can have small incentives for plan participation and plan enrollment. Because with plans that don’t have auto[matic]-enrollment, we do get that question a lot: “Can we give them the Starbucks gift card?” … If you can give them something, the $25 or $10 Starbucks or Amazon gift card just might really move the needle on getting those folks to enroll. I was happy to see that, because there was just a regulatory block on doing anything like that, and people always ask about it.

PA: Let’s wrap, then, on some things you’d like to see that aren’t on the table with SECURE 2.0 and, if we dare ask, what a SECURE 3.0 should have?

McPherson: I’d still love some greater expansion to the auto-enrollment for existing plans, because I know they implemented some of these provisions that have affected new plans with automatic features. … There’s always the option for a participant to opt out. But, if every three years, we automatically reenrolled people unless they opted out, I think that would go a long way, in case you forget [to do it].

Send: I’d like to see the kind of clearinghouse concept for recordkeepers to talk to each other to make the distribution process easier. We don’t make it easy, as an industry, to allow folks to transfer money from place to place, and I think that also ties in to that abandoned account thing. … If you’re a 401(k) recordkeeper, the number [of peers] is not infinite anymore, right? There are maybe around 30. If they could all somehow talk to each other to make that transfer process easy, that would be a win.

The other thing is a completely new issue, and I don’t even know if it can be mandated, but it could really improve how folks work with their retirement plans. Right now, especially with the market being lousy, if someone chooses to retain her savings in the corporate retirement plan—which oftentimes is much less expensive than hiring your own wealth manager—if she wants to take money out of the plan, it has to be pro rata across the funds she owns. You can’t do fund-specific withdrawals. Now some do, but it’s a manual process that, again, sits on the shoulders of the HR team, and that’s just not good.

If Kelli were “queen for the day” and could make any changes, it would be to say, “You must allow fund-specific withdrawals from retirement plans.” … It could really reduce the leakage from these recordkeepers and from the actual retirement plan to allow fund-specific withdrawals.

Epstein: One other big thing with SECURE 2.0 that we haven’t talked about is that we have all these new reasons that you can get service withdrawals. There’s really a tension there between all this push for more participation, like the long-term/part-time employees and small businesses and encouraging more plans and more people into plans. But then you can take it out for all these different reasons. … I just feel like we’re giving participants kind of a dual message of, “Put that money away; do not take it until you’re retired,” and, “Oh, by the way, you can get it at any time because you can self-certify hardship.” … All of a sudden, it looks more like a savings account, so your retirement savings is more like an ATM card, and that’s just confusing.