Secure Act 2.0 – not so fast

Following is a summary of the Secure Act 2.0 published by the 401k Specialist. My observations to each section are shown as well. As usual, Congress ignores the likely consequences of its actions and misunderstands the actions of people.

51% of workers can’t save so we make laws to help save more and we take money from other taxpayers. We want employers to offer retirement plans, but we make it more complex and expensive to do so. We want people to save for retirement, but we have laws to make it easier to take out money sooner. We are concerned workers won’t have sufficient funds to retire, so we make it possible to delay longer using the funds.

And we base all these conflicting and costly decisions on stupid surveys.

It’s mostly nonsense.

Transamerica Institute and TCRS compiled a list of eight ways the new law progresses retirement security, based on surveying findings in their reports, “Emerging From the COVID-19 Pandemic: Four Generations Prepare for Retirement” and “Emerging From the Pandemic: The Employer’s Perspective.”

1. Implementing a government matching contribution for income-eligible retirement savers. Fifty-one percent of workers feel they do not have enough income to save for retirement. Under current law, the Saver’s Credit is a tax credit for low- to moderate-income workers saving for retirement in a 401k or similar plan or individual retirement account (IRA). However, its success has been limited by its being nonrefundable and due to a widespread lack of awareness. Beginning in 2027, SECURE 2.0 reimagines and replaces the Saver’s Credit with the Saver’s Match, a matching contribution from the government for retirement savers meeting income eligibility requirements. The Saver’s Match will be 50% of a worker’s retirement plan or IRA contributions up to $2,000, representing a maximum match amount of $1,000. The new law also calls for the promotion of the Saver’s Match.

2. Expanding workplace retirement plan coverage. Only 46% of employers with fewer than 100 employees offer a 401k or similar plan, compared with approximately nine in 10 employers with 100 to 499 employees (89%) and 500+ employees (92%). Among those not offering a plan and unlikely to do so in the next two years, employers’ top reasons are that their company is not large enough (79%) and concerns about cost (31%). Beginning in 2023, SECURE 2.0 helps address these issues by making it easier and more affordable for small businesses to adopt a qualified retirement plan, whether a stand-alone 401k or similar plan, or by joining a multiple employer plan (MEP) or pooled employer plan (PEP).

3. Extending retirement plan eligibility to part-time employees. Many employers offer retirement benefits to their full-time employees, but relatively few extend eligibility to their part-time employees. Only 51% of part-time workers are offered a 401(k) or similar plan by their employer, compared with 77% of full-time workers. Beginning in 2025, SECURE 2.0 creates more stringent requirements for employers to extend retirement plan eligibility to their long-term part-time employees.

4. Making it more convenient to save vis-à-vis automatic enrollment and automatic escalation. Together, these plan features increase employees’ participation in the plan and contributions to their retirement savings. However, among employers, only 23% of plan sponsors have adopted automatic enrollment, while 75% have adopted automatic escalation. Beginning in 2025, SECURE 2.0 will require employers adopting new 401k plans to include automatic enrollment and automatic escalation.

5. Mitigating the impact of financial emergencies. Workers have saved just $5,000 (median) to cover the cost of an unexpected major financial setback, and 14% of workers have no emergency savings. Moreover, more than one in four workers (26%) have taken an early withdrawal and/or hardship withdrawal from a retirement account, often the result of an emergency. Beginning in 2024, SECURE 2.0 helps solve these issues by creating an emergency savings account as a new plan feature for defined contribution retirement plans, including 401k plans, to help mitigate the need for workers to dip into their retirement savings. Additionally, under the new law, withdrawals from retirement accounts that are emergency withdrawals will not be subject to the 10% early distribution tax that is generally applicable to those under the age of 59½.

6. Matching contributions for student loan repayments. Younger generations are graduating from college with student debt, which competes with their ability to save for retirement, during a time in their life when they can potentially leverage the growth and compounding of investments over a long-range savings horizon. More than one in five Generation Z workers (22%) between ages 18 to 24 and 17% of Millennial workers cite paying off student loans as a current financial priority. Beginning in 2024, SECURE 2.0 enables employers to make matching contributions to 401k or similar plans with respect to employees’ qualified student loan payments. So, if workers cannot afford to save for retirement while they are repaying student debt, they can still receive a matching contribution from their employer into their retirement plan account.

