Congress Passes SECURE 2.0, Forwarding Second Major Retirement Reform in Three Years

Retirement policies called SECURE 2.0 passed House of Representatives approval on Friday as part of a $1.65 trillion spending bill, moving to President Joe Biden’s desk for signing.

On nearly party lines, the House approved the more than 4,000-page bill by a vote of 225 to 201, with one lawmaker voting present. The bill cleared the Senate on Thursday.

The passage of SECURE 2.0 would be the second round of large-scale retirement reform since the Setting Every Community Up for Retirement Enhancement Act passed in 2019. SECURE 2.0 was the combination of three separate bills seeking to broaden retirement saving among Americans in both participation and volume, particularly for lower-income workers and among small businesses.

The response to SECURE 2.0 across industry associations, recordkeepers, advisory firms and annuity providers is largely positive, with industry players seeing opportunity to expand retirement benefits among plan sponsors and participants. Though the votes were split in the House, retirement legislation is often described by analysts as an area of collaboration between parties, and the package was passed the same year that longtime retirement champion Rob Portman, R-Ohio, announced his departure from the Senate.

The ERISA Industry Committee, a national lobbyist for large employers that provide retirement and health benefits, praised the passage and noted it included several of its policy recommendations.

“We are pleased that Congress has supported on a bipartisan basis many of ERIC’s commonsense recommendations, which together will enable employers to enhance health care and retirement benefit plans for millions of employees, retirees and their families,” James Gelfand, president of the ERIC, said in a press release.

SECURE 2.0 seeks to expand retirement coverage to more Americans through both short- and long-term proposals. These include pushing out required minimum distributions from tax-deferred savings plans to 73 next year from 72 in 2022; mandating new 401(k) and 403(b) plans automatically enroll participants with a deferral of at least 3% of their salary by the end of 2024; and increasing tax credits for low-income savers in 2027.

Other policies seek to address more systemic issues in the retirement system. These include the Department of Labor having two years to create an online database of plans so employees and employers can identify missing or forgotten retirement accounts to reduce so-called savings “leakage.” The new law will also allow employers to match student loan payments with plan contributions in an attempt to help people focused on paying off student debt build a retirement nest egg.

Expanding access and uptake by participants to save toward a guaranteed monthly retirement paycheck beyond Social Security was another key area of focus. To that end, the bill increased the amount of retirement account funds that can be used for a Qualified Longevity Annuity Contract from $135,000 to $200,000. These contracts are designed to provide guaranteed monthly paychecks until death to supplement Social Security and be safe from market volatility.

“SECURE 2.0 will help strengthen Americans’ retirement readiness through provisions that will reduce barriers to annuitization, increase access to workplace retirement plans and improve opportunities to save for retirement,” Kourtney Gibson, the chief institutional client officer for the Teachers Insurance and Annuity Association said in a press release. “We look forward to working with Congress in the new year and building upon these important, foundational reforms to make a financially secure retirement attainable for all.”

The policy will also expand the use of pooled employer plans, or PEPs, beyond 401(k) retirement plans to nonprofit 403(b) plans. PEPs were first launched in the initial SECURE Act to help small businesses join collective retirement plans to reduce administrative and cost burdens, though uptake so far has been relatively slow.  

“We are optimistic about what this can mean for the expanded adoption of pooled employer plans,” Melissa Elbert, a partner at PEP-provider Aon said in a statement. “We have already seen how PEPs can provide significant savings for participants and ultimately improve their retirement outcomes while also easing the burden of plan management for employers. The PEP model is more efficient for everyone.” 

The Work Begins

Now that the bill is passed, retirement industry players will be able to start getting to work on the “pipes” that will need to be created, both within 401(k) plans and in messaging to participants for these new policies to get results, says Jennifer Doss, senior director and defined contribution (DC) practice leader at Captrust Financial Advisors.

“Most of the policies are a year or two out, because the industry is not ready in terms of immediate implementation,” Doss says. “Particularly from a retirement plan, recordkeeper perspective, they have to figure out how to make all this work. … It will take a year or two to build out and get all the technology up and running.”

One policy that will be immediate in 2023 is an increased tax credit for businesses that start an employee retirement plan that will pay the cost of startup for the first three years, Doss says. That may kickstart businesses who had been waiting for the incentive, as well as those that might want to avoid the automatic enrollment mandate that will not kick in until later.

“We could see a lot of plan creation starting next year, and ultimately it could be for people who want to start a plan but don’t want to have it be automatic enrollment and want to get out in front of that,” Doss says. “There’s a little bit of a delay [to the mandates], so you can still get a startup credit, but you don’t have to necessarily do all those other things going forward.”

Jon Chambers, a managing director at SageView Advisory Group, says the success of every policy is not certain, and each will ultimately depend on industry and participant demand and uptake.

“There’s plenty of examples of legislative actions that have unintended consequences or just get ignored,” Chambers says, noting the example of in-retirement plan annuities to provide income in retirement. “We’ve seen a number of regulatory moves, but have seen very little plan sponsor uptake on that overall.”

Chambers notes an example of policy that may not take off is the emergency savings option. As an untested addition to a 401(k) plan, he finds it hard to say yet if people will leverage it at the levels policymakers may expect.

On the other hand, Chambers says plan sponsor clients frequently ask about the student loan match program as a way to potentially recruit and retain talent.

“The student loan program is something we see a lot of demand for, and that is something that could take off quickly,” Chambers says.

Biden has until December 30 to sign the legislation because both the House and Senate this week also passed measures extending the deadline for funding the federal government. As a result, there is time for the yearlong spending measure to be formally processed and sent to Biden, avoiding a government shutdown.