Pension, retirement policy committees send letter to Congress: Pass SECURE 2.0 already!
The actuarial group relayed its support of automatic enrollment in new 401(k)s, benefit portability and other key provisions of the landmark legislation, expected to become law by the end of 2022.
(Photo: U.S. Capitol Rotunda, Diego M. Radzinschi/ALM)
The clock is ticking on passage of SECURE 2.0 Act legislation before Congress adjourns for the year. The Pension Committee and the Retirement Policy and Design Evaluation Committee of the American Academy of Actuaries recently sent a letter to House and Senate leaders – Chuck Schumer (D-NY), Mitch McConnell (R-KY), Nancy Pelosi (D-CA) and Kevin McCarthy (R-CA) – encouraging its passage.
“We support the efforts of lawmakers to address the challenges that many Americans face in retiring securely while addressing the accompanying longevity risk due to increasing life expectancies and changes in the way that employers provide retirement benefits,” the letter said.
The letter summarized proposed provisions addressed in the association’s National Retirement Income Policy series:
Automatic enrollment in new 401(k) and 403(b) plans. SECURE 2.0 would require new 401(k) and 403(b) plans to automatically enroll eligible employees, with a default employee contribution rate of between 3% and 10%, as well as automatic escalation of 1% per year up to a maximum of at least 10% but no more than 15%. Automatic enrollment (with the ability for workers to opt out) has been shown to increase plan participation, and automatic escalation can increase the size of employee contributions.
403(b) plan enhancements. Two sections of SECURE 2.0 and related Senate bills have provisions that would be beneficial to 403(b) plan participants:
- Section 110 of SECURE 2.0 would provide that 403(b) plans can be multiple employer plans established and maintained under rules similar to those for 401(k) pooled employer plans. PEPs, which were authorized in the SECURE Act of 2019, already have become popular, increasing coverage, especially among small employers that previously didn’t offer qualified retirement plans.
- Section 105 of SECURE 2.0 would enhance investment options under 403(b) plans by allowing those with custodial accounts to invest in collective investment trusts as well as annuity contracts and mutual funds. This enhancement would be beneficial to participants, because it could lower investment fees, thereby increasing account balances and, ultimately, retirement income.
Employer matching contribution options. SECURE 2.0 would allow employers to make matching contributions on behalf of employees for qualified student loan payments, subject to certain requirements. This provision applies to 401(k), 403(b), SIMPLE IRAs and 457(b) plans. Many employees are repaying student loans and may not be able to start saving for retirement while they are paying off the loans.
Plan eligibility changes for part-time employees. SECURE 2.0 would modify the service requirements for long-term, part-time workers by reducing from three to two the required years of service before these workers are eligible to contribute to a 401(k) plan. Easing the eligibility rules for part-time workers should facilitate and increase participation among these workers, many of whom have low incomes, are women or are members of disadvantaged groups.
Qualified longevity annuity contracts. SECURE 2.0 would allow participants to purchase larger qualifying longevity annuity contracts by removing the limit of 25% of the individual’s account balance. These deferred annuities potentially could help retirees who have insufficient assets to provide lifetime income many years into retirement.
Related: SECURE 2.0 will change retirement plans, but employers need to ramp up financial wellness
Benefit portability. SECURE 2.0 and the EARN Act would create an online searchable “lost and found” database to help terminated participants keep track of their vested benefits in qualified retirement plans. In today’s mobile workforce, individuals who have multiple jobs during their careers often lose track of benefits they earned many years before retirement.
Emergency fund. All three bills contain provisions related to the need for more emergency savings and the ability to withdraw funds from a retirement account in an emergency.
Cash balance plan interest crediting rates. The RISE & SHINE ACT would clarify how to convert cash balance accounts with variable interest crediting rates to accrued benefits for various plan qualification tests. Specifically, the proposal would call for projecting accounts using a reasonable projection of the interest crediting rate, not to exceed 6%. The issue needs clarification, because the IRS hasn’t yet provided regulations.
Termination of variable-rate premium indexing. The RISE & SHINE Act includes a provision that would end the indexing of variable-rate premiums, reducing the amount of premiums paid by plan sponsors. The current level and structure of Pension Benefit Guaranty Corporation premiums provides a strong incentive for plan sponsors to take actions to reduce premiums, such as lump-sum buyouts or annuity purchases from an insurer.