House Committees Build Consensus on ‘SECURE 2.0’

As evidenced by Wednesday morning’s House Education and Labor Committee hearing, retirement security is a topic where strong bipartisan consensus is possible, even in an intensely divided Congress.

The House Committee on Education and Labor held a hearing Wednesday morning to examine certain aspects of the Securing a Strong Retirement Act, also known as H.R. 2954, as introduced by Representatives Richard Neal, D-Massachusetts, and Kevin Brady, R-Texas.

The hearing expanded what has already been an extensive amount of discussion about the Securing a Strong Retirement Act, which many in the retirement plan services industry have taken to referring to as “SECURE 2.0.” This is in reference to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed into law at the very end of 2019.

As noted by lawmakers and witnesses, SECURE 2.0 has already been passed unanimously by the House Ways and Means Committee, which means the bill is eligible for debate and passage by the full chamber. Companion legislation has also been introduced in the Senate.

Just like the members of the Ways and Means Committee, representatives on the Education and Labor Committee voiced strong bipartisan support for SECURE 2.0, arguing the provisions in the bill have been made even more important by the ongoing COVID-19 pandemic. They also spoke about the broad shift away from pensions in favor of defined contribution (DC) plans, and how this change has put far more responsibility for saving for retirement on the backs of unprepared and unsupported individuals and their families.

The singular area of substantial disagreement during Wednesday’s hearing had to do with relief targeted at distressed multiemployer pension plans sponsored by labor unions.

Republicans on the committee voiced concern about the relief strategy already passed into law as part of the latest round of COVID-19-related stimulus. In basic terms, the most recent stimulus bill allows multiemployer plans that are in critical and declining status to get a lump sum of money to make benefit payments for the next 30 years, or through 2051. Democrats say this forgivable loan program is essential to protect current and future retirees’ benefits, while Republicans are concerned that the legislation does not require stressed union pensions to address the underlying issues that resulted in their poor funding status.

Witnesses at the hearing included Teresa Ghilarducci, Irene and Bernard L. Schwartz professor of economics and policy analysis at The New School for Social Research; Nari Rhee, director of the retirement security program at the University of California Berkeley; Andrew Biggs, resident scholar, American Enterprise Institute; and David Certner, legislative counsel and director of legislative policy for government affairs for AARP.

Opening the witness testimony, Ghilarducci spoke at length about the history of the retirement system in the United States, recounting in particular detail the development of the Social Security system and the erosion of public pensions. She emphasized the fact that the DC plan system functions well, but only for those in the middle and upper class.

“I fear the widening gap between the economic classes in this country,” Ghilarducci said. “The relatively high degree of retirement equity that we enjoy in the United States today came from the strength of pensions and the expanding Social Security system. We must take policy action to prevent a degradation of the retirement experience. If we don’t, we could see decades of progress reversed in short order.”

As summarized by the witnesses and lawmakers, the SECURE 2.0 legislation will enable millions more workers to build savings through employer-provided retirement plans. A key feature is an automatic enrollment provision for new retirement plans. The speakers agreed that auto-enrollment is a proven method for increasing worker participation in the retirement plan system. They noted that employees who are automatically enrolled can opt out at any time under SECURE 2.0, and that the bill also increases a tax credit for small business owners to encourage them to offer their employees a retirement plan.

“Access to the DC plan system is far from complete,” Rhee said. “Your degree of access to the DC plan system is directly correlated with your income level. Most concerning, those sectors of the economy with the greatest representation of Latino and Black workers, such as hospitality, have the worst access to the DC plan system. The upshot of this is that only 46% of Black working households and 36% of Latino households are currently enrolled in the DC plan system.”

Biggs’ commentary stood out from the other speakers in that he sought to downplay the concept that there is a “retirement crisis” unfolding in the United States. He spoke about the strong progress that has been driven by the DC plan system in helping Americans build retirement-focused wealth.

