After a long and windy road, the SECURE 2.0 Act has become law. The new legislation, which updates the original Setting Every Community Up for Retirement Enhancement Act of 2019, contains a number of changes impacting recordkeepers.
SECURE 2.0 changes represent an opportunity for your plan participants. However, they also represent new risks for you as a financial professional. Taking the right steps now can help you avoid a claim. Here’s a recap of the law’s key points, plus four ways you can minimize your risk of SECURE 2.0 changes going forward.
Key Provisions of SECURE 2.0 for Advisors
The SECURE 2.0 legislation is notable for being the consolidated, amalgamated result of the Senate’s Enhancing American Retirement Now (EARN) Act and Retirement Improvement and Saving Enhancement to Supplement Healthy Investment for the Nest Egg (RISE and SHINE) Act bills with the House’s Securing a Strong Retirement Act bill. All three bills sought to update regulations in the SECURE 1.0 law.
As Plan Sponsor notes, some of the key changes for advisors are as follows:
- Auto-enrollment and escalation: The legislation requires new participants of 401(k) and 403(b) plans to be auto-enrolled with a salary deferral contribution of between 3% to 10%, escalating 1% annually to between 10% and 15%. Employees are allowed to opt-out of these provisions, and small businesses, new businesses, churches and government plans are exempt.
- Increased tax credits for low-income savers: SECURE 2.0 will allow low-income savers to receive a tax credit of 50% of their retirement contributions, up to a limit of $2,000, beginning in 2027.
- 403(b) improvements: One of the new changes will allow 403(b) plans to participate in multiple and pooled employer plans. However, a collective investment trust (CITs) provision that was considered in a prior version of the House bill was not included in the final measure.
- Required minimum distributions: The previous required minimum distribution age of 72 will increase to 73 in 2023 and 75 in 2033.
- Catch-up contributions: A super catch-up contribution provision takes effect in 2025, allowing those aged 60 to 63 to contribute the greater of $10,000 or 150% of the regular catch-up amount for those aged 50 and older, above and beyond their ordinary contribution limit.
- Student loan matching: Beginning in 2024, employers will have the option to match an employee’s student loan payments with plan contributions. The rule is not limited to government education debt and can apply for any loan used for higher education expenses.
- Emergency savings: Plan participants will be able to withdraw up to $1,000 without an early withdrawal tax penalty. If the funds are repaid, this benefit can be accessed annually. Otherwise, it’s available once every three years. Additionally, the law will allow employers to offer a separate plan-linked emergency savings account allowing up to four penalty-free withdrawals per year. Contributions here are set to be capped at $2,500.
- Hardship withdrawals: Newly specified hardship withdrawals are also part of the new SECURE 2.0 law. Up to $22,000 may be withdrawn to pay for expenses related to a natural disaster, with the funds to be taxed as gross income over three years. Self-certifying domestic abuse survivors will be able to withdraw the lesser of $10,000 or 50% of their account funds without penalty.
- Plan lost and found: An online database of plans is said to be under development by the Department of Labor. Its purpose is to help employees and employers find lost and forgotten retirement accounts and match them with their corresponding sponsor and participant.
- 529 account rollovers: Unused funds in a 529 college savings account can now be rolled over into a Roth IRA for the beneficiary without penalty. SECURE 2.0 specifies the 529 account has to be at least 15 years old and the rollover has to fall within IRA limits.
- Part-time employees: A new change impacting part-time employees requires these employees to be enrolled in employer 401(k) plans after two years. The current rule requires enrollment after three years.
- Auto-portability: The new law gives plan providers the ability to automatically transfer a participant’s retirement savings from a previous employer to a new employer. Participants will still have the option to leave funds in a past employer’s plan.
- Qualified longevity annuity contracts: QLAC rules are changing to allow up to a $200,000 allocation. The previous rule limited allocations to the lesser of 25% of the retirement account balance or $135,000. SECURE 2.0 also clarifies that spousal survivor rights extend past divorce.
4 Ways You Can Minimize the Risk of SECURE 2.0 Changes
The above are just a few of the highlights of the SECURE 2.0 legislation — the full text of the law totals more than 400 pages. With so many new plan rules, the risk of an advisor making a mistake is high. But taking the right steps can help minimize your risk.
Here are four best practices to keep in mind:
1. Education
Once you get a handle on the SECURE 2.0 changes yourself, your plan stakeholders are going to need your help getting up to speed, too.
Think about what you will say. Communicating too little information about relevant changes can be risky. But so can communicating too much information without proper context or guidance.
It can help to think about presenting new SECURE 2.0 information in an organized manner. For example, there are some changes, such as those dealing with RMDs, catch-up contributions and annuities aimed at those in or near their retirement. Other provisions, such as auto-enrollment, student loan matching and emergency savings are more relevant to younger plan participants.
Finally, with new information, participants are bound to have questions. Take time to think about how you will handle their requests for clarification and additional information.
2. Communication
Good communication builds trust, but it also helps minimize the risk of a claim. Be sure to take stock of the full breadth of your communication risks.
For instance, you may need to communicate a wide variety of information to participants concerning SECURE 2.0, including policy and procedure information, rules and regulations, professional advice, plan and account information, educational information and promotional information.
Plus, consider all the ways you communicate daily — in-person meetings, phone calls, text messages, annual reviews, presentations, conference calls, interviews, webinars, websites, white papers, guides, emails and advertisements.
No matter what is being communicated and how, it’s important to be clear. Recordkeepers also need to ensure they comply with any rules regarding documentation of their communications.
3. Cyber Safety
SECURE 2.0 will probably bring about some confusion and disorganization in the short term. It’s important to realize such periods of transition can be risky from a cyber security perspective.
Unfortunately, cyber criminals have discovered that periods of change present an excellent opportunity to hack and defraud businesses and account holders. In fact, several prominent scams were launched during the early days of the pandemic.
Protecting your systems, business and plan participants is key for avoiding a claim. Heightened vigilance for scams is a must and be sure to follow cyber security best practices.
The right Cyber Liability Insurance coverage is also a must in today’s world, where even the best precautionary measures may not prevent every hack and fraudulent instruction request.
4. Professional Advice
Professional mistakes — or even just the accusation of one — can be very costly for financial advisors. With so many changes in SECURE 2.0, the next few years will likely be a period of heightened risk.
Retirement plan fiduciaries can be sued for a number of reasons, from trading errors to advisor-client miscommunications, product suitability complaints, failure to disclose or breach of fiduciary duty. Claims can also be brought for more complex allegations of professional negligence, such as excessive fee lawsuits.
With all these risks, the right E&O coverage is a must. E&O Liability Insurance from Lockton Affinity Advisor helps protect you and your business from a broad range of professional negligence claims.
Fiduciary coverage is 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.
More SECURE 2.0 Protection With Lockton Affinity Advisor
SECURE 2.0 affords many new opportunities for plan participants to achieve their financial goals. You can help them do so wisely by minimizing your professional risks and having the right insurance protection.
To learn more about insurance solutions from Lockton Affinity Advisor, visit us online or give us a call at (844) 406-5958.
