Beyond deductions & credits: The underlying effects of SECURE 2.0 on employers

Saving for retirement has always been an issue for Americans.  According to the 2022 Retirement Confidence Survey, about 19% of American workers have less than a $1,000 in savings and investments.  One often cited reason for this has been the lack of retirement plan options.  Financial professionals and many lawmakers have reasoned that if we simply give employees more opportunities to save, then they naturally will.  Out of this logic SECURE 2.0 was passed.  The media has largely framed it as a positive for employees, because it will allow them to save more for retirement.  A huge win.

On the employee side though, the implications are more complex.  While certainly the increased flexibility in retirement plan design and tax incentives are appealing on the surface, the issues go far beyond credits and deductions and force employers to rethink the role of the retirement plan in their strategy for recruiting and retaining talent.  A closer look at the details raises many questions that will need to be answered by companies in the upcoming years.

Addressing self-certification issues

A common issue among younger workers is the inability to save for retirement due to student loan debt.  To combat this problem, SECURE 2.0 offers the opportunity for employer matching contributions to be made based on student loan payments of the employee after 2024.  This allows even those straight out of school to begin saving for the future right away and promotes paying down debt.  Employees will generally be able to self-certify to their payments.

Similarly, starting in 2024, employees will be able to self-certify that they have experienced an emergency and be able to pull up to $1,000 out of their employer retirement account.  Also, domestic abuse survivors will be able to access retirement funds through a self-certification process as well.

Related: SECURE 2.0 encourages employers to expand employee benefits (not just retirement plans)

With these additional employee certification requirements, the concern for employers has to be the execution of this.  More conservative employers may reason that they could still be on the hook for the reasonableness of the employee’s assertions.  For example, if an employee claims they made just enough student loan payments to max out the employer match, the employer may want more information from the employee.  It should also be mentioned that IRS agents may ask for additional proof that a self-certification was accurate – essentially placing additional responsibility on the employer.

All of this is to say that there may be hidden administrative costs with self-certification provisions.  Employers will need to create processes and controls to adequately protect themselves in the case of IRS income or retirement plan audits.  In certain cases this may be easy, such as asking for an account statement from a student loan provider.  In other cases, such as domestic abuse survivor withdrawals, the answers are less clear and will require greater sensitivity.

Addressing employee concerns related to automatic enrollment

In a bill littered with small changes in retirement plans, perhaps the one that employers should be paying the most attention to is Section 101 which mandates automatic enrollment for most new employer plans (including 401Ks and 403Bs) starting in 2025.  The same section also requires at least 3% contributions into the plan in the employee’s first year, as well as a default investment option if an employee makes no election.  Essentially then, if a new employee forgets to fill out their paperwork or simply does not know what to choose, they will automatically be contributing at least 3% of their pay.  Employees will be forced to save even if they don’t make a choice.

While such a mandate does help bolster retirement savings, the question remains whether such a change will be welcomed by employees.  Will employees feel like the employer is taking away a choice from them by mandating automatic enrollment?  Some companies have automatic enrollment already, but many still do not.  If this becomes more common, does it change employee attitudes?

Another related question is how the choice of automatic enrollment levels affects the perceived adequacy of retirement savings for the employee.  Let’s say the employer picks an auto enrollment contribution rate of 5%.  Even though there is plenty of evidence to suggest that this savings rate may not be enough to fund a comfortable retirement, do employees interpret this contribution rate to be an adequate savings rate?

In other words, automatic enrollment does not relieve the employer of its responsibility to have conversations with employees about what the company retirement plan is and how to get the most from it.  It also may put unrealistic expectations on the employer.  The employee may think the employer is taking more responsibility for his/her retirement than they actually are.  It would seem prudent for employers to address the opportunities and challenges of open enrollment up front before adopting these changes into the plan.  Specifically, they should discuss why automatic enrollment can be helpful in saving for retirement.  They should also mention that opting out of the plan is still an option.  Finally, they should also address how just because a certain amount is being contributed each paycheck, the employees may still not have enough in retirement.

Addressing employee expectations

Many will be quick to point out that existing plans, most plans for employers in existence for less than 3 years (including any predecessor employer) and any plan maintained by an employer with no more than 10 employees are exempt from the automatic enrollment and default investment requirements discussed above.  However, even though these employers are not required to comply, they may want to make these changes to their plans anyway.  If employees truly do expect employers to take a more active role in helping them save for retirement, then automatic enrollment and more involvement by employers in employee’s retirement planning may become the expected norm.

After SECURE 2.0, employers have more opportunities than ever before to start and shape their retirement plans.  There is an increased credit available for employers who have 50 employees or less to start a new pension plan.  There is increased incentives to offer Roth options.  For example, SIMPLE and SEP plans can begin taking Roth contributions starting in 2023.  However, with these options comes increased pressure on employers to explain these options to employees (or hire outside sources to do this) and become involved in more complex financial planning areas.  Employers will need to find a line between offering enough plan options to stay competitive in the hiring marketplace and keep employees motivated without causing employees to feel overwhelmed by all the considerations.

The path ahead

While SECURE 2.0 does present some unique opportunities for employers, companies need to think beyond tax deductions and credits.  They need to consider how the plan they offer fits into their overall strategy for hiring talent.  They need to consider how much value employees will place on these new savings vehicles, as well as cost considerations.  Companies that realize that the options available after SECURE 2.0 go beyond just mere tax considerations will be better able to utilize their retirement plan in the competitive hiring market in the times ahead.

David Peters, financial advisor and CPA, is founder and owner of David Peters Financial Group.