7. Expanding Catch-Up Contributions.Many workers are inadequately saving for retirement and, as they grow older, they need to substantially increase their savings before they retire. For example, Baby Boomer workers have saved $162,000 in total household retirement accounts, and Generation X workers have saved just $87,000 (estimated medians). Beginning in 2024, SECURE 2.0 enables workers aged 50-plus to increase their catch-up contributions to a retirement plan account or IRA, allowing them to save more as they get closer to retirement. The new law includes rules requiring higher-income earners who make catch-up contributions to do so on a Roth or after-tax basis. Beginning in 2025, SECURE 2.0 enables workers aged 60 to 63 to save even more through catch-up contributions.

8. Acknowledging longevity and fixing required minimum distributions (RMDs).People have the potential to live longer than ever before, and today’s workers envision working beyond the traditional retirement age. Almost four in 10 workers (39%) expect to retire at age 70 or older or do not plan to retire. Thirty-eight percent of workers cite outliving their savings and investments as one of their greatest retirement fears. Under current law, the IRS generally requires individuals to begin taking the RMD annually from their retirement accounts at age 72. The failure to do so comes with a steep penalty of a 50% excise tax on the RMD amount. SECURE 2.0 increases the RMD age from 72 to 73 years old in 2023 and up to 75 years old in 2033, thereby giving workers more time to grow their savings. The new law reduces the excise tax for failing to take an RMD to 25%, and if the RMD is corrected in a timely manner, the tax is further reduced to 10%.

401k Specialist

3 comments

  1. You guys are ruining my Happy New Year buzz with all this serious conversation. I know it’s going to end badly. The whole house of cards can’t be propped up forever with fiat money. All the legislation is designed to keep the juice flowing to the financial interests and a sop to the higher education boondoggle with some credit for loan payback. A proxy war with Russia gets funded and the taxpayers get the bill or at least those who pay taxes get a bill.
    What can’t go on won’t go on.

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  2. Repeated from prior post with a few minor updates – you need not read past the next paragraph to get the gist of this way too long note:

    Thanks for nothing. Simply, unless Congress does something about Social Security and Medicare funding, and soon, all this SECURE 1.0 and SECURE 2.0 stuff is nothing more than “colored bubbles.” Per James Freeman of the WSJ: “… According to CBO’s projections, interest payments (on the existing federal debt) would total around $66 trillion over the next 30 years and would take up nearly 40 percent of all federal revenues by 2052. Interest costs would also become the largest “program” over the next few decades — surpassing defense spending in 2029, Medicare in 2046, and Social Security in 2049… ”

    Some thoughts about a few of the most prominent changes that are part of SECURE 2.0:

    1. Require auto enrollment in 401(k) plans
    Employers starting new workplace retirement savings plans could be required to automatically enroll employees in the plan.

    Wrong answer. Will reduce adoption of plans in the future … just like health reform mandates have chilled addition of employer-sponsored health coverage, and actually triggered changes in the number of individuals added to the to the workforce and the number of hours worked as a means to avoid the employer mandate.
    For example: https://peabody.vanderbilt.edu/departments/lpo/faculty-pubs/Henrich.pdf

    2. Introduce employer contributions for student loan payments
    Secure 2.0 could let employers make a matching contribution to an employee’s retirement plan based on their student loan payments.

    Wrong answer. Better answer is to update loan provisions. For example, a $1,000 pre-tax contribution with a $500 immediately vested match, would allow the worker to borrow $1,500 to pay against student loans. Otherwise, assuming a 25% marginal income tax rate (federal and state), the worker can only make a student loan payment of $750, and only get a $375 employer match.

    3. Increase the age for required minimum distributions

    It used to be that when you turned 70-1/2 you had to start withdrawing a required minimum amount from your 401(k) or IRA. Then, the age moved up to 72. Under the latest legislation, you likely would not need to tap your retirement savings until age 75 if you did not wish to.

