5 Most Meaningful Provisions of SECURE 2.0

A recent study indicates that 41% of all U.S. households are projected to run short of money in retirement¹. Further, just 72% of private and government workers in the U.S. had access to an employer sponsored retirement plan in 2021, with participation rates as low as 56% for combined private and public workers—and much lower (22%) for all part-time workers.² 

While there may be an expectation that individuals without a workplace sponsored retirement plan typically rely on individual retirement accounts (IRAs) for retirement savings, another recent study indicates otherwise, estimating that 7% of US households have only an IRA and just 30% have an IRA plus a workplace sponsored retirement plan.³ 

These concerning statistics require bold action from our elected officials in order to strengthen the retirement system in the U.S. Fortunately, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 introduced several innovations aimed at minimizing inequities related to retirement savings. As a follow on, SECURE 2.0 was signed into law in December 2022, taking additional steps to help broaden access to, and improve savings opportunities in, the existing retirement system.

While there are over 90 provisions in SECURE Act 2.0, Northern Trust Asset Management has identified what we believe are the top five most meaningful provisions that seek improved access to workplace sponsored retirement plans, as well as help improve engagement and savings. These “Top Five” are summarized below:

1. Mandated auto-enrollment of participants into new  401(k) and 403(b) plans, and the grandfathering in of participants in existing plans, seeks to improve participation and increase savings (participants can always opt-out but inertia typically keeps people in).
2. The treatment of student loan debt payments as elective deferrals for purposes of capturing the matching contribution removes the difficult decision for many student debt loan payers of whether to make a loan payment or contribute to their plan to capture the employer match. In the past, this decision has resulted in many participants missing out on the company match.
3. An updated provision allows workers with just two consecutive years of service, at 500 hours per year, to obtain access to their workplace retirement plan, improving access for the large, part-time workforce across America. We believe this will improve the lack of access and uptake for part-time workers, especially, in workplace sponsored retirement plans. Additionally, this is a marked improvement over the prior requirement for part-time workers to complete three years of service before access to a workplace retirement plan was granted.
4. The removal of the 10% tax on early withdrawals due to certain emergency expenses, of up to $1,000 per year, reduces hurdles to access. As a result, participants may be more likely to start contributing; however, income taxes apply. Additionally, SECURE Act 2.0 offers yet another way to prepare for unforeseen financial emergencies, by allowing participants to save in designated emergency savings accounts. These provisions address the reality of unforeseen emergencies wherein many Americans may not be able to afford the corresponding expense(s).
5. Portability between plans is improved by allowing service providers to provide plan sponsors automatic portability services to effectuate transfers to the employees’ new plan, making it less likely workers will forget about balances left behind when they change jobs.

Summary

These provisions, and numerous others, are key to improving retirement outcomes for millions of Americans. However, we know there is more work to be done. Northern Trust Asset Management believes that our elected officials, with the proper input from interested parties such as plan sponsors, recordkeepers, asset managers and consultants, will continue to search for and provide ways to strengthen the American retirement system and improve the retirement readiness of all American workers.

SEE ALSO:

• 401(k) Specialist SECURE 2.0 Guide

• IRI Wants Virtually All Employees Auto Enrolled into Retirement Plans

SOURCES:

¹https://www.ebri.org/content/retirement-savings-shortfalls-evidence-from-ebri-s-2019-retirement-security-projection-model (March 2019)

²https://sgp.fas.org/crs/misc/R43439.pdf (November 2021)

³https://www.icifactbook.org/pdf/2022_factbook_ch8.pdf (June 2022)

Lee Freitag

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Lee Freitag is the Practice Lead of Retirement Solutions at Northern Trust Asset Management. He is responsible for the development and distribution of investment solutions and research content designed for the institutional and intermediary retirement markets. Lee’s 30 years in the financial services industry include 29 years at Northern Trust. He received a B.S. in finance and an MBA in management accounting from DePaul University. He holds FINRA Series 7 and 63 registrations and is a member of the Defined Contribution Institutional Investment Association (DCIIA) for which he’s currently on the Editorial Review Board and is the immediate past chair of the Global Committee.

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