Plan sponsors, managers mull merits of SECURE 2.0 provisions

Questions around the nearly 100 provisions in the SECURE 2.0 Act and whether and which ones to implement in retirement plans dominated discussions at Pensions & Investments' Defined Contribution East conference held March 12 – 14 in Orlando.

During panel discussions and networking breaks, plan sponsors debated the merits and complexities of implementing voluntary measures such as emergency savings accounts and employer matching contributions for student loan debt payments.

Many puzzled through questions not addressed in the legislation and for which they would like additional guidance from the Department of Labor.

A big question for many plan sponsors is how to prevent abuses in emergency savings accounts linked to retirement plans, said Holly Verdeyen, a partner and U.S. defined contribution leader at Mercer, during a well-attended panel called "Accomplishing So Much in So Little Time — Meeting the New SECURE 2.0 Provision Deadlines."

Plan sponsors want to know how to "prevent things like participants contributing to their accounts and getting the match and then immediately withdrawing their contribution," she said.

Another big question for many plan sponsors revolves around the optional provision of allowing employees to designate employer matching contributions on a Roth basis.

"There is so much additional clarification that is needed on how those employer matching contributions are going to be treated for the purposes of payroll, withholding and income taxation," Ms. Verdeyen said.

"This is one of the few provisions that is actually implementable today, but I think employers would take on a lot of risk implementing that provision without that additional clarification that really needs to come from the IRS," she said.

Even as plan sponsors and their service providers tried to dissect the legislation and scratched their heads about how best to move forward, some were already thinking ahead to SECURE 3.0.

Shlomo Benartzi, professor emeritus at UCLA Anderson School of Management and founder and CEO of PensionPlus, a digital retirement income service provider, looked at how to boost financial wellness in a way that he felt "really moves the needle."

"That's not to say that SECURE 2.0 is not a great improvement, but I think there's a lot more we can do," he said during a keynote speech on "SECURE 3.0 and Behavioral Economics — Making the Best Nudge Even Better."

Mr. Benartzi suggested that the auto-enrollment and auto-escalation requirements for all new plans under SECURE 2.0 be more aggressive. SECURE 2.0 requires employers offering new 401(k) and 403(b) plans to auto-enroll participants at an initial deferral rate of 3% and then auto-escalate them by 1% annually.

"We need to start at higher rates, we need to escalate sooner and faster," Mr. Benartzi said.

Mr. Benartzi also pushed the industry to use data to personalize the default auto-enrollment and auto-escalation rates in defined contribution plans.

"How many of you believe that a single mom with three kids and five maxed out credit cards should be auto-enrolled at 7%?" he challenged the audience during his keynote speech.

Mr. Benartzi pointed out that auto-enrolling everyone at the same rate without considering their debt is misguided.

"I think we have to start looking at data. We have to start using it. We have to start personalizing it," he said.

The concept of personalization permeated many other panel discussions. Joseph Szalay, senior vice president of defined contribution at PIMCO, for example, talked about personalized target-date funds, those that in addition to a participant's age incorporate data such as a participant's current annual salary and current retirement account balance.

"Instead of just giving you the 2050 or 2030 rendition of yourself, we're able to blend those target dates and give someone a specific allocation for them that's going to automatically update throughout their life," Mr. Szalay said during a panel discussion called "DC Lineup Construction: The Growing Appeal for Simplicity, Lower-Cost Investments and More Personalization."

Rachel Weker, vice president and senior retirement strategist at T. Rowe Price Group, also discussed the importance of using data to personalize and make decisions about defined contribution plan design.

"As we recognize the unique needs of different populations, we understand the value of being able to drill down and look at differences by gender, by race and ethnicity, maybe by household income," she said during a panel called "Analyzing Your Plan's Data to Make More Informed Decisions."

Another popular topic revolved around guaranteed retirement income and whether SECURE 2.0 would spur greater adoption of annuity products within defined contribution plans.

John Doyle, senior vice president and senior retirement strategist for Capital Group's American Funds, predicted that guaranteed income will become the norm within 10 years during a panel called "Continuing the Discussion — How Does Your Plan Provide Guaranteed Income to Retirees?"

"It's a process and there are decisions that need to be made," Mr. Doyle said of the many steps that plan sponsors need to take before implementing a guaranteed income product into their retirement plans.

Patrick Goessling, sales director of institutional income annuities at MetLife who was also on that panel, noted that "conversations are happening" and was encouraged by the fact that SECURE 2.0 made annuities easier to understand.

Under SECURE 1.0, plan sponsors and participants "had to do a little math," Mr. Goessling said.

The prior legislation limited the maximum purchase amount for a qualified longevity annuity contract to the lesser of 25% of a participant's account balance or $145,000. SECURE 2.0 made it more straightforward by eliminating the 25% threshold and increasing the maximum QLAC purchase amount to $200,000.

"Much, much more simple and easier to understand for all parties involved," Mr. Goessling said of the change.

Both Messrs. Goessling and Doyle agreed that making annuities simple will be critical to boosting their adoption in plans, with Mr. Doyle adding that participant education will be important too.

Depending on how the question is phrased, "80% of participants want guaranteed income but none of them want annuities, and obviously you're talking about the same thing," Mr. Doyle said.

The sizzling hot topic of ESG investing also stirred up heated discussions. During a panel called "The Wait is Over — DC Plans Now Have More Discretion to Embrace ESG," speakers vented about the politicization of the Department of Labor's final "ESG rule," which allows retirement plan fiduciaries to consider ESG factors when selecting investments.

"It's a neutral rule. It's not an ESG rule," said Liana Magner, executive vice president and head of retirement and institutional at Natixis Investment Managers. "It's a rule about prudently selecting and monitoring investment options over time."

Ms. Magner echoed earlier comments that day from Ali Khawar, principal deputy assistant secretary of the Labor Department's Employee Benefits Security Administration, who bemoaned the misinformation about what the final rule actually does.

"It does not mandate the consideration of ESG, it does not mandate that everyone has to buy Amazon rainforest property," Mr. Khawar said of the final rule. "What it does is say that you have to be a prudent fiduciary."

Ms. Magner and the other panelists urged plan sponsors not to be dissuaded by the current backlash to ESG investing.

"Forget about this nonsense coming out of Washington, D.C., around what you can and can't do," said Jeff Vilker, director of defined contribution for Impax Asset Management. "It's just ridiculous. It's infuriating because it's impacting our ability as a community to close the retirement gap."

Brian Croce contributed reporting.