Has SECURE 2.0 been over-hyped? Or will it prove to be a game-changer? Financial professionals are split on the issue. But there’s one thing for sure: in some cases, the blunt force of reality may dampen the enthusiasm of the headlines.
You can’t escape it. Everywhere you look, you find prognosticators predicting the best of all possible worlds rising from SECURE 2.0. There’s a problem looking at SECURE 2.0 through rose-colored spectacles. Some provisions won’t become effective immediately. Others, like the once promising PEPs from the original SECURE Act, may sound better on paper than in the practical world.
“Honestly,” says Corey Noyes, Owner & Financial Advisor of Balanced Capital in Heber City, Utah, “none of the parts people expect to be game changers will.”
In the months leading up to its passage, reporters trumpeted all the prospective benefits to be offered by SECURE 2.0. You’ve probably noticed the headlines since President Biden signed the reconciliation bill that contained the language of the new retirement law.
Will SECURE 2.0 live up to its hype?
“The hype around SECURE 2.0 may be overblown, as some aspects of the program may not meet the expectations of retirees,” says Charles Leaver, Chief Financial Officer at Healthier Trajectory. “For example, the program’s reliance on annuities may not be as attractive to retirees as hoped, as annuities can be complex and may not provide the guaranteed income stream that retirees are looking for. Additionally, the program’s focus on using investments to generate retirement income may not be as appealing to some retirees as promised, as the stock market is notoriously volatile and may not provide the stability that retirees are looking for.”
If Leaver is correct, this won’t be the first time a good product fell short of market demand. When the SECURE Act passed in 2019, many felt it would usher in a new era of explosive growth in Pooled Employer Plans (“PEPs”). That growth has yet to be realized.
There are other benefits that may also not live up to their touted promises.
“I think one area of SECURE 2.0 that has been over-hyped is the new privacy protections it provides,” says Mina Tadrus, CEO of Tadrus Capital in Tampa. “People may expect SECURE 2.0 to completely protect their personal information when in reality, there are still vulnerabilities and security concerns associated with sharing any sensitive data online. Additionally, even with the new protections, users may not be aware of the potential for malicious actors to access and misuse their data if it is stored in a vulnerable system or platform.”
The Student Loan Matching Program has energized many, but there are unanswered questions.
“The concept sounds exciting, but there isn’t a lot of concrete evidence to support the impact on delaying saving at optimal levels to pay down student debt,” says Joe DeBello, Managing Consultant at OneDigital in Atlanta. “While the provisions will allow an employee to effectively participate in both, it is a reasonable deduction that overall retirement savings (both employee and employer contributions) will be depressed and will have natural incentives to not save in the 401(k) plan on an elective deferral basis. It will be interesting to see the outcomes of the various approaches we see, but my sincere hope is that we don’t have unintended consequences by trying to do the right thing for student loan debt payors.”
Perhaps the most ballyhooed element of SECURE 2.0 has been its prioritization of increasing retirement savings. This aspect has the potential to disappoint in a manner similar to the equally hyped state-sponsored retirement plans.
“It is estimated that only 26% of small business employers offer a 401(k) plan,” says Jody D’Agostini, a financial professional with Equitable Advisors in Morristown, New Jersey. “Add to this the fact that many workers are independent contractors and therefore do not have access to a workplace plan, and you have a large percentage of workers that still won’t benefit from the Secure Act 2.0. nor have access to a retirement plan. There is still no mandate which requires employers to provide a plan as well. If employees choose to save in an IRA, the limits are still quite low, and the accounts likely will not approximate the amount needed to pay for a long retirement.”
Indeed, the increased catch-up provisions found in SECURE 2.0 don’t apply to IRAs. But that’s not all.
D’Agostini says, “A couple of other over-hyped items. RMDs for those who have already started will need to continue. Employers with ten or fewer employees or companies that have been in business for less than three years are exempt from the auto-enrollment and auto-deferral rules. The new rules are not enforced until 2025.”
About those catch-ups. According to a report from the National Association of Plan Advisors (NAPA), it turns out SECURE 2.0 has a technical error that may not allow any retirement plan participant to make catch-up contributions to either their pre-tax or Roth account. NAPA says it’s not clear if the fix will require Congressional action or if the IRS can address it through the regulatory process.
Much that is contained in SECURE 2.0 won’t be fully realized until regulators have a chance to finalize the rules. You might know what is intended, but you don’t yet know how you’ll get there.
“One part that deserves clarification is that the surviving spouse who inherits an IRA can take required minimum distributions (RMDs) based on the theoretical ages the deceased spouse would have attained each year they had lived,” says Matt Rogers, Director of Financial Planning at eMoney Advisor in Conshohocken, Pennsylvania. “It may be disappointing to learn that this is only beneficial for couples if there is a significant age difference and the younger spouse dies first, allowing the surviving spouse to take RMDs based on their presumed ages. Most married couples are of similar age, or the older spouse typically dies first, proving little or no value to this scenario.”
The new RMD rules are complicated, as they depend on age, type of plan, and the calendar year. In addition, what appears to be an advantage may actually be a disadvantage.
“The most underwhelming part is the fact that Roth 401(k)s no longer have Required Minimum Distributions (RMDs),” says Nate Hoskin, Founder & Lead Advisor at Hoskin Capital in Denver. “The day you leave your employer, it is possible to roll those accounts into a Roth IRA, which has never had RMDs. This strikes me as an attempt to increase the longevity of assets in 401(k) accounts, which can often be subject to much higher management fees than can be achieved in an IRA. Despite this change, moving the assets into a Roth IRA may still be the best course of action.”
Delaying RMDs may also have negative tax implications for you. You may end up with higher dollar RMDs which can increase taxes. In addition, should you die before exhausting your IRA funds, you might leave your estate with a hefty tax bill.
Estate planning is certainly an important part of your retirement years. SECURE 2.0 addresses a popular estate planning tool. What is it, and does it have a practical impact?
The new law presents a “one-time opportunity to use Qualified Charitable Distribution (QCD) to fund a Split-Interest Entity such as a Charitable Remainder Unitrust (CRUT) or a Charitable Remainder Annuity Trust (CRAT),” says Pam Lucina, Chief Fiduciary Officer and Trust & Advisory Practice Executive at Northern Trust Wealth Management in Chicago. “This change makes it seem like you can move money tax-free and pass onto future beneficiaries through these charitable trusts. It is overhyped because the maximum amount that can be moved is $50,000. CRUTs and CRATs can be extremely beneficial but are complex—it would be hard to justify the cost in creating and maintaining these trusts for $50,000.”
Lest you think all is lost, there are some benefits you can capture almost immediately from SECURE 2.0.
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