What is SECURE 2.0, and why does it matter to plan sponsors and retirement savers?

Lawmakers unveiled a retirement security package, referred to as SECURE 2.0, on Tuesday that is widely considered to be the most significant change to retirement policy in years and is aimed at shoring up Americans' retirement readiness.

The package is attached to a $1.7 trillion omnibus spending bill. Among other provisions, SECURE 2.0 expands automatic enrollment in 401(k) and 403(b) plans, enhances a tax credit for small businesses launching a retirement plan and allows employers to make matching contributions to a 401(k) plan, 403(b) plan or SIMPLE IRA based on qualified student loan payments.

Not yet, and its immediate fate depends on both chambers of Congress passing the omnibus spending bill. In order to avoid a government shutdown, the omnibus bill must pass by the end of the week, when government funding runs out.

A successful retirement has long been defined as a three-legged stool, with a pension plan, personal savings and Social Security all working together to produce a stable outcome. Traditional pension plans have become rarer, however, as plan sponsors increasingly move to freeze such plans, a development that has undermined financial security. Efforts to improve workers' ability to save for retirement through 401(k) plans are considered essential to helping close the savings gap.

"These are critical new protections that will make it easier for Americans to save for their retirement and have the financial security they need. As the economy deals with the effects of the worst inflation in nearly 40 years, working families need all the help they can get when it comes to saving for the next chapter in their lives and we are now one step closer to making that possible," said Sen. Rob Portman, R-Ohio, in a statement Tuesday. Mr. Portman introduced a bill in May 2021 that served as part of the basis for SECURE 2.0.

There's a host of provisions in the bill, but one of the most significant ones includes a requirement for employers launching 401(k) and 403(b) plans to automatically enroll new workers in those plans at an initial amount of at least 3%, with that amount increasing by 1 percentage point each year to 10% — unless the employee opts out. This wouldn't take effect until 2025, and current 401(k) and 403(b) plans would not be affected.

Auto enrollment is key to boosting savings because of a behavioral finance term known as inertia. This means that if employees are automatically enrolled, they'll stay enrolled and save in the 401(k) plan because of the human tendency not to make changes.

Another important provision allows for 403(b) plans to join multiple employer plans starting in 2023. Retirement plans known as 403(b) plans are offered by certain tax-exempt and non-profit organizations such as school systems, medical institutions and churches. According to Melissa Kahn, managing director of retirement policy for State Street Global Advisors' defined contribution team, this move "creates parity" for 403(b) plans and will help curtail the administrative and cost burdens that these plans often face.

Another key provision lowers the standard for long-term part-time workers to participate in 401(k) plans. The original SECURE Act, passed in late 2019, made it so that part-time workers who work at least 500 hours for three consecutive years are eligible for their employer's 401(k) plan. SECURE 2.0 lowers that requirement further to two years, starting in 2025. This is especially notable as the U.S. economy begins to move toward more service-oriented jobs.

Plan sponsors will need to work with their record keepers to implement the changes. For example, SECURE 2.0 bumps up the catch-up contributions for a select group of older workers, increasing to the greater of $10,000 or 50% more than the IRS-determined regular catch-up amount in 2025.

Drew Carrington, senior vice president and head of institutional defined contribution at Franklin Templeton Investments, said this provision could be "complicated" to implement for plan sponsors and record keepers, as it increases limits only for those aged 60, 61, 62 and 63.

SECURE 2.0 also increases the age at which plan participants are required to begin taking distributions from their retirement plans. The SECURE Act of 2019 increased the required minimum distribution age to 72, while SECURE 2.0 further increases that age to 73 beginning in 2023 and 75 beginning in 2033. This primarily benefits older workers who can afford to wait making withdrawals from their retirement plans, helping them avoid paying taxes on those withdrawals. This change could also result in keeping more assets in retirement plans, which could ultimately lower fees for plan sponsors.

Several retirement organizations are supportive of the retirement security package and have commended Congress for its efforts.

"Including SECURE 2.0 retirement provisions in the last major legislation of the year means that Congress is poised to help millions more workers and retirees with significant improvements to the nation's private retirement system. We expect that the legislation will add billions to the retirement savings for small-business workers, part-time workers, employees with student loan debt, military spouses, low-income workers, and others," said Paul Richman, chief government and political affairs officer at the Insured Retirement Institute, in a statement Tuesday.