The New Finance Of Longevity

SECURE 2.0 and the Future of Retirement Saving

Advancing a new focus on building a ‘strong retirement’

by Tim Walsh

Mr. Walsh is Senior Managing Director with TIAA. Visit www.tiaa.com

To further enhance Americans’ retirement security following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, the House Ways and Means Committee recently voted to send the bipartisan Securing a Strong Retirement Act to the full House for a vote. While there continues to be interest from both Democrats and Republicans (including in the Senate, where another comprehensive retirement reform bill was recently reintroduced) in passing the bill and further improving Americans’ retirement security, Congress’ very full agenda makes it unclear how quickly they’ll be able to do this. This momentary lull, however, can be used as an opportunity for plan sponsors to re-familiarize themselves with elements of both the SECURE Act of 2019 and the Securing a Strong Retirement Act, known informally as “SECURE 2.0.”

COVID-19 Impacted Likely Plan Sponsors’ Familiarity with the SECURE Act

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019, just months before the COVID-19 pandemic hit. This meant that as plan sponsors got up to speed on how the legislation would impact their retirement plans and lifetime income strategies for 2020, many were required to quickly shift their attention more to navigating the immediate economic impact of the pandemic and helping their plan participants meet day-to-day financial needs.

As a result, just half of plan sponsors now say they are familiar with the SECURE Act and its specific provisions, according to the 2020 TIAA Retirement Insights Survey (view here). This includes understanding provisions that can improve access to guaranteed lifetime income solutions – solutions like annuity safe harbor protections, annual lifetime income disclosure requirements, and the provision that allows for the portability of annuities for participants – something that most plan sponsors say they want their plans to include.

While this dip in awareness is understandable following such a challenging year, there is a surging interest in guaranteed lifetime income in retirement. According to the same survey, nearly half of all plan sponsors say the passage of SECURE Act of 2019 increased their interest in offering in-plan guaranteed lifetime income options, and both plan sponsors and participants now view their retirement savings as more than an accumulation vehicle for getting to retirement. Further, plan sponsors who currently offer access to guaranteed lifetime income options consider them highly valuable for employees (86%) and think the average employee would be interested in a lifetime income annuity.

A Retirement Plan Review

With a renewed focus on helping participants reach their long-term savings goals through increased access to lifetime income products, plan sponsors should assess the impact SECURE 2.0 will have on their plan designs.

Review your plan’s default investment options:
 While 8 in 10 plan sponsors say they are satisfied with their current default investment option, 52% said they were satisfied, but also open to new options to replace it. Plan sponsors should think about the default and auto features that can fight inertia and help participants clearly understand the implications for their savings, which can improve retirement outcomes. Given that 60-80% of plan flows go to the TDF, the default decision is arguably the most important fiduciary decision.

Consider adding Target Date Funds (TDFs) with lifetime income options:
 Eighty-four percent of plan sponsors who offer TDFs say they are extremely or very satisfied with them, and 79% say they are satisfied with their current default investment option. However, 77% of plan sponsors would be extremely or very interested in a product if there was a new type of TDF that as the target date gets closer would start allocating assets into an investment that provides plan participants with the option to receive guaranteed lifetime income anytime—typically at retirement.

Add lifetime income disclosures: 
A large majority (84%) of plan sponsors believe an annual lifetime income disclosure is a good idea, and 77% believe that it will increase employee interest in acquiring in-plan guaranteed lifetime income. Enabling participants to have adequate income in retirement is the biggest influence on plan design (34%).

Congress should work to expedite the passage of SECURE 2.0, but in the meantime, plan sponsors have a unique opportunity review their current plan designs and get up to speed on the legislative provisions...

Get to know the specifics of SECURE 2.0

Once plan sponsors have reviewed the elements of their current plans and have implemented the provisions created by the SECURE Act, they should begin to familiarize themselves with the new provisions pending the passage of SECURE 2.0.

  • SECURE 2.0 will expand auto-enrollment and auto-escalation policies and increase participation incentives

Under the new provisions, participants will be automatically enrolled in their employers’ available savings plan at a 3% rate when a new plan is created. Those contributions will increase by 1% each year until they reach 10%.

This provision, specifically, may come as a shock to some as less than less than half of plan sponsors currently offer auto-enroll to their employees and 43% auto-escalate their participants’ contributions. Further, participants don’t always recognize that they are auto-enrolled or auto-escalated; 44 % say they were auto-enrolled into their savings plan, but just 28% say their employer auto-escalates their contributions.

Not only will plan sponsors need to understand how this provision impacts their current plan, but they will also need to clearly communicate the changes to their participants. In addition to auto-enrollment, plan sponsors will also be able to encourage increased participation in savings plans through financial incentives. Beyond matching employees’ contributions, employers will now be able to provide small gifts or benefits to make participating in their retirement plans more appealing.

  • Participants can continue to build their savings later in life

Workers ages 50 and older can currently make annual “catchup” contributions of an additional $6,500 to their 401(k) and 403(b) retirement accounts. Under SECURE 2.0, these “catch up” contributions will increase to an additional $10,000 to eligible savings plans for participants between 62 and 64 years old.

Much like the SECURE Act of 2019, SECURE 2.0 will also raise the age for taking required minimum distributions. SECURE 1.0 raised the RMD from 70.5 to 72. As proposed, over the next decade, the age will gradually increase to 75. This will give participants more time to grow their retirement savings accounts tax-free, assuming they do not delay their withdrawals. The bill also proposes decreasing the penalty tax for failing to take an RMD from 50% to 25%.

  • Barriers to lifetime income are being removed

There are several provisions in SECURE 2.0 that would address certain regulations that sometimes hinder the ability of individuals to take lifetime income. While these changes are generally technical in nature, we believe they’ll go a long way in improving access to guaranteed income in retirement.

  • Rules on CIT participation will be loosened

While most defined contribution plans, such as 401(k) and 401(a), have been allowed to offer collective investment trusts (CITs) on plan menus, most 403(b) plans have been unable to offer these investments. SECURE 2.0 would expand access to CITs for 403(b) plans and, therefore, expand investment opportunities to the largest providers of 403(b)s — public school systems, universities, and hospitals.

  • Helping modernize and streamline plan administration

There are several provisions in SECURE 2.0 that would help plan sponsors by simplifying and modernizing plan administration. This includes, but isn’t limited to, consolidation of notices, requiring relevant federal agencies to review reporting and disclosure requirements, and eliminating unnecessary plan requirements for unenrolled participants.

  • Helping younger people save sooner for retirement while they pay off debt

Student loan debt has had a crippling effect on millions of Americans, often forcing them to weigh their immediate financial needs against longer-term savings goals. This means that many are not contributing to their plans or reaching their employers’ match. SECURE 2.0 will allow employers the ability to match employees’ student loan payments and contribute that money to a retirement savings account, even if the employee is not currently contributing. They will vest under the same schedule and provide the employee with a head start on their long-term savings as they pay down their student loans.

Congress should work to expedite the passage of SECURE 2.0, but in the meantime, plan sponsors have a unique opportunity review their current plan designs and get up to speed on the legislative provisions – ones both currently in place and pending – that can enhance Americans’ retirement savings.