How to Leverage SECURE 2.0 to Improve Participant Outcomes

I spent four years as a head of human resources—a role that required discipline and candor. One of our team’s most important responsibilities was making our retirement plan the best fit possible for our “crew,” our term for employees. I felt firsthand the responsibility of supporting our crew’s retirement readiness.

Today, sitting on the other side of the conversation as head of Vanguard’s Institutional Investor Group, I hear a familiar sentiment from our plan sponsor partners: Focus on doing the right thing for participants. Fortunately, we have more data than ever before to support plan design decisions made to help employees reach their long-term financial goals.

In particular, the implementation of SECURE 2.0 Act of 2022 provisions this year and beyond offers an opportunity for plan sponsors and advisers to consider opportunities to improve plan design. Our industry has understandably spent most of the past year focused on the legislation’s mandatory provisions. Yet some of the optional provisions also present an exciting opportunity. The qualified student loan payment provision, emergency savings account provision and withdrawal for emergency expenses provision, for example, have the potential to support retirement savers with goals that may feel even more pressing than retirement.

Uncovering Participant Challenges

Plan sponsors can lean on plan data across participant demographics and participant behavior to gain a stronger understanding of which SECURE 2.0 provisions will resonate most with their participant base.

1. Participant demographics

Baseline demographic data provide a meaningful look at the likely needs of an employee base. Plan sponsors can consider the age of their participants as a starting point to uncover potential needs. For example, an employer with very few young workers may decide to put the student loan provision on the back burner and focus on different ways to engage their participants. According to the Federal Student Aid Office of the U.S. Department of Education, most student debt is held by Americans younger than 35.

Overlaying age data with income offers additional insights. Data from Vanguard’s “How America Saves“ report indicates a correlation between income and plan participation. Among plans managed by Vanguard, 55% of eligible employees with an income less than $30,000 contributed to their employer’s defined contribution plan in 2022. Meanwhile, 95% of employees with an income more than $150,000 elected to participate. Employers with a large population of lower-income workers may consider offering support for accessing cash to provide a necessary cushion to allow their employees to prioritize retirement saving.

SECURE 2.0’s emergency savings account and emergency expenses provisions are additional options.

2. Participant behavior

Participant behavior can indicate an employee’s financial concerns and where current plan design may fall short. Plan sponsors can leverage data such as participation rate and loan use to uncover underlying behavioral trends across a plan’s participants.

For example, student debt remains high among younger Americans. Plan sponsors may want to confirm whether this impacts their young participants’ retirement saving behavior. Our data shows that over the past five years, participation rates among younger employees have actually increased. There is reason for optimism about younger generations’ retirement readiness. Reviewing how student debt does—or does not—influence participants’ behaviors can inform SECURE 2.0 implementation considerations.

Loan use data could also prove informative for plan sponsors. Among participants in Vanguard-managed plans, 12% had a loan outstanding at year-end 2022. This number has generally declined over the past decade. Participant loan rates higher than this benchmark may signal sponsors to further explore participants’ needs for easier access to funds. This could be achieved by assessing SECURE 2.0’s provisions covering emergency savings and withdrawals for emergency expenses.

Designing Plans With Impact

SECURE 2.0 will help give millions of Americans a better chance for retirement success and can help employers attract and retain talented employees. As our industry moves quickly to implement SECURE 2.0 provisions, we should remember the existing plan design best practices that have demonstrated impact on participant retirement readiness.

While not new, automatic enrollment has arguably the most notable impact on plan participation. The adoption of automatic enrollment has more than tripled since year-end 2007, but it is still used by only 58% of Vanguard-managed plans. According to data from How America Saves 2023, automatically-enrolled employees had an overall participation rate of 93%, compared with a rate of 70% for employees in plans with voluntary enrollment. The gap is even more stark among lower-income workers, making automatic enrollment a powerful but still underutilized tool to reduce barriers to retirement saving.

Additionally, we hear increasing interest from consultants and plan sponsors in adding advice to plans to help employees save for goals beyond retirement. More than three in four participants in Vanguard-managed plans now have access to managed account advice. Advice can help participants working toward multiple financial goals such as long-term saving for retirement, immediate liquidity needs for student loan repayment and short-term saving for an emergency savings fund.

Focusing on participant demographics and behaviors will help plan sponsors determine the best course of action to meet the unique needs of their participants. I am optimistic about the work our industry has done to improve outcomes for participants. Plan sponsors’ and advisers’ enhanced focus on financial wellness is encouraging, and plan design continues to improve to support participant outcomes. There is more work ahead. To keep moving forward, we can lean on actionable data to build strong plans and, ultimately, help prepare American workers for retirement success.

John James is managing director of Vanguard Institutional Investor Group, which serves the needs of employers offering company-sponsored retirement plans, as well as organizations such as endowments and foundations. Previously, he was chief human resources officer and managing director of Vanguard’s Human Resources division, which is responsible for talent, leadership, and culture.