Compliance January 24, 2024

SECURE 2.0’s Auto Enrollment, Savers Match Will Bring Most Positive Impact

Research from EBRI forecasts the two features will do more for retirement savings than other provisions.

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Preliminary research from the Employee Benefit Research Institute says that the SECURE 2.0 Act of 2022 will bring modest benefits for those approaching retirement but will have a larger impact on younger workers. The report also found that the automatic enrollment and saver’s match provisions will have the largest positive effect on retirement security nationally.

The research findings were presented Tuesday by Craig Copeland, EBRI’s director of wealth benefits research, at the 2024 Retirement Symposium hosted by EBRI and the Milken Institute. The full research report is expected by mid-March.

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SECURE 2.0 requires all plans started after December 29, 2022 to automatically enroll their participants at a savings rate of between 3% and 10% of pay, unless they opt out or elect a different contribution, starting in 2025.

In 2027, savers with an income below $20,500 or $41,000 for married couples qualify for a 50% match to their individual retirement account or an eligible workplace plan from the federal government up to a maximum match of $1,000. The income thresholds will adjust for inflation beginning in 2027. The match is cut gradually until an individual has income of $35,500 or $71,000 for married couples to prevent a sudden loss of the match. The saver’s match replaces the saver’s credit.

EBRI’s research says these two provisions will likely have the most effect on retirement security for American workers, a key goal of SECURE 2.0. Copeland explains that these provisions are uniquely powerful at bringing more low-income people into the retirement system. The saver’s match “helps the most vulnerable group contribute more savings” by matching their contributions, and this match can be in addition to an employer match.

Copeland adds that low-income workers are “far more likely to participate with automatic enrollment.”

Younger vs. Older

EBRI’s research also shows that SECURE 2.0 will have much greater impact on today’s younger workers. Copeland explains that this is because the benefits of the legislation will need time to compound, and younger workers have time on their side.

In addition, the automatic enrollment provision does not apply to plans that existed at the time SECURE 2.0 was passed, which means this powerful provision does not apply to most plans that currently exist.

Over time, as new plans are launched, and as new firms and even new industries are created, this effect of plans grandfathered without auto features will decline in relative impact, Copeland explains, and many plans that were grandfathered in will voluntarily adopt automatic enrollment. Since this process will take time, it will naturally impact younger workers more.

EBRI finds that that workers between the ages of 35 to 39 who are projected to run out of money during retirement would decline by 4.7 percentage points as a consequence of SECURE 2.0, but workers between 55 and 59 would only see theirs decline by 0.1 percentage points.

Further, the average savings deficit for workers age 35 to 39 would decline by 14.4%, EBRI finds, but only 0.3% for those age 55 to 59.

View Points January 24, 2024

State Mandates and the Adviser Opportunity

Retirement plan fiduciaries and providers can benefit from the influx of state mandates, writes AmericanTCS President Tim Friday.

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Qualified retirement plan fiduciaries and providers can feel like they’re on a rollercoaster of regulatory complexity.

Industry mandates constantly evolve. Amendments are made, rules are changed and the retirement plan providers including custodians, recordkeepers, third-party administrators, plan advisers and investment managers must endure the twists and turns. All this is in the name of fiduciary duty to the tens of millions of Americans who contribute to qualified retirement plans.

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Tim Friday

While plans like the 401(k) have only grown in adoption over the years, many employers still shy away from offering a formal retirement plan to employees. Costs, complexity, fear of liability, lack of demand—all of these issues can factor into the decision, but, ultimately, it’s the worker that sits at the disadvantage. A 2022 AARP study found that nearly 57 million people—48% of American private sector employees ages 18 to 64—still do no’t have a retirement plan at work. The situation becomes even grimmer for those workers at smaller companies:  78% of workers at companies with fewer than 10 employees and 65% of those who work in companies with 10 to 24 employees lack access to a plan.

Several states are now stepping in to offer their solutions to rectify the “retirement gap” faced by almost half of American workers. California’s CalSavers is just one example, but today, at least a dozen states have retirement plan mandates, and it is only a matter of time before the federal government picks up the issue and sets rules of its own.

Rather than simply bracing for impact, retirement plan intermediaries should use this movement as an opportunity to present the right corporate retirement plan option to business owners who are being forced to consider state-mandated plans.

Acknowledge the Benefits

Part of identifying the opportunities presented by state-mandated retirement plans is first understanding how they may benefit American workers. There are certainly upsides that should be acknowledged. After all, any type of retirement savings is better than not having a nest egg, and with automatic enrollment for employees, more people will begin saving for retirement. This may help reduce America’s severe retirement savings gap, which could cost state and federal governments $1.3 trillion by 2040, according to research from the National Conference of State Legislatures.

While at the highest level, state-mandated plans allow employees to save for retirement even if they work for a company that does no’t offer a traditional plan, there are several other benefits. Plan portability, cost-effectiveness and regulatory oversight are just a few more of the potential advantages.

That’s not to say there are no flaws.

Know the Drawbacks

Employees enrolled in a state-mandated retirement plan are often limited in their investment options and could see lower returns as a result. They also do not reap the benefit of employer contributions, a substantial missed opportunity over time.  

Additionally, there are several drawbacks for employers who relegate employees to state-mandated plans. For starters, employers do no’t get the tax benefit of setting up a qualified retirement plan and deducting the expenses associated with creating and maintaining it. At the same time, employers are still on the hook to help pay for the administrative costs and participate in day-to-day plan management.

In fact, if an employer opts for a state-run plan like CalSavers, it would essentially be committed to a similar amount of work as when offering an employer-sponsored retirement plan. It would be solely responsible for processing payroll contributions, updating contribution rates and adding newly eligible employees.

It is important to note that even though an employer can limit certain fiduciary liability when participating in some state plans, it should be cautious and know that it may be subject to a state’s penalties for noncompliance with that government’s requirements. Employers also miss out on a very valuable recruiting and retention tool when they do not sponsor a retirement plan.

Educate Your Audience

The opportunity here is for plan advisers, providers and administrators to leverage this wave of state mandates to educate businesses on why they should sponsor a plan of their own. Use these mandates as a reason to reach out to clients and potential clients. It can be a retention tool or a smart tactic when earning new business. Walk clients through the intricacies of the state-mandated plans, as well as the benefits of sponsoring their own. They may quickly see the advantages.

As state-mandated retirement plans like CalSavers continue to proliferate, it is only a matter of time before they, in some shape or form, impact all Americans. Plan advisers and providers are missing out if they are not getting ahead of this trend.

These practitioners should be connecting with businesses to let them know they have two choices when it comes to giving their employees access to a qualified retirement plan. They can either form their own, understanding that yes, it’s going to cost time and money to administer, or they can be compelled into supporting a mandated plan that may not suit their needs, nor provide them with the boons associated with offering an employer-sponsored option. No tax benefits, no recruiting tool, no control.

There’s never been a more critical time for plan advisers and providers to have these conversations with clients and potential clients. Embrace the regulatory twists and turns and take advantage of this stretch of the coaster.

Tim Friday is president of AmericanTCS.

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