In Practice September 7, 2023

Aspen Institute Retirement Experts Look to Saver’s Match to Close Savings Gap

An Aspen Institute forum on retirement considered major sector issues, including leveraging SECURE 2.0's 50% federal matching contribution deposited directly into a taxpayer’s IRA or retirement plan.

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When looking for wider access to retirement savings, as well as more equitable benefits, the Saver’s Match will offer an opportunity to amass meaningful amounts of money in the retirement accounts of workers with low incomes, according to experts who spoke at the seventh annual Aspen Leadership Forum on Retirement Savings, held May 31-June 2 and summarized in a recent report released by the Aspen Institute Financial Security Program.  

The SECURE 2.0 Act of 2022 revised what was formally known as the Saver’s Credit, which allowed qualified individuals—namely low- and mid-income workers—participating in a retirement plan or contributing to an IRA to receive a nonrefundable tax credit of up to 50% of their contribution, up to a maximum contribution of $2,000 (or $4,000 if married filing jointly). 

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The Saver’s Match will replace the Saver’s Credit, changing from a credit paid as part of a tax refund into a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan. The match program is equal to 50% of IRA or retirement plan contributions, up to $2,000 per individual. 

According to law firm Schneider Downs, qualified participants will be able to choose which retirement account to receive the contribution, excluding Roth accounts. If a participant’s annual contributions are less than $100, the matching contribution will be applied to lower their tax liability, or, if elected, a participant can have their matching contribution applied to pay their tax return, similar to how the Saver’s Credit functions. 

The match deposited into an individual’s account does not count toward an annual contribution limit. The goal is to make it easier for people to save for retirement by actually putting more money into retirement accounts. 

This match is set to become effective for taxable years after December 31, 2026, according to the provision. 

Retirement experts at the Aspen Leadership Forum said there is concern that without “thoughtful and strategic preparation,” the program may not reach its full potential.  

“We need to do the necessary background work to ensure that the Saver’s Match succeeds—and we need to begin that work now,” the brief from the Aspen Institute stated. “Specifically, we must identify potential operational challenges and programmatic bottlenecks and preemptively establish the necessary workarounds and solutions. At the same time, we must build a broad and powerful cross-sector base of support to help this program be most effective for the workers it is meant to serve when this match becomes available in 2027.” 

Joshua Luskin, the managing director of Secure Retirement Trust, a nonprofit retirement plan for home care workers in Seattle, says the Saver’s Credit is beneficial for low-income participants, but very few currently take advantage of it. He says more education about this benefit would make it more effective and, as a whole, more legislation is needed to help low-income workers. 

SECURE 2.0 requires that the U.S. Department of the Treasury increase public awareness of the matching contribution program. This will include: 

  • Developing and distributing digital and print materials about the Saver’s Match, including materials for state-facilitated retirement savings programs;  
  • Translating these materials into the 10 most commonly spoken languages in the U.S.; and 
  • Making people aware of the potential penalties for withdrawing matching contributions early. 

The Treasury must submit a report to Congress by July 1, 2026, summarizing its planned promotional efforts.  

Speakers at the Aspen Institute forum also argued that the retirement industry, as a whole, needs more diverse voices and should partner with peers in related areas of household finance, including those focused on expanding economic opportunity, access to housing and credit, debt relief and more, in order to help close the retirement savings access gap. 

“Given the interconnected nature of these issues and the burgeoning sense that national policy will be required to eradicate the retirement savings access gap, there is an urgent need to bring new voices, expertise, and perspectives to the inclusive retirement savings community in order to both learn from one another and share networks, resources and ideas, and also to build a broader, more diverse coalition that better represents the larger ecosystem of household wellbeing, of which retirement is a critical piece,” the Institute’s summary stated. 

The Aspen Leadership Forum welcomed retirement experts from the public, private and nonprofit sectors, including corporate leaders, policymakers, researchers and advocates convened at the Sagamore Pendry Baltimore hotel. Conducted under the Chatham House Rule, which prevents speakers from being identified by name or by affiliation, the Aspen Institute’s summary was written by Loren Berlin who served as forum rapporteur. 

 

The Markets September 7, 2023

Can ETFs Work in 401(k)s With Mutual Fund Rebranding?

F/m Investments has asked the SEC for the right to classify an ETF series as mutual funds to be accessible for 401(k) participants.

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An investment firm is seeking to make an exchange-traded-fund series available to a wider swath of investors, including defined contribution plan participants, by getting them classified as mutual funds—the reverse of a trend toward getting mutual funds classified as the more popular ETFs.

F/m Investments LLC, a subsidiary of Diffractive Managers Group LLC, filed the request with the Securities and Exchange Commission in August in what firm president and CIO Alex Morris says is “swimming the opposite way from the crowd.”

