Navigating the Evolving Landscape of Retirement Planning: Impact of the SECURE Act 2.0

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Our Speaker:

Bradley Troy, CFP CAP , CFP?, CAP?, CLU?, CHFC?, AIF?, CPFA?

Wealth Management Advisor, First Financial Group

*The SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0

In this edition, we delve into the changes brought by the SECURE Act 2.0 and its impact on retirement planning. Key highlights include the shift towards auto-enrollment, the introduction of pooled employer plans, and new opportunities for Roth conversions and student debt matching. We also explore the implications of these updates for both employers and employees, including potential tax credits and changes in audit requirements. Stay informed on how these changes can affect your retirement strategy and planning.

The Shift to Auto-Enrollment

One of the most significant changes introduced by the SECURE Act 2.0 is the auto-enrollment requirement for retirement plans. Starting this year, any plan established after December 29, 2022, must include automatic enrollment at a minimum of 3%, with an annual increase of 1% up to 10%. This is a game-changer for retirement savings, ensuring higher participation rates and more consistent savings across the board.

From a practical standpoint, this means if you’re implementing a new retirement plan, you’re likely to see a notable increase in employee participation. This shift is expected to drive up savings rates significantly. However, it also means businesses will need to be prepared for the associated financial exposure. With auto-enrollment, companies will have to account for increased payroll contributions and adjust their financial strategies accordingly.

The Impact of Disenrollment

Interestingly, statistical evidence suggests that once employees are auto-enrolled, they rarely opt out. This mirrors our broader experience with other automatic deductions, like Social Security and Medicare taxes. Employees tend to adjust to their net pay and accept the deductions as a given. This behavioral insight is crucial for understanding the long-term implications of auto-enrollment.

Grandfathering and Tax Credits

Existing plans will be grandfathered in under the new rules, so businesses with pre-existing plans won’t need to adopt auto-enrollment immediately. However, there’s an incentive to switch: a tax credit is available for those who implement auto-enrollment. This could make the transition more attractive for many organizations.

Streamlining Retirement Plans with Multiple Employer Plans

The SECURE Act 1.0 introduced multiple employer plans (MEPs) and pooled employer plans (PEPs), which aim to streamline retirement plan administration and reduce costs. The elimination of the “one bad apple” rule means that non-compliance by one participant in a MEP or PEP won’t affect the other participants. This change simplifies compliance and reduces the administrative burden for employers.

Additionally, PEPs and MEPs now have fewer restrictions and can be offered outside of professional employer organizations (PEOs) or associations, making them a more accessible option for small to medium-sized businesses. This can lead to significant savings and reduced fiduciary risk.

The Future of Retirement Planning

Looking ahead, the SECURE Act 2.0 introduces several new provisions, including the ability to convert unused 529 plan funds into Roth IRAs, and potential changes in how hardship withdrawals are managed. While some provisions, like the auto-enrollment and the 529-to-Roth conversion, are promising, others, such as the self-certification for hardships, require careful consideration to avoid pitfalls.

Student Loan Matching

Another noteworthy addition is the matching for student loan payments. This allows employers to match employee contributions to their retirement plans based on the amount they are paying towards student debt. While still relatively rare, this could become a valuable tool for attracting and retaining talent, especially among younger workers with significant student loan burdens.

Embracing Plan Conversions and Tax Credits

The SECURE Act 2.0 also brings some exciting changes regarding plan conversions and tax credits. Historically, simple plans required notice for conversion to a 401(k) by the end of the year. Now, conversions can be made at any time, offering greater flexibility and potential benefits of 401(k) plans over simple plans. Simple plans, which were introduced in 1996, often face issues with compliance and eligibility tracking, making a switch to a 401(k) plan a potentially wise move for many employers.

Additionally, there are new tax credits for employers. For startups, there’s a tax credit of $250 per non-highly compensated employee, up to $5,000 over the first five years. If you adopt auto-enrollment, there’s an extra $500 credit. Matching contributions for employees earning less than $100,000 can also be offset by a tax credit of up to $1,000 per employee. These credits are designed to encourage retirement plan adoption and can provide significant financial benefits to employers. For a detailed breakdown and to see how these credits could apply to your situation, reach out for a personalized calculator.

Part-Time Employees and Audit Changes

The new regulations under the SECURE Act 2.0 also impact part-time employees. Previously, plans had to exclude employees who worked less than 1,000 hours in a year. Now, part-time employees who work at least 500 hours per year for two consecutive years must be included in the retirement plan. This is a significant shift and requires a thorough audit of past employment records.

It’s recommended to review your workforce from the past three years to identify employees who meet the new criteria and make them eligible for your plan. While these employees won’t affect your ACP or top-heavy testing, having a clear policy for handling them is crucial. If you're considering a pooled employer plan (PEP), note that only the pooled plan undergoes the audit, potentially easing your administrative burden.

Managing Audits and Provider Evaluations

For companies with over 100 active participants, the SECURE Act 2.0 changes the audit requirements. You will need to conduct an audit if you have over 100 active participants at the start of the year. However, if you switch to a pooled plan, the responsibility for the audit shifts to the pooled plan provider.

Consolidation of Record Keepers

We've seen a significant consolidation in the record-keeping industry over the last couple of years, and it’s expected that only a handful of record keepers will remain. While this can limit choices, the good news is that if you work with a skilled advisor, they can help you leverage your benchmarking data to negotiate better terms with your current record keeper. Your advisor should be able to secure cost concessions if available, which is a crucial aspect of maintaining an efficient and cost-effective retirement plan.

State-Specific Retirement Plans

The landscape of retirement planning is also being shaped by state-specific legislation. Many states, particularly those with Democratic leadership, are pushing for mandatory state-run retirement plans. For example, states are increasingly requiring employers to either establish their own retirement plans or facilitate employee enrollment into state-managed plans. This involves helping employees understand their options and managing deductions from payroll into these state plans.

Benchmarking and Advisor Engagement

Benchmarking your retirement plan is essential to ensure you are getting the best value. If you have questions about this process or need assistance, reach out to a qualified professional who can help illuminate where costs may be inefficiencies. It’s crucial to work with an advisor who is proactive and capable of managing the complexities of plan maintenance and compliance. If your current advisor is not providing the necessary support, it might be time to seek out someone who can actively engage with your plan and provide the guidance needed to navigate these changes effectively.

Evaluating Plan Providers

When considering changing your 401(k) plan provider, be cautious of market value adjustments, especially if you have a substantial stable value fund. These adjustments can result in significant penalties, so understanding the implications of moving your plan is critical. A comprehensive evaluation with your advisor can help prevent potential pitfalls and ensure a smooth transition if needed.

Conclusion

As the landscape of retirement planning evolves with the SECURE Act 2.0, it’s crucial for employers to stay informed and proactive. From auto-enrollment and state mandates to provider evaluations and benchmarking, there’s a lot to consider. By staying engaged and working with knowledgeable advisors, you can navigate these changes effectively and ensure your retirement plan meets the needs of your employees and your organization.

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