SECURE 2.0’s Disappointments

SECURE 2.0 has a number of issues with it such as its budget myopia and failure to expand access adequately.


Three months after the passage of the SECURE 2.0 Act of 2022, some observers are looking at the law and considering what SECURE 2.0 left out.

Some items have been widely covered, such as the failure to include a provision permitting collective investment trusts in 403(b) plans. Some technical errors, such as accidentally banning catch-up contributions starting in 2024 (which is still yet to be fixed) have also been widely noted.

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But observers say there are some other major omissions from SECURE 2.0 that have flown under the radar.

One of the more underexamined shortcomings of SECURE 2.0 is that it disproportionally helps high earners and those who already have retirement savings, while offering much less to lower earners.

Alicia Munnell, the director at the Center for Retirement Research at Boston College and a professor of management sciences at Boston College’s Carroll School of Management, says of SECURE 2.0 that it has “lots of goodies for high-income people” and “we are giving away a lot to high earners to get some provisions for middle and low [earners].”

For example, SECURE 2.0 expands catch-up contributions for those ages 60 through 63, which would only help those who are already maxed out on their contributions for that year, a group that is disproportionately wealthy. The legislation also increases the required minimum distribution age to 73 and then again to 75 by 2033. Putting off RMDs allows participants to grow their account further, again disproportionately favoring wealthy employees who can afford to wait longer before beginning to take distributions from their retirement accounts.

Siavash Radpour, the associate research director of the Retirement Equity Lab at The New School’s Schwartz Center for Economic Policy Analysis, adds that increasing the RMD age mainly helps those who are saving for other purposes, especially those who are aiming to leave a greater inheritance, rather than needing the money during their retirement.

SECURE 2.0 expands access to lower earners in some ways, such as requiring that part-time workers with two years of service be permitted to join an employer plan and expanding that to include workers with access to 403(b) plans, and enhancing the retirement savings contribution credit, better known as the saver’s credit. However, she says, these reforms are tiny compared to the ones that assist high earners, and the saver’s credit enhancement does not take effect until 2027.

The law also creates two new plan designs for employers that do not offer a retirement plan. One is a deferral-only 401(k) plan and the other is a safe harbor 403(b) plan. Both would require that all employees be enrolled in a plan. The provision is effective for plan years beginning after December 31, 2023. Deferral limits for these plans match the IRA contribution limits.

SECURE 2.0 also allows employers to offer “de minimis” incentives to employees to join a plan, such as by giving them gift cards, says Radpour. Radpour worries, however, that because many employers need low earners in their plans to pass top-heavy testing, this provision may come at the expense of things, like a more competitive and quickly vested employer match.

Tax Revenue Sustainability

The drafters of SECURE 2.0 were very conscious of its budget score and making sure it would be “paid for” within the normal 10-year time frame used by Congress to evaluate the tax price of a bill. Since the window for budget scoring is only 10 years long, SECURE 2.0 was able to account for all its expenses to a large degree by encouraging Roth contributions, as opposed to traditional ones.

Since the income tax on Roth contributions is paid upfront, that tax revenue counts as a “pay for” or revenue raiser for the bill, even though in the long-term, it will cost the government even more money, because the gains on those Roth contributions will be untaxed when distributed.

For example, SECURE 2.0 requires the enhanced catch-up contributions for highly compensated employees to be to a Roth account, which is simply a way to make sure that income is taxed upfront and therefore able to count toward “funding” the bill.

Munnell adds that moving from traditional to Roth is “a hokey thing” and “just a gimmick,” because future tax revenue will be lower as a consequence, even though it is presented today as being financially responsible.

Implementation

Another problem with SECURE 2.0 is that some portions are poorly written, excessively complicated or do not have adequate compliance dates.

The clearest example of this is the requirement that enhanced catch-up contributions for HCEs be made into a Roth account, starting in 2024. This process will be so difficult to implement for many sponsors that many are contemplating suspending catch-ups altogether as a temporary fix, especially public sector employers.

It would be an unfortunate irony if the headache of this provision ended up causing plan sponsors to suspend features like catch-up provisions, given that the point of the legislation was to improve retirement security.

Some of the more anticipated voluntary provisions due to start in 2024, such as the student loan match, will likely not start immediately due to an absence of regulatory guidance.

