Perspectives : Fiduciary Regulatory | November 10, 2022

Securing a stronger retirement: A SECURE 2.0 update

At a time when some people may find it harder than ever to save for retirement, help could soon be on the way.

Making their way through the corridors of Washington, D.C., and likely heading for a vote during the lame-duck session of Congress, are several retirement reform bills that were introduced in the House and Senate in 2022. They’re collectively known as the SECURE Act 2.0 (itself a successor to 2019’s Setting Every Community Up for Retirement Enhancement Act—or the SECURE Act).

The new bills introduce changes to how catch-up contributions are made, help for employees with student loan debt to save for retirement, easier ways for employees to join retirement plans, and additional investment opportunities for participants in 403(b) plans.

While SECURE 2.0 includes many helpful provisions for participants and plan sponsors, there is still uncertainty about when the vote will take place and what will be included in the final bill if it passes. Still, given our history of helping investors improve outcomes and achieve retirement success, here are four provisions that Vanguard is keeping an eye on.

Changes to catch-up contributions 

Under the new bills, all new catch-up contributions to defined contribution retirement plans must be Roth. As written, the bills propose that plans that don’t offer Roth won’t be permitted to allow catch-up contributions. Further, depending on the bill, the limit may increase to $10,000 for people who reach a certain age (i.e., 60).

We encourage sponsors to consider offering Roth in their plans so participants already making catch-up contributions don’t miss a beat. 

Why the change from pre-tax to Roth? Essentially, the government intends to use the current taxation of Roth contributions to fund other parts of the bill (such as pushing back the mandatory age for required minimum distributions). 

Source: Vanguard, How America Saves 2022.
Graduating with student debt

As more and more people may find it difficult to prioritize retirement saving and pay off student debt, rescue could come in the treatment of those loan payments.

SECURE 2.0 proposes that employers can make matching contributions to their plan based on their employees’ student loan repayments. This could be beneficial to employees who feel that the money they put toward making loan payments prevents them from also saving for retirement at the same time.

While this provision would be voluntary, plan sponsors should consider the current participation and saving behaviors of their employees before deciding to adopt this feature. 

New hires are in, tenured hires are in

The adoption of automatic saving provisions in retirement plans is growing, and these measures help increase participation and saving rates among employees. SECURE 2.0 would make these measures mandatory. 

SECURE 2.0 proposes that employers offering newly established 401(k) plans with at least 10 participants automatically enroll new hires into their plans at a pre-tax rate of at least 3% of the employee’s pay. Further, and exclusive to the Senate bill, established employees who haven’t yet joined the retirement plan would also be automatically enrolled following the same parameters.

Perhaps even better, the act also proposes automatic increases of saving rates at one percent of an employee’s pay every year up to 10%. 

Source: Vanguard, How America Saves 2022.
Expanded investment opportunities

Currently, participants in 403(b) plans can only invest in mutual funds. This limits a plan’s ability to offer even lower-cost investments through collective investment trusts (CITs)—popular options in 401(k) plans.

While not officially in any of the Senate bills that make up SECURE 2.0, Vanguard is advocating for the addition of language that allows lower-fee CITs to be part of a 403(b) plan’s investment lineup to meet the needs of savers and create equitable choice in 403(b) and 401(k) plans. 

Vanguard’s Strategic Retirement Consulting group will continue to monitor the progress of SECURE 2.0 and report any news, including the final outcome and what it will mean for our plan sponsors and participants. 


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