In an effort to improve Americans’ retirement security, Congress is working on the Secure Act 2.0 – but there’s more it can do, experts say.
The House passed the Securing a Strong Retirement Act, and two Senate committees advanced their own legislative proposals focused on retirement savings – one from the Health, Education, Labor and Pensions Committee called the RISE & SHINE Act, and another from the Finance Committee called the EARN Act. The three proposals share similarities, though some provisions take slightly different approaches to address the same issue.
Although it’s not yet clear how Congress will mesh these proposals into one, experts expect these ideas will come together to become the Secure Act 2.0.
“It took so long for the first Secure Act to pass,” said Melissa Kahn, managing director of retirement policy at State Street Global Advisors. “But even while the Secure Act was being discussed, debated, marked up and ultimately enacted, more developments were happening and that’s why we have this need for the Secure Act 2.0.”
There are many ways to bolster retirement security, and Americans need help. Not all employees have access to a tax-advantaged, employer-sponsored retirement account, and many who do struggle to contribute. Planning for retirement can be complex and overwhelming, with what feels like an unlimited number of strategies to claim Social Security and invest in a retirement portfolio. Many small businesses have trouble offering retirement plans to their workers, and IRAs have lower contribution limits than their employer-sponsored counterparts.
Enter a potential Secure Act 2.0. The proposals that may make up the Secure Act 2.0 include many provisions to improve retirement security for Americans, and include increasing the IRA catch-up limit so that it increases beyond the current $1,000, as well as treating student loan payments as elective deferrals for retirement accounts so that employees can pay down their debt and potentially get employer contributions to their 401(k) plans.
There’s also a call for a ‘lost and found’ database for old workplace plans, because sometimes workers change jobs and forget to roll over their assets. Expanding automatic enrollment in retirement plans to make it easier for workers to get started saving is also on the list.
These proposals have bipartisan support, just as the original Secure Act did when it was passed in December 2019, making it likely that a bill will end up on the president’s desk by the end of the year. But there are a few missing pieces in each of the proposals, and Congressmembers could ensure Americans’ retirements are strengthened if they were to take these into consideration, retirement experts said.
How to make the legislation stronger and better
Each draft bill has aspects it can amend or include, and some show up in one or two proposals while it is missing from another. For example, the EARN Act may be better off tweaking its provision on emergency savings, the Insured Retirement Institute, a group that represents annuity and insurance providers, wrote in a letter to the Senate Finance Committee supporting the proposal. Instead of a one-time $1,000 penalty-free distribution per calendar year, as is suggested in the draft bill, a “side-car” savings program would be most beneficial for Americans, just as it had been suggested in the RISE & SHINE Act.
Automatic enrollment is a powerful tool to get retirement savers on the right track for their old age, and could be better emphasized in the EARN Act, IRI said, just as the House wrote it in the Securing a Strong Retirement Act. Long-term care planning is another important area of focus, and senators could promote that by adopting Pennsylvania Republican Sen. Pat Toomey’s proposal that excludes retirement account distributions for long-term care insurance from gross income, the group noted in its letter.
Both the EARN Act and the RISE & SHINE Act should consider including lifetime income options in workplace retirement plans, such as annuities and qualified default investment alternatives, the latter of which are currently prohibited under the Department of Labor, IRI said. Contributions to a QDIA are invested as the plan fiduciary (such as the plan sponsor) sees fit. “By eliminating this regulatory barrier, retirement savers gain the ability to accumulate assets using a protected lifetime income solution without needing to make underlying investment selections inside their workplace retirement savings plan,” IRI wrote to the Senate HELP Committee in regards to the RISE & SHINE Act.
A starter 401(k) plan for businesses without a workplace plan would be a boon for retirement savers, and the EARN Act lays the framework for such – but it could use some improvement. The proposal says these plans would have the same limits for annual deferrals as IRAs, but that’s significantly less than a traditional 401(k) allows. In 2022, the contribution limit is $6,000 plus a catch-up contribution of $1,000 for people 50 and older, compared to 401(k) plans, which is $20,500 with a $6,500 catch-up. “There’s no reason if they’re meeting all the requirements for a 401(k) that they shouldn’t have 401(k) limits,” said Jared Porter, co-founder of small business 401(k) provider 401GO.
A stronger focus should also be placed on portability of retirement accounts, especially considering so many Americans move from job to job and may not have time to accumulate enough assets in each separate workplace plan, Khan said. The process of rolling over an old plan to a new account can be time-consuming and complicated, and “more needs to be done” for a seamless transition, she said.
Of course, the retirement industry is constantly evolving, which means even if the Secure Act 2.0 passes, more legislation will eventually be needed, Khan said. “There’s going to continue to be innovation in the financial services industry,” she said. “There are still going to be issues to be solved.”