In Practice March 17, 2023

The Financial Wellness Side of SECURE 2.0

Experts at a PLANADVISER webinar discuss how SECURE can push forward more than just retirement savings.

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The original SECURE Act had “retirement enhancement” in the name. With SECURE 2.0 Act of 2022, there are a number of provisions that, if done right, can help participants with many more aspects of their financial lives, according to experts who spoke Wednesday for one of a series of PLANSPONSOR webinar’s on the legislation.

The move by Congress to go into areas such as emergency savings and college debt in some ways mimics the industry, said Kelli Send, senior vice president-participant services, Francis Investment Council. In many conversations her team has with clients, areas of advisement can quickly go beyond workplace retirement plans.

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“On a day-to-day basis, we spend more time talking about outside things than we do the 401(k),” according to Send. “The industry has done a phenomenal job automating the 401(k) side … but what about everything else? And that’s where the American public really needs help these days.”

The legislative moves on the table include allowing unused 529 education savings funds to go into a Roth individual retirement account, allowing employers to permit contributions into emergency savings vehicles, and letting employers match student loan payments with company retirement plan matches.

Honing those programs to work for different pools of participants, both by industry players and regulators, will ultimately determine if they are successful, said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute.

“I don’t think there’s going to be one magic bullet that’s going to help every plan,” Copeland said. “I think some of these things are going to help different workforces better than others, and what we really have to find out is what aspect is helping … and once we get there then I think we can really design plans to be more effective.”

The Rothification of America

One of the biggest mandatory provisions of SECURE 2.0 is that if a person is over age 50 and makes more than $145,000 a year, any catch-up contributions to their retirement plan must be considered a Roth—meaning it will be taxed before going into the account, according to Francis’ Send. What that means, in essence, is that every plan sponsor will have to offer a Roth featurestarting in 2024, and every recordkeeper will have to have the ability to provide it for catch-up contributions.

“If you’re listening to this and you don’t have a Roth provision, it’s really important for you to get to your recordkeeper to have it added, because it will be required,” she said.

Send believes the plan shows that “Congress loves Roth,” in part because the federal government gets the income taxes paid up-front as opposed to waiting for when people are withdrawing from their plans years later. That said, she does see huge benefit for participants.

“I think in general workers should be much more focused on Roth, simply because they’re able to compound their savings completely income tax free, and the younger you are the more powerful that is,” she said.

Another “Rothification” element in SECURE 2.0 is that people who put education savings into a tax-benefitted 529 plan can now send unused money into a Roth that goes to their child. Although it is still subject to Roth rules, it is up to a maximum of $35,000, and will help motivate people to use 529s as part of the more holistic wealth planning, according to Send.

“I think it really eliminates in a large way [any] hesitancy because there is something that they can do with that money, and who wouldn’t want to provide their children a head start toward saving for college as well as a head start to saving for their retirement?” she said.

Emergency Savings

When research group EBRI does employer surveying around financial wellness, the most talked about topics recently have been student loan debt and emergency savings, according to Copeland.

An emergency savings program, especially post-pandemic, is an important element for many participants, and employers, in terms of feeling that they have a safety net should they need it, without having to tap a workplace retirement account.

“Regardless of the economic situation going on out there, there is still a number of families .[that] live paycheck to paycheck,” he said. “So anytime there’s this unusual expense—car breaks down, or something happens to your home—there’s that need for money.”

Copeland said that while an emergency savings account is similar to a hardship withdrawal from a 401(k), it will be easier to access. While this vehicle is allowed in 2024, Copeland suspects it will take some time for the industry to implement it, so the account may not really start being offered in widescale until 2025.

Student Debt

In terms of student loan debt management, employers have been hoping to incorporate student 401(k) plan matching for some time to help with the large debt load across the U.S., according to researcher Copeland.

“They really want to help people on a more full basis on their finances than just focusing on retirement or on paying down student-loan debt, because it really lets you do both,” he says.

With SECURE 2.0, employers will be able to provide retirement plan contributions that match a participant’s student debt payment. Once the details and regulations are worked out, this should offer employers a way to help participants both pay off debt and build retirement savings, as opposed to having to make that difficult decision for one or the other, he says. The one thing that Copeland hopes the option doesn’t create is a trend toward participants not paying into 401(k) plans at all.

Overall, however, he sees the policy as another way SECURE 2.0 will forward general financial health for participants.

“Employers wanted some definite structure on what they can do for people, and Secure has done that for them,” he said.

In Practice March 17, 2023

Principal Continues Focus on Asset Management, ‘Jet Fuel’ of the Business

CEO Dan Houston discusses recent moves furthering the firm's asset management focus.

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Dan Houston

Dan Houston is the head of a $17 billion global company. He is also the kind of CEO that, after an interview, casually hands out his business card as if you might call him later to discuss which income annuity to recommend to your aging cousin.