Not Everyone is Covered

Radpour observes that self-employed workers and independent contractors are wholly left out of SECURE 2.0, as are all state-level auto-IRA programs, since they rely on sign-ups through employers. As the “gig economy” expands, this point will likely become a more salient one.

Part-timers with less than two years of service, caregivers and parents eschewing work to raise children were likewise left out of the legislation.

Longevity, Guaranteed Income, Social Security

SECURE 2.0 also does very little to reform annuities.

The legislation makes it easier to invest in qualified longevity annuity contracts by increasing the maximum amount one can spend from a retirement account to buy one. It also loosens RMD rules for partially annuitized plans. Guaranteed income was simply not a focus of the legislation, to the chagrin of many who saw guaranteed income as an essential element of retirement security.

The Setting Every Community Up for Retirement Enhancement of 2019, aka the original SECURE Act, made it easier to offer lifetime income in a DC plan by protecting employers from liability if they select an annuity provider that meets certain criteria. But observers agree that in-plan annuities remain complicated and adoption has been limited.

If SECURE 2.0 did little to help guaranteed income, then it did nothing for the closest thing to a guaranteed annuity that all workers contribute to and get upon retirement: Social Security.

Social Security has been a hot item since President Joe Biden discussed it in his State of the Union Address on February 7. Several bills have been proposed to reform it, including one that would change the consumer price index used to calculate benefits and another that would remove reductions in benefits paid to some public sector workers.

Radpour says that though SECURE 2.0 did a lot of good, “It is regrettable that we are already looking to SECURE 3.0.”

Adviser M&A To Stay Strong in 2023, but Expect Delays

Advisor Growth Strategies reports that  dealmakers are getting more creative amid high interest rates.

The dealmaking for registered investment advisers seems to have peaked in 2022 in terms of volume, but private capital is still intent on getting more acquisitions done in 2023, according to a recent report from Advisor Growth Strategies.

Of 85 advisory firms surveyed about M&A activity, a whopping 86% said a rocky 2022 did not change plans to look for a partner or pursue M&A as seller, according to the Phoenix -based consultancy. There were 225 transactions in 2022 as tracked by AGS and Fidelity Wealth Management, according to the researchers.

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Forecasts of a slowdown in 2023 track with recent research from M&A watchers Echelon Partners and DeVoe & Co., the latter of which reported in February a 22% decline year-to-date versus the same period last year. Consolidation has been rampant in the past decade as an aging RIA industry meets strong demand for wealth management, including by firms with retirement advisement practices. But that began to shift amid volatile markets and rising interest rates in 2022, according to the authors of the report.

“For the first time in several years, deal expectations were not matching reality, and buyers and sellers had to collaborate to move transactions forward,” wrote AGS Managing Partner John Furey and Principal Brandon Kawal.

This year buyers may be more selective in their deals, giving a high level of scrutiny to talent amid a tight labor market, the authors wrote. Increased interest rates could also put pressure on buyers that rely heavily on debt, likely slowing down some dealmaking.

Part of what will make deals harder to hammer out is a continued shift toward less cash payment and more “collaborative” structures based on firm growth, according to the authors. In 2022, cash deals fell to 67% of transactions, as compared with 77% in 2021. Meanwhile, the percent of equity deals—based on shared outcomes—rose to 25% from 21% the year prior. Contingent deals, which are based on earnouts, jumped to 8% from 2% in 2021.

“The early shift to long-term consideration (equity) and contingent payments (earnouts) signaled the market will become more collaborative as buyers seek to conserve cash and sellers look to make transactions less point-in-time,” Kawal and Furey wrote.

Deals may also be smaller in size “than the rush of $1b+ AUM deals we saw in 2020 and 2021,” the authors wrote in an emailed response. “We also saw overall valuation (not multiple) drop for the first time in our tracking.”

The analysts are still bullish that dealmaking will happen, in part due to the continued push by private equity to find growth in consolidation.

“The influx of capital from private equity bodes well for continued M&A activity, whether investments are made directly or through other firms,” Furey said in a statement with the report. “Teams seeking enhanced resources and business continuity solutions through a transaction still have a fantastic opportunity to find a great result, but they may have to work harder to get it.”

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