“U.S. households today hold $41 trillion in retirement savings—and, yes, those assets are skewed toward higher income earners,” he said. “However, we have to remember that Social Security skews toward lower income earners. I believe the overall picture is a lot more balanced. Retirement success isn’t about saving the most amount of money. It’s about replacing your working income. In short, we have to support policies that create easy and affordable access to the DC plan system, for everyone.”

Certner echoed comments made by the other three witnesses, emphasizing the importance of maintaining a healthy Social Security program in tandem with a strong DC system.

“The dramatic switch from pensions to DC plans has put so much responsibility on workers, while so many of them have very little experience investing or saving,” he said. “Automatic features do a lot to help these people, but only once they are already included in plans that are well designed. We need to address this coverage gap and get more people in automated savings programs. AARP supports both state- and federal-level programs to achieve this.”

Key provisions of SECURE 2.0 include the following:

Section 101 – Requires 401(k) and 403(b) plans to automatically enroll participants in the plans upon becoming eligible and allows employees to opt out of coverage. The bill requires the initial auto-enrollment amount to be at least 3% but no more than 10%, and then each year that amount is increased by 1% until it reaches 10%. All current 401(k) and 403(b) plans are grandfathered into the new rule. There is an exception for small businesses with 10 or fewer employees, new businesses, church plans and governmental plans.

Section 102 – Modifies the credit for small employer pension plan startup costs. Among other changes, this section increases the startup credit from 50% to 100% for employers with up to 50 employees.

Section 103 – Promotion of the Saver’s Credit. This section directs the IRS to promote the Saver’s Credit to increase its use.

Section 104 – Enhances 403(b) plans in a variety of ways. This section permits 403(b) custodial accounts to invest in collective investment trusts (CITs). It also amends the securities laws to treat 403(b) plans like 401(a) plans with respect to their ability to invest in CITs, with certain requirements and exceptions.

Section 107 – Establishes higher catch-up limit to apply at age 62, 63 and 64. Under current law, employees who have attained age 50 are permitted to make catch-up contributions under a retirement plan in excess of the otherwise applicable limits. The limit on catch-up contributions for 2021 is $6,500, except in the case of SIMPLE [savings incentive match plan for employees] plans, for which the limit is $3,000. Section 107 increases these limits to $10,000 and $5,000 (both indexed), respectively, for individuals who have attained ages 62, 63 and 64, but not age 65.

Section 108 – Creates an opportunity to establish multiple employer 403(b) plans. This provision generally mirrors the approach to pooled plans established by the original SECURE Act, including relief from the “one bad apple rule” so that the violations of one employer do not affect the tax treatment of employees of compliant employers.

Section 109 – Treats student loan payments as elective deferrals for purposes of matching contributions. The section permits an employer to make matching contributions under a 401(k) plan, 403(b) plan or SIMPLE individual retirement account (IRA) with respect to “qualified student loan payments.” Qualified student loan payment is broadly defined under the bill as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.

Section 201 – Removes required minimum distribution (RMD) barriers for life annuities. The section eliminates certain barriers to the availability of life annuities in qualified plans and IRAs that arise under current law due to an actuarial test in the RMD regulations. The test is intended to limit tax deferral by precluding commercial annuities from providing payments that start out small and increase excessively over time. In operation, however, the test commonly prohibits many important guarantees that provide only modest benefit increases under life annuities.

Section 202 – Addresses issues relating to the minimum distribution rules, which have impeded the use of qualified longevity annuity contracts (QLACs) in retirement plans and IRAs. Due to a lack of statutory authority to provide a full exemption, regulators have imposed certain limits that have prevented QLACs from achieving their intended purpose in providing longevity protection.

Section 307 – Expands the Employee Plans Compliance Resolution System (EPCRS). Because of the ever-growing complexity of retirement plan administration, the legislation would expand the EPCRS to (1) allow more types of errors to be corrected internally through self-correction, (2) apply to inadvertent IRA errors, and (3) exempt certain failures to make RMDs from the otherwise applicable excise tax. For example, the bill would allow for correction of many plan loan errors through self-correction. These are a frequent area of error and it can be burdensome to go to the IRS to correct a single loan error.