Navigating the new norms of retirement with the SECURE 2.0 Act

The topic of retirement – and people’s readiness for it – plays an important role in investment and financial advice. As concerns grow over retirement savings, financial advice must adapt and change.

Retirement models around the world

Different countries have different vehicles for accumulation and decumulation of retirement investments.

The UK, for example, has:

• The state Pension,
• Workplace Pensions,
• and Personal Pensions.

Australia has the Superannuation Guarantee. Meanwhile IRAs & 401(k)s are the primary vehicle in the USA.

All plans evolve over the years, and much government legislation has been enacted to strengthen them. One such plan which has recently been introduced in the USA is the SECURE 2.0 Act. Passed by Congress in December 2022, it is an expansion of the Setting Every Community Up for Retirement Act, 2019 (SECURE Act).

A game-changer in the American landscape

The Act was introduced amid growing concerns about retirement security, influenced by global issues and lasting economic challenges. As a recent US News Survey of 2000 adults points out “50% of respondents say they had to pause saving for retirement at some point in 2022, and 41% of those surveyed stopped contributing to retirement funds like 401(k)s or individual retirement accounts.”

A recent poll, conducted by YouGov for Bankrate, found that over half of Americans feel they’re lagging in retirement savings, and almost half don’t have any retirement plan. This is especially true for small business employees. One of the main goals behind the SECURE 2.0 Act was to target these concerns.

It is important to remember that a significant percentage of this population is going to be the beneficiary of the Great Wealth Transfer, estimated to be close to $72 trillion. Wealth firms, especially those advising Mass Affluents and High Net Worth Gen Zs and Millennials, must adjust their strategies keeping in mind some of the important changes brought by the SECURE 2.0 Act.

Unlocking benefits for all ages

The Act addresses a range of age groups. On one hand, it allows for higher catch-up amounts of $10,000 for employees aged 60-63. At the same time, it treats student debt repayments as contributions to a 401(k) and enables transfers from certain 529 accounts to Roth IRAs.

Addressing student loan payments is, as the official Senate paper on SECURE 2.0 puts it, a significant benefit for young adults who are only just embarking on the retirement savings journey. The act allows for more tax optimized funds to become available for both accumulation and decumulation cycles.     

A greater role of financial advisors in the SECURE era

Under all these circumstances, the role of Financial Advisors becomes more and more important. As the spectrum of Wealth Management expands to the Mass Affluent segment, maximizing the benefits of SECURE 2.0 becomes a key part of advice. As a Vanguard article on the subject points out, “starting in 2024, employers will have the option to make contributions to an employer-sponsored retirement plan—i.e., 401(k), 403(b), SIMPLE IRA, 457(b), and similar plans—that match an employee’s qualified student loan payments, even if the worker doesn’t directly contribute to the retirement plan.” It is important for Financial Advisors to be aware of these changes, to help their clients optimize their retirement savings journey.

Small businesses, big benefits

SECURE 2.0 requires businesses to auto-enroll employees in new (k) and 403(b) plans. From 2025, these plans will start with a minimum 3% contribution rate. There is also the provision for transferring employees’ retirement plans, especially low-balance ones, when switching jobs. This is vital for low-balance savers, often found in smaller enterprises.

JP Morgan Asset Management’s 11^th Annual Guide to Retirement highlights the Act’s incentives for small businesses to offer retirement plans via tax credits. This targets nearly 50% of private sector employees working for in such establishments with no such plans. Those with employer-sponsored setups are more likely to save towards retirement by two-fold. It’s essential for Financial Advisors to be aware of this significant change and integrate it into their own advice.

Conclusion

The SECURE 2.0 act brings significant changes that should encourage retirement savings for Americans and will inevitably become an important part of all financial advice conversations. Wealth firms must ready themselves to quickly adopt these changes so they can remain relevant and continue to be the advisor of choice for their clients.