How to Minimize Your Liability for New SECURE 2.0 Investors and Sponsors

As many retirement plan advisors know, the retirement landscape is changing. Recent Setting Every Community Up for Retirement Enhancement Act revisions (SECURE 2.0) are designed to spur more employers to create plans and more workers to participate in them. The likely result over the next few years will be a large number of sponsors and investors who don’t quite know what to do or how to do it. And that’s a recipe for more liability claims.

Advisors are already under pressure from regulators, custodians, sponsors, investors and more to ensure that plan participants are protected from undesirable outcomes. Yet SECURE 2.0 changes add to that challenge. Specific features of the legislation will be risky for retirement plan professionals who don’t take precautions. Following the best practices for onboarding and educating new sponsors and investors will be one of the best ways to control your risk. Here’s what to know.

What Are the Changes?

Retirement benefits are a familiar work perk for many. Over 96 million workers actively participate in either a defined benefit or defined contribution plan in the United States, according to the Employee Benefit Research Institute. Yet for millions of other workers, the ins and outs of a 401(k) are a mystery. In 2020, 45% of workers did not participate in any type of retirement plan.

But with SECURE 2.0, millions more workers are expected to enroll. The plans they will join include existing plans for current employer sponsors, plus newly created plans that smaller employers will now qualify to sponsor.

Confusion over what to do and how to do it will be a key factor in this process for both these employers and their employees. Yet beyond the existing retirement benefit structure now being opened up to a new pool of sponsors and investors, there are also the many changes SECURE 2.0 brings to the existing system, including:

  • Auto-enrollment and escalation
  • Increased tax credits for low-income savers
  • 403(b) plan participation improvements
  • Required minimum distribution changes
  • Catch-up contribution increases
  • Student loan matching contributions
  • Emergency savings withdrawals
  • Expanded hardship withdrawals
  • Plan lost and found initiatives
  • 529 rollover options
  • Part-time employee plan eligibility
  • Job change plan auto-portability
  • QLAC allocation expansions

We previously detailed some of these changes here.

What Are the Risks?

Of all the SECURE 2.0 changes, a few stand out for the risk they present to retirement plan professionals:

Auto Enrollment

The automatic enrollment of newly qualified employees is expected to benefit millions of workers and save on costs and complexity for plan administrators. However, the initial rollout of this new feature may pose some risks. SECURE 2.0 sets out rules for three tiers of plans:

  • Plans created before 2023 will be grandfathered in and are not currently required to follow the new auto enrollment procedures.
  • Plans initiated in 2023 or 2024 must ensure the automatic enrollment features are included, with implementation to begin in 2025.
  • Plans starting in 2025 and beyond will be required to enroll all qualified employees in a plan automatically.

Auto enrollment may pose a compliance challenge due to the different rules affecting differently aged plans. New beneficiaries may require additional guidance and support getting up to speed on the benefits and responsibilities of participating in a plan. For those who are enrolled automatically yet wish to opt out, a “permissive withdrawal” window of only 90 days is allowed.

Automatic Escalation

The new SECURE 2.0 legislation also features new rules for the automatic annual escalation of a participant’s contribution rate. While this benefit may also reduce complexity and benefit savers, it is also not without risks. Notable changes include:

  • The auto escalation feature of SECURE 2.0 stipulates that qualified employees be auto enrolled in a plan at a contribution rate of between 3% and 10% of pay.
  • An annual 1% escalation of the contribution rate is then set to be applied automatically until the participant reaches a minimum of 10% or maximum of 15%.
  • Within these minimum and maximum rates, the exact percentages are at the discretion of the sponsor.

Challenges with this part of the legislation also exist. An automatic escalation of exactly 1% is required, though this may not be the best option for all plan participants. Initial and escalation minimum and maximum contribution ranges are specified, but the exact rates are left up to the discretion of a sponsor, which also may not suit all participants. Plan administrators will also need to make clear that participants do have the right to choose their own initial contribution rate as well as future rates, including the option to opt out of automatic escalation.