Houston’s relaxed manner may stem in part from Principal Financial Group’s Des Moines, Iowa roots (though to be fair, he met PLANADVISER shortly after a business trip in the Middle East and Asia). That demeanor may also come from his personal history of joining Principal in 1984 as an insurance sales representative. Or, it could be Houston’s practice of joining his teams for client meetings, both large and small.

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“I think the worst thing you could ever do as a CEO is be holed up in an office and not get out and get your chops busted from time-to-time,” Houston said. “You need to see what your professionals are up against and what the real issues are out there.”

Whatever the reason, Houston’s approach has kept him at the helm as Principal has taken on a dogged push in recent years to focus on three core pillars: asset management, group insurance, and retirement investing services.

In June 2021, the company announced the results of a strategic review in part due to a “cooperation agreement” from its largest investor, the activist shareholder Elliott Investment Management. That review resulted in the company focusing on its “higher-growth retirement, global asset management and U.S. benefits protection businesses,” according to a release at the time. The firm also stopped sales of its U.S. retail fixed annuities and consumer life insurance products.

Since then, Principal has unloaded some of that life insurance business—parts of which Houston had cut his teeth on nearly forty years ago—rebranded its asset management arm with an announcement on the Nasdaq stock exchange, and most recently folded its international pension businesses into asset management.

“We’re a big asset manager around the world in retirement plans that have nothing to do with recordkeeping,” Houston said.

Rupiah Management

That most recent move is part of a decade-long shift in the so-called emerging markets where Principal operates, Houston explained.

One part of the transition was that many countries that had once only allowed for local investments in retirement plans started to allow offshore options. A second factor, Houston said, was that participants —who had long seen investing in compulsory retirement plans as something of a tax that may not return to them—began to see the retirement vehicle more like a 401(k) plan in the U.S. that they could have later in life. Finally, many countries started to offer wraparound products to the state-required programs, so participants could voluntarily make “top-up” investments.

“Now fast forward to today,” Houston said. “In a compulsory system it’s one size fits all—it’s really hard to differentiate yourself. So where does the differentiation come from? Asset management.”

Houston said the international asset management shift announced this February is “all about framing it in a way that when we go to market in Chile, Mexico, Brazil, Hong Kong, Malaysia, Thailand, Indonesia … it’s coming with the full force of here’s a global asset manager.”

“And by the way,” he added, “we also provide recordkeeping administration, compliance, testing, and participant services—but in those compulsory models, they look a lot alike.”

In the U.S., Too

In the U.S., where Principal does recordkeeping for over 12 million participants, the story is somewhat similar in terms of providing asset management and investing services to retirement savers, according to Houston.

In the U.S., the industry “fell into a bit of a view that the retirement business is recordkeeping. But it’s not really,” he said. “What is it really about? It’s about managing assets. That’s the jet fuel for the company.”

Principal does as much DC investment-only business as it does full recordkeeping, Houston noted. That includes offerings such as a target date option, a mid-cap option, a small-cap option, and a fixed income option for qualified retirement plans, and separately, investment sleeves on large platforms for co-mingled investments.

“Retirement too conveniently gets shrouded in ‘they’re the recordkeeper,’” Houston said. “When we think about retirement, we think about how we provide products that are appropriate for a qualified retirement plan, long-dated, that preserve capital. If you look at our $600 billion-plus in assets under management, and $1.5 trillion under custody, they are tied to retirement in some form—most of it ERISA.”

Decumulation

While Houston feels Principal is well poised for the retirement accumulation stage, he said the company is also focused along with the rest of the industry on how to better solve for decumulation. In that case, he sees the market continuing to move toward institutionally-priced, in-plan annuities that provide a guaranteed paycheck in retirement.

He agreed that this in-plan option needs time before being put to mass use. But he noted that, today, the investment options in qualified retirement plans are vetted by trustees in the plan, as well as a third-party provider, and that overall there is a rigorous process involved.

“If you think about it, you’ll have to have that same sort of mechanism and process in place for in-plan annuities,” he said. “So I think we’re going to end up competing there with an institutionally placed product … it will take time, but that is where I think things are going.”

Houston sees retirement income management continuing to evolve in coming years in part because during those client meetings he attends, “the topic of conversation around financial security and retirement is always there,” he said. “You can’t get away from it.”

Currently, Principal oversees 45,000 client plans and has more than 155,000 small and medium sized business relationships through other employer services. Houston says those clients, while being served by different touchpoints, are all connected in some way to asset management.

“We’ve never been a monoline business,” he said. “There’s a lot of overlap of our small-to-medium sized business that has both retirement planning and benefits. We have the largest practice of ESOPs because we’re in the retirement business. We’re the largest player in the nonqualified deferred compensation space, why? Because we’re in the retirement business. We’re the largest administrator of defined benefit plans, why? Because we’re in the retirement business. And we’re in the asset management business because every one of those businesses needs asset management.”

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