Auto Enrollments in Secure Act 2.0 Linchpin For Improving Retirement System
Paul Andrews, J.D., CFA Institute
In a rare, if refreshing and resounding bipartisan vote, the House of Representatives passed the Securing a Strong Retirement Act, aka the Secure Act 2.0, back in March.
The Senate has been mulling retirement options: its own Rise & Shine Act and Earn Act. With 2.0 now in review in the upper house, it’s anticipated that the Rise & Shine Act, the Securing a Strong Retirement Act and the house version of Secure Act 2.0 will be welded together to create the Secure Act 2.0 (the first version was passed in 2019).
Four provisions of the House version are likely to survive the Senate review -- expanding automatic enrollment for employees, changes to required minimum disclosures, linking student loan and retirement savings and improving coverage for part-time workers.
Let’s expand on one of the most important provision -- the expansion of automatic employee enrollment into 401(k) and 403(b) plans. In our view, this is one of the pillars of a secure retirement for millions more Americans. One of the main reasons many Americans reach retirement age with little, or no savings is that too few workers are offered an opportunity to save for their golden years through their employers. Auto-enrollment significantly increases participation.
Since first defined and approved by the Treasury Department in 1998, automatic enrollment has markedly boosted participation by eligible employees. The House committee promulgating Secure Act 2.0 cited an Ariel Aon-Hewitt study that noted “The most dramatic increases in enrollment rates are among younger, lower-paid employees, and the racial gap in participation rates is nearly eliminated among employees subject to auto-enrollment.”
Specifically, this new provision requires 401(k) and 403(b) plans to automatically enroll participants in the plans upon becoming eligible (the employees may opt out of coverage). The initial automatic enrollment amount is at least 3 percent but no more than 10 percent. The plans can then increase the automatic contribution each year by 1 percent until it reaches 10 percent.
We also note the importance of an additional provision in Secure Act 2.0 that supports these auto-enroll objectives. The bill establishes a safe harbor to protect employers that make honest mistakes and take corrective actions to rectify employee elective deferral failures in a timely manner.
As it stands, the prospects for comfortable retirement are daunting. Several of the more troubling statistics from the U.S. Census, the GAO, and other sources raise the alarm on the looming retirement shortfall and its potential for serious disruption to civil society.
We simply cannot ignore these challenges any longer for several reasons. First, according to one Federal Reserve survey, only ~ 50% of families even have retirement accounts. For those fortunate to have retirement savings, the median retirement account balance is less the $145,000. Second, the average annual income for Americans over the age of 65 is less than $39,000 with an average net worth of just over $170,000.
The lack of preparedness for retirement is a ticking time bomb. Even worse, it has festered for years without meaningful legislation to address the challenge. However, the 2.0 Act represents a giant leap forward. Let’s hope the Senate deliberates with this imperative in mind.
Up next: the importance of the new flexibilities for require minimum distributions.
Paul Andrews is Managing Director for Research, Advocacy, & Standards for CFA Institute. Paul is also a current member of the CFA Institute Systemic Risk Council. Previously he was Secretary General of the International Organization of Securities Commissions (IOSCO), Vice President and Managing Director, International Affairs, of FINRA and Senior Managing Director, Business Operations – Europe, at Nasdaq Europe.
CNBC, House passes ‘Secure Act 2.0.’ Here’s what that means for retirement savings
Think Advisor. Senate Version highlights
MarketWatch. Senate Deliberations
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.