SECURE Act 2.0: What’s Not in the Bill Is as Important as What Is
As the tide of COVID-19 flowed across the United States in 2020, the accompanying economic and financial challenges eroded Americas’ retirement security.
According to a mid-2020 Transamerica Center for Retirement Studies survey, more than a quarter of Americans dipped into their retirement savings amid the pandemic. A SimplyWise report from September 2020 showed 58% of those surveyed are more concerned about retirement now than they were a year before.
In an effort to restart retirement saving and improve how Americans save for retirement, lawmakers introduced the Securing a Strong Retirement Act of 2020 (a.k.a. SECURE 2.0). The legislation is intended to ensure “…Americans have the resources they need for a prosperous retirement.”
While SECURE 2.0 builds on the 2019 Setting Every Community Up for Retirement Act (SECURE Act) in some important ways, most of its provisions are engineered to help improve the retirement security of people who have access to workplace retirement plans.
The proposed SECURE 2.0 legislation includes:
- Automatic employee enrollment in workplace retirement plans,
- Automatic increase in participant contributions each year (through auto escalation of the auto deferral rate by 1% per year, up to a maximum of 10%)
- Allowing employees to pay down student loans instead of contributing to a workplace retirement plan and still receive a company 401(k) matching contribution, if one is offered and
- Raising the required minimum distribution (RMD) age from 72 (increased by the SECURE Act from 70½ to 75, for certain workplace retirement plans and individual retirement accounts.
While SECURE 2.0 enhancements may help improve retirement plan participation and savings rates which, in turn, will help advance long-term financial wellness for employees with access to workplace retirement plans, the legislation does little to address other challenges to retirement security, such as:
Protecting Retirement Savings
Many people think-or are forced to think-of retirement savings as emergency savings. Congress reinforced this belief when the Coronavirus Aid, Relief and Economic Security Act (CARES Act) expanded retirement plan distribution options for individuals affected by the coronavirus and eliminated tax penalties for qualifying coronavirus related distributions taken in 2020.
A November 2020 survey reported in Kiplinger’s found:
- Nearly 33% of Americans withdrew or borrowed money from an IRA or 401(k) plan during the pandemic
- 32% of respondents said they withdrew $75,000 or more from a retirement account
- 58% of those who took loans borrowed between $50,000 and $100,000
The money withdrawn or borrowed was used for living expenses (63%), medical bills (41%) and home repairs (32%). What the withdrawn money won’t be doing is growing and compounding in the retirement account to provide income in retirement.
To illustrate the potential impact of such a withdrawal, let’s take the example of a 37-year-old who planned to retire in 30 years, who took a $50,000 CARES Act distribution and did not recontribute that distribution to the retirement account.
The retirement savings may be $237,000 lower at retirement, assuming a 6% average annual return on the account. That decrease in total retirement savings results in more than $13,000 less potential annual income in retirement.1
To improve retirement outcomes, employers should consider offering emergency savings fund options as part of their financial wellness plans. These emergency savings programs can be quite simple. Employees automatically set aside money each pay period in a designated emergency savings fund. When emergencies arise, the emergency savings funds are available.
Having access to designated emergency savings may help protect retirement savings from withdrawals when unexpected financial circumstances arise and improve workers’ everyday financial wellbeing.
Boosting Plan Access
Despite the availability of traditional and Roth individual retirement accounts (IRAs), Americans primarily save for retirement through payroll-deduction workplace retirement plans. Unfortunately, millions of employers don’t offer retirement plans, so a significant proportion of American workers do not have access to them.
Pew Research reports that, “Thirty-five percent of private sector workers 22 and older do not work for an employer that offers a defined contribution plan or a traditional defined benefit plan.” The lack of workplace retirement plan access is most acute for younger workers (Millennials) and gig/freelance workers, 41% and 77%, respectively, who do not have opportunities to save for retirement at work.
Traditional 401(k) plans may not be the right fit for every business, especially small businesses. Multiple-employer or pooled-employer plans (MEPs and PEPs) may not be a viable solution either.
However, affordable, easy-to-manage retirement plan options that are specifically designed for smaller employers are readily available. These options include Savings Incentive Match Plan for Employees (SIMPLE) and payroll-deducted IRA options.
Improving Financial Literacy
While SECURE 2.0 automatic enrollment and automatic deferral increase provisions impact long-term financial wellness for retirement plan participants, these provisions do little to improve general financial literacy and knowledge.
Individuals who become financially literate better understand how their saving behaviors can create positive financial outcomes. This knowledge may change spending and saving behaviors and realign financial priorities.
Financial literacy can lead to improved individual financial wellness by changing behavior as it relates to spending and saving for long-term financial goals.
Financial wellness that occurs through automatic enrollment and deferral programs offered by workplace retirement plans does not necessarily help individual participants develop a deeper understanding of personal financial issues.
Many retirement plan sponsors offer education, tools and resources that support financial literacy. Millennium Trust offers financial wellness solutions, and is committed to promoting financial literacy programs to its clients.
Strengthening retirement security and improving retirement outcomes is not a simple task. It will require the coordinated effort of business, government and individuals.
Visit our Retirement Services page to learn more about how we help retirement plan providers and participants.
1Assuming a 4% average annual rate of return in retirement and a 30-year retirement.
The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal or tax advice.