SECURE 2.0 Removes Barriers to Saving for Retirement

Securing a Strong Retirement Act

Informally known as SECURES 2.0, the Securing a Strong Retirement Act of 2021 is making its way through Congress. Passage of this act will address many issues long identified by retirement professionals as small yet significant barriers to saving for retirement.

Retirement Savings Significantly Below Optimum Level

The retirement savings emergency continues in the US, with only half of Americans saving anything for retirement. Of those, ¼ have saved only $10,000 or less. Reasons for this include barriers to retirement savings, most resulting from the system’s complexity, including types of retirement accounts and lack of easily understood information about how, when, and what steps to take.

Automatic Enrollment into 401(k), 403(b) and SIMPLE IRA

Employers will be required by SECURES 2.0 to include new workers in their QRPs when onboarding automatically. In year one, they can deduct 3% of the new worker’s pre-tax earnings into the company’s retirement plan. Every year the percentage automatically deducted will increase by 1% to a cap of 10%. But the most significant change is instead of employees opting into the plan, they will have to opt-out of participating. 

The percentage of the match remains a decision for the employer, but there is a safe harbor for the employer if they match the 3% for a total of 6% in year one.

IRS: “A safe harbor 401(k) is like a traditional 401(k) plan, but the employer is required to make contributions for each employee. The safe harbor 401(k) eases administrative burdens on employers by eliminating some of the rules ordinarily applied to traditional 401(k) plans.” [1]

Employers who elect to participate by matching the 3% will receive a tax credit of 2% for those workers who are designated NHCE (Non-Highly Compensated Employees).

Tax Credit for Qualifying Small Businesses to Establish Plan

92% of companies with 500 or more employees offer a 401k, while only 57% of those with less than 99 employees offered a plan. [2] The Federal government wants these smaller companies to create QRPs (Qualified Retirement Plans). Under the proposed act, qualifying businesses will receive a tax credit of up to 5K over three years to cover the costs of putting a QRP in place. [3]

Retirement plans are popular with workers with up to a 90% participation rate in many companies, but the employer has to make accessing the plan easy for workers, especially NHCE (Non-Highly Compensated Employees).

Increasing access to 401K plans

Securing a Strong Retirement Act of 2021 Act will reduce regulations and costs of setting up QRPs, the purpose being to increase access for lower-income workers. According to a study by Transamerica, “More than 70% of workers from households with incomes over $100,000 have access to a 401(k), compared to 50% of those from household incomes below $50,000...” [4]

 Not for Profits Will Be Eligible to Join Multiple Employer Plans

While provision might not seem that important, it is very important because US not-for-profits employ more than 12 million people, 10% of the US workforce. [5]  “A multiple employer plan (MEP) is a retirement savings plan adopted by two or more employers…” [6]  Many small not-for-profits cannot afford the expense of establishing a 403b. Because an MEP spreads the costs of administration across many not-for-profits, it will be substantially less expensive for small not-for-profits to offer plans to their employees. 

To ease the financial emergency of low retirement savings in the US, individuals will need to save substantially more money in whatever type of retirement account they have. The US Government can’t force Americans to save. Still, they can remove every legal and regulatory barrier that now exists, which makes saving for retirement complicated, and this proposed law will do precisely that. We need it.

Resources:

[1] https://www.irs.gov/retirement-plans/plan-participant-employee/definitions

[2] cnbc.com/2021/02/14/why-401k-wont-fix-us-retirement-crisis

[3] irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit

[4] transamericacenter.org/docs/default-source/retirement-survey-of-workers/tcrs2020_sr_pre-pandemic-us-employer-benefits-and-business-practices.pdf

[5] bls.gov/opub/ted/2018/nonprofits-account-for-12-3-million-jobs-10-2-percent-of-private-sector-employment-in-2016.htm?view_full#

[6] www.investopedia.com/multiple-employer-plan-mep-definition-

Contributing Writer: Subject Matter Expert Charles McCain

Copyright© 2021 Cannon Financial Institute - All Rights Reserved

Subscribe to Cannon Insights at http://www.cannonfinancial.com/newsletter/subscribe