Employer Tax Credits

A well-designed plan is often an important recruiting and retention tool for a small business. However, the creation of a new plan can be quite an undertaking. While a tax credit already exists to encourage the formation of plans, SECURE 2.0 incorporates a range of new changes, including these:

  • SECURE 2.0 increases the employer tax credit for creation of a new plan to 100% of administrative costs for three years, up to $5,000 annually. Businesses with 51 to 100 employees are eligible for a lesser credit.
  • For employers with defined contribution plans, sponsors can receive a tax credit toward 100% of matching contributions in the first year, subject to a cap of $1,000 per employee. Lesser credits are available for the second and third years.

Plan design will play an important role for employers seeking to take advantage of SECURE 2.0 tax credits. This may create some risks for advisors. Eligibility for certain credits relies on an employer having no 401(a), 403(b), SIMPLE or SEP plans in place during the three year period prior to the adoption of the plan. Certain tax credits also base eligibility on how many employees received at least $5,000 or less than $150,000 in compensation. Such details require careful attention.

What Could Happen?

SECURE 2.0 has only been the law of the land for a few short months, with many parts of the law not taking full effect until 2025. It will be hard to know the full effects of the law and its changes for some time. However, recent history has shown that when the outcome for a plan is less than ideal, an advisor may be blamed.

Plan Sponsor notes that almost 90 lawsuits against plan professionals were initiated last year. We previously reported how just one law firm was responsible for 11 such lawsuits. Yet Plan Sponsor also notes that the most recent lawsuits have been more sophisticated.

With the rollout of SECURE 2.0, new complaints may focus on the new law and its areas of risk. For example, complaints could allege losses related to:

  • Participants being improperly enrolled in a plan automatically.
  • Eligible employees being left out of a plan or experiencing a delayed automatic enrollment.
  • Mistakes occurring involving the auto enrollment or auto escalation of contributions.
  • Lack of information regarding the plan, contribution rates, permissive withdrawals, opt-outs or other plan choices.

Sponsor employers could also lodge a complaint over the creation of a new SECURE 2.0 plan for any number of reasons, including potentially the complex nature of eligibility for plan tax credits.

Besides these risks, advisors will likely continue to face lawsuits claiming excessive fees, investment performance, investment options and more. History has also shown that, unfortunately, claiming your role as a plan fiduciary is merely ministerial is not a guarantee a court will see it that way.

What Can Be Done?

Fortunately, advisors don’t have to wait for problems to arise to take action. The right steps can minimize your risk of liability to investors and sponsors.

Focus on education – Advisors can play an important role when it comes to education about requirements, benefits and features of SECURE 2.0 plans. This material will be new to some employer sponsors and employee participants, so think ahead to develop a plan of action.

Practice good communication – Good communication can help foster positive relationships and minimize the risk of complaints. Be sensitive to the fact that participants and sponsors may have different communication needs. Develop plans and procedures to communicate effectively.

Consider cyber safety – Cyber safety is an important part of protecting a plan and its participants. Cyber criminals often look for weaknesses, such as new processes and procedures, as a target for exploitation. Ensure you follow best practices to protect yourself.

Document professional advice – The proper documentation of professional advice can help protect you, your plan and its participants. Professional mistakes can range from trading errors to fiduciary duty breaches and more. The right processes can minimize your risk.

Carry liability insurance – The right coverage is a must for today’s advisor. E&O Liability Insurance from Lockton Affinity Advisor can help protect you and your business from a broad range of professional negligence claims. Fiduciary coverage is included automatically, and our E&O meets ERISA standards, including services as an ERISA 3(21) and 3(38) advisor, ensuring any fiduciary duties you perform are covered.

Managing SECURE 2.0 Risks and Benefits With Lockton Affinity Advisor

New SECURE 2.0 investors and sponsors don’t just represent a new liability risk, they also represent an opportunity. Advisors have an opportunity to help many more employers and employees save and prepare for their future. The right insurance protection helps ensure you’re ready for the future, too.

To learn more about insurance solutions from Lockton Affinity Advisor, visit us online or give us a call at (844) 406-5958.