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“As we looked at it, we recognized that the $6 trillion 401(k) DC/DB space is really cut out of the innovation that’s happening on the ETF side of the house and that the best way to cut them in was to find a way for ETFs to participate in mutual funds,” he says. “It was not to do the other thing, which was to find a way for mutual funds to effectively earn a tax dodge.”

The “exemptive relief” application calls on the SEC to allow F/m’s U.S. Benchmark Series, a suite of 10 ETFs that provide investors with exposure to one of the “benchmark” U.S. Treasury securities, to be listed in the mutual fund share class. While Morris and team have not received a response from the SEC, they are hopeful of having a dialogue within a 90-day window from the proposal’s submission.

The Right ETFs

The move by F/m Investments reverses a trend in which mutual funds are being converted to ETFs to take advantage of investor inflows going more to ETFs in recent years than mutual funds (which are often seeing outflows), according to Morningstar data. In terms of those conversions, Fidelity Investments reports that more than 50 mutual funds with $60 billion in assets have converted to ETFs since March 2021.

F/m Investments’ pitch to the SEC relies, in large part, on the type of ETF series they are proposing, according to Aisha Hunt, a principal in and the founder of law firm Kelley Hunt & Charles, which worked with the firm on the proposal. The firm’s U.S. Benchmark Series is made up of U.S. Treasury securities, cash and cash equivalents, and would be available in a daily accrual offering—as opposed to intraday—if allowed by the SEC.

“The SEC has really emphasized that their determination around issuing this exemptive relief is facts- and circumstances-driven, and they’ve been very explicit about that,” Hunt says. “We were very fortunate that the U.S. Benchmark Series has the best facts and circumstances for making the case that the SEC should consider approving adding a mutual fund share class to an ETF family.”

One of the SEC’s biggest concerns is a “cash drag” for the ETF shareholders should the mutual fund share class reserve cash to meet cash redemptions, Hunt explains. The ETFs with single-issue Treasurys would not disrupt portfolio management, because they are holding highly liquid Treasurys.

“That’s why the benchmark series really presents the best facts and circumstances to make the case to add a mutual fund share class,” Hunt says.

On the flip side, the ETF shareholders can then benefit from “a larger asset pool and greater economies of scale, as you can spread fixed costs across a greater asset pool,” Hunt notes.

Another key part of the application, according to Hunt, is that unlike other ETF issuers or mutual fund managers, F/m Investments is proposing that a mutual fund share class and the ETF share class would charge the same “unitary fee.”

“The unitary fee, unlike a traditional mutual fund fee schedule, requires the manager to pay other fund expenses,” she says. “There wouldn’t be any subsidization where mutual fund shareholders or ETF shareholders would be paying for other expenses; the manager would be paying the fees under the unitary fee structure.”

Swimming Upstream

Morris says the firm’s push to make an ETF a mutual fund, as opposed to the other way around, comes in part from an ethos of not necessarily “going faster,” but thinking differently.

He notes that the firm was “getting laughed out of a lot of rooms” for the initial launch of a single-Treasury ETF. Now, slightly more than one year later, it has more than $2.5 billion in investments and is being requested as a mutual fund to be included in DC plan investments, he says.

“In the short term, our thought process was pretty simple,” Morris says. “We’ve got a fund that has had demand from the retirement space. Our options were to start a new fund and wait for five years for it to be effective or see if we could allow folks to join in on the innovation and success of this ETF practice.”

Along with the exemptive relief application, F/m Investments has filed a provisional patent application to protect its creation, according to the firm.

There is precedence for retirement plan providers including ETFs in workplace plans. The 2023 PLANSPONSOR Defined Contribution Benchmarking Report found that 0.4% of retirement plans offer exchange-traded funds in their investment lineup, compared with 55.5% in mutual funds and 23.1% in collective investment trusts.

When asked about whether proposing other ETFs, such as those that invest in stocks, would come next, Morris of F/m Investments said they were focused, for now, on this particular series. He did champion the idea of getting ETF offerings to retirement plan participants in the future.

Attorneys from Ropes & Gray LLP, when commenting on the proposal, noted the significance of the application only applying to F/m’s suite of Treasury ETFs.

“Given the novel relief requested by F/m, we expect that applicants seeking similar relief will need to engage with the [SEC] to work through the issues raised by the proposed structure,” the firm’s comment stated.

Overall, the attorneys wrote, “we continue to believe that the ability to offer investors the choice of an ETF share class and a mutual fund share class in the same vehicle would provide significant benefits to shareholders.”

Meanwhile, the question of whether F/m Investments’ proposal gets a serious hearing should be determined in coming months. The SEC did not respond to a request for comment on the proposal.

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