    Wrong answer. Only those who can afford to forego RMD would defer payment. Why allow for futher deferral … to benefit those who don’t need to take funds. Better answer is to go back to age 70 1/2 and cap the distribution at no more than 5% of the prior year end account balance, reached at about age 80.

    4. Help employees build and access emergency savings
    One option would let you make a penalty-free withdrawal of up to $1,000 a year for emergencies. While the employee would still owe income tax on that withdrawal in the year it’s made, they could get that money back if they repay the amount they withdrew within three years, Winters said.

    Wrong answer. Better to simply have an interest free loan that must be repaid within 3 months or perhaps 1 year.

    Another might let an employer add a “sidecar account” to an employee’s retirement account, where the employee can contribute after-tax money explicitly for emergencies, Spence said. That money could be taken directly from their paycheck, just as their 401(k) contributions are.

    Wrong answer. ~50% of workers who are eligible for their employer sponsored retirement savings plan don’t contribute, or don’t contribute enough to receive the full available employer match. Better answer, concentrate monies in the 401k plan and allow for plan loans using 21st Century processing functionality.

    5. Raise catch-up contribution limits for older workers
    Currently, if you’re 50 or older you may contribute an additional $6,500 to your 401(k) on top of the $20,500 annual federal limit. Under the retirement package, those between ages 60 and 64 (the final range may be narrower) may be allowed to contribute $10,000, instead of $6,500.

    Wrong answer. These are individuals who are already contributing the 402(g) limit, $22,500 in 2023 (and that doesn’t include the employer contribution). The median 401(k) contribution is ~$100T (when you include Medicare Part A, B and D).

    From James Freeman, WSJ – if you are wondering whether America can afford to keep spending Trillions, including billions funding border security for countries we have never committed to defend, all funded with debt:

    America’s Top Priority
    Let’s hope that the United States Treasury never faces a funding crisis. But when congressional leaders cite military assistance to a country the U.S. does not have a treaty obligation to defend as the priority in negotiations over the federal budget, taxpayers have to wonder if they understand the debt burden.

    One can support Ukraine while also recognizing that a financially strapped United States wouldn’t be able to do much good in the world.

    A recent report from the Peter G. Peterson Foundation notes that “as interest rates on U.S. Treasury securities rise, so too will the federal government’s borrowing costs. The United States was able to borrow cheaply to respond to the pandemic because interest rates were historically low. However, as the Federal Reserve increases the federal funds rate, short-term rates on Treasury securities will rise as well — making some federal borrowing more expensive.” The foundation cites analysis from the Congressional Budget Office that given recent events may already be too optimistic but is still plenty concerning. The Foundation writes:

    According to CBO’s projections, interest payments would total around $66 trillion over the next 30 years and would take up nearly 40 percent of all federal revenues by 2052. Interest costs would also become the largest “program” over the next few decades — surpassing defense spending in 2029, Medicare in 2046, and Social Security in 2049…

    CBO estimates that by 2052, interest costs are projected to be nearly three times what the federal government has historically spent on R&D, nondefense infrastructure, and education, combined.
    Each new congressional spending splurge only moves the financial reckoning closer to the present.

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  3. You can lead a horse to water but you can’t make him drink. You can take a person to the bank to cash their check but you can’t make them save. You can save money for some people and who says they won’t take it out for an “emergency”?

    I think the easiest thing to do is to make IRA limits the same as 401K annual savings limits. The 2023 limits are $6,500 IRA / $22,500 401K not that most people can max out their 401K but some might on an IRA. Then have a mandatory 3% withdraw by the employer for either a IRA, Roth, or 401K with an opt out option. Most people would be too lazy to opt out. My employer in 1983 offered direct deposit to a bank IRA of my choosing so it is not hard to do and that was before my employer offered direct deposit.

    I also wonder what Americans will do in the future now that we are basically a cashless society since Covid. With online ordering and debit and credit cards, do people feel the same way I did when I collected cash on my paper route so long ago? It took a long time to get that quarter tip and I saved my money.

    I am not sure how I feel about the matching contributions for student loan repayments yet. But it takes away another excuse on why they can’t save and the tax payers won’t have to pay that student loan in the end.

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