How Secure Act 2.0 creates more retirement
In 2019, Congress passed the SECURE Act, which stood for Setting Every Community Up for Retirement Enhancement and included a range of reforms designed to help people prepare financially for retirement. Now, Congress is building on that legislation with several pending retirement-related bills, known collectively as SECURE Act 2.0.
“While the SECURE Act put many Americans on a path toward a more secure retirement, many people remain concerned about their financial security and ability to accumulate the savings they need for a sustainable retirement income,” says Paul Richman, chief government and political affairs officer at the Insured Retirement Institute (IRI). Those concerns have been exacerbated by the health and financial challenges of the COVID pandemic, along with inflation and market volatility. “So Congress is hearing the voices of their constituents who are experiencing this anxiety, and it is focused on getting this SECURE Act 2.0 bill across the finish line,” he says.
SECURE Act 2.0 is still a work in progress, but so far much of it focuses on encouraging people to save more for retirement. To that end, it is expected to require companies to auto-enroll employees in new retirement plans (with employees being able to opt out if they want). “Statistics have shown auto-enrollment to be highly effective,” says Bill Crane, senior vice president of market development at Global Atlantic. “When there's no auto-enrollment, about half of employees contribute to their retirement plans; when there is, about 9 out of 10 do.” The legislation may also include auto-escalation, through which employee contributions are automatically increased each year until reaching a certain level, such as 10% of earnings.
Something for all generations
How will the SECURE Act 2.0 impact your clients?
Our podcast featuring the Insured Retirement Institute’s Paul Richman and Frank O'Connor breaks it down for you.
The proposed legislation would also increase retirement plan catch-up contributions to $10,000 for people in their early 60s; these contributions would be subject to Roth treatment and made on an after-tax basis. The bills would also allow employers to match employees’ student-loan payments with a contribution to their 401(k) and 403(b) plans—a provision that would be important to a broad range of people, not just recent graduates. “There is a huge amount of student loan debt for older generations, people in their 50s and 60s, who are not only paying off their own loans, but who also signed or co-signed for loans for their children and grandchildren,” says Crane. “So it’s a crisis that confronts all generations.”
Some of the act’s pending provisions are of particular interest to producers. For example, proposals raise the required minimum distribution (RMD) age incrementally over several years to 75. “That provides additional years of growth of the portfolio, and the person will also be several years older. So the RMD is going to be higher,” says Frank O'Connor, vice president of research at IRI. Producers will need to help their clients work through those calculations, he says.
SECURE Act 2.0 is also expected to make it more attractive to include annuities in retirement plans. For example, the increased age for RMDs to begin means an eventual higher monthly income from the annuity. And the act is expected to increase the amounts that individuals can invest in Qualified Longevity Annuity Contracts (QLACs), which can delay payouts to as late as age 85, helping to reduce the amounts of earlier RMDs and provide guaranteed income late in life.
One proposal, for example, would eliminate the current QLAC investment cap of 25% of retirement savings and raise the investment maximum from $145,000 to $200,000. “When you have to start taking RMDs out of your qualified plans, the QLAC will still be exempt for years,” says Crane. “That’s really critical, because all of us are worried that we’re going to outlive our savings. This can be a very effective hedge against that longevity risk. This is something that every financial professional should be discussing with their clients.”
All of this should help increase awareness of annuities, which are not always well understood by the public, according to IRI’s research. “When you ask people in a survey if they're interested in an option that will give them a guaranteed lifetime income in retirement, about 90% say, ‘absolutely—bring it on.’ But when you attach the word annuity to that question, it goes the other way,” says O'Connor. SECURE Act 2.0 opens the door to increased discussions of annuities in the context of retirement plans, and an opportunity for producers to educate clients about their value, which can boost interest in including them in their portfolios.
Strong bipartisan support
Although it seems likely that these provisions will become law in some shape or form, the SECURE Act 2.0 bills still need to be negotiated and combined, leaving the door open to unseen shifts and possibly even its failure to pass. However, says Richman, “we're very optimistic that given the strong bipartisan support for this bill and the interest in doing something in the retirement space, this is going to get done this year. But until it happens, we’re not sure. So we’re going to keep working at it to help make sure Congress does get it done.”
In the meantime, producers can learn about and prepare for the arrival of the new legislation. “SECURE Act 2.0 creates an incredible opportunity for financial professionals because people will have more options to consider, and they will need advice, guidance, and education,” says O'Connor. And with the act’s encouragement of increased retirement investment, he says, “more clients will have higher balances in their retirement accounts, which gives financial professionals more flexibility to help people prepare for and enjoy the best retirement they can.”
Key Provisions of the SECURE Act 2.0: Toward the Best Possible Retirement
- Catch-up contributions
- Matching student-loan payments
- Increased RMD
- Increased QLACs
- Focus on annuities