There is so much energy and momentum in the retirement and savings industries right now. As SECURE 2.0 was officially signed into law, there is a lot to unpack. With so much “goodness” wrapped in there, distilling the impact and opportunities for advisors to support their small business clients will take some time.
Below are six key provisions and their expected impact on the industry. Please note that all provisions are summarized for brevity. Please refer to the Act for clarification and specificity.
1. Increased tax credits
Small businesses with less than 50 employees may be eligible for tax credits as much as $50,000 in the first year. That’s a huge credit, and essentially makes this plan “free” for the employer. The new tax incentives create a “no-brainer” decision, at least from a financial perspective, to offer a solution, and an easy discussion for advisors and a new opportunity to engage and prospect with employees. NOTE: Make sure your preferred platform provider is able to share plan data with you so that you can add the most value for your employer client and its employees. After all, a key reason to offer a retirement plan in the first place is to facilitate financial wellness for individual workers and advisors should be part of those conversations.
2. Required auto-enroll and auto-escalate
New defined contribution plans are required to automatically enroll employees once they become eligible to participate in the employer’s retirement plan. These employees would be enrolled with a 3% pre-tax contribution that gradually increases by 1% each year, up to at least 10% but not more than 15% of the employee’s earnings. Employees can opt-out of participation before they become eligible or within the first 90 days. When employees are auto-enrolled, industry studies confirm that plans have nearly double the national participation rate as compared to plans without that feature. Adding an automatic escalation provision helps workers save more, and more quickly accumulate retirement savings. This not only helps engagement and the broader savings rate, but makes new startup 401(k) and 403(b) plans more attractive for financial advisors. NOTE: Modern recordkeepers built on advanced technology can implement these changes with ease. If your preferred provider is unable to quickly make these changes, it may be time to evaluate other options.
3. Student loan repayment matching
We all know Americans carry a lot of debt, and education expenses make up a significant portion of that. As someone who put myself through undergraduate and graduate school, I completely relate to being burdened by large student loans for many years. The No. 1 reason people don’t save is their distress around debt. This new provision allows an employer to match its employees’ “qualified student loan payments,” helping to relieve that stress. Along the theme of education, the new Act allows the remaining balance in 529 accounts to be rolled into a Roth IRA. Another win for savers and advisors. NOTE: Make sure the student loan tool used by you as the advisor, the employer, or the platform provider can provide the necessary reporting needed to adhere to the mandate obligations and not make testing and tax filing a challenge.
4. Inclusion of part-time employees into a retirement plan
Recognizing workplace trends around employees working part-time while handling various family obligations, SECURE 2.0 expands access to workplace retirement plans by allowing part-time employees who work more than 500 hours in two consecutive years to participate in a plan without impacting top-heavy rules. NOTE: Complying with this rule may be difficult for legacy providers to track eligibility due to their technical capabilities, so make sure your provider can handle this change.
5. Starter-K option for employers not offering a 401(k) or 403(b) today
Employers that do not have a 401(k) or similar workplace retirement plan can offer a simplified Starter 401(k), which functions similar to a payroll-deduction IRA with the same contribution cap limits. It also includes the auto-enrollment feature we see in many of the state-sponsored IRA Secure Choice programs Vestwell powers today. It’s a great way for an advisor to have their employer client “dip a toe in the water” if they are uncertain about offering a 401(k) or 403(b), while getting more employees saving faster.
6. Increasing ABLE eligibility
I’d be remiss if I didn’t mention the new provisions expanding the age for ABLE-eligible savers from 26 up to 46 years old. That now opens up tax-preferred savings opportunities to another six million people in the country. This is an incredible initiative sponsored by the state governments to help families and individuals with disabilities to relieve the high-cost burden of necessary and medical expenses. It’s our job to help and care for each other. It may not be the most lucrative savings account for advisors, but it’s one of the most impactful.
There is a lot more we can further unpack in the SECURE 2.0 Act, but on the whole, this newly passed bill has the opportunity to positively impact more financial lives than anything we’ve seen in decades. Data shows that employers and employees are actively seeking advice from financial advisors. These largely underserved segments create a rapid growth and expansion opportunity for advisors, while helping close the savings gap across the country.
SEE ALSO:
• A Guide Dedicated to Those Excited for SECURE 2.0, But Don’t Know Where to Start
• New Outline of SECURE 2.0 Provisions Offers Guidance for Plan Sponsors
• Ubiquity CEO Comments on SECURE 2.0 Impact for Small Businesses
• Vestwell CEO Aaron Schumm on Who Owns the Participant and What’s Next for Recordkeeping