‘SECURE 2.0’ will modernize retirement security for the post-COVID American workforce
The economic security of American entrepreneurs, small business employees, and gig economy workers was significantly enhanced on Dec. 20, 2019 when the Setting Every Community Up for Retirement Enhancement SECURE) Act was signed into law. Among other important reforms, the SECURE Act modernizes retirement security law to allow small businesses and startups to band together to provide multiple-employer 401(k)-like retirement savings products to their employees.
Now, in the wake of the COVID-19 pandemic, Congress has the opportunity to build on that progress by further modernizing retirement security law to address additional realities of the 21st century workforce — realities highlighted and accelerated by the crisis.
The COVID-19 pandemic amounted to a severe stress test for the nation, revealing a number of serious socio-economic deficiencies and vulnerabilities. One serious ongoing vulnerability is the fact that a quarter of American adults have no retirement savings at all and millions of others aren’t saving nearly enough. With ten thousand Americans turning 65 every day through 2030, the retirement savings deficit is a looming threat to the economic security of millions of Americans and a ticking time bomb for the U.S. economy.
According to a new analysis by PwC, a major cause of the problem is the disconnect between the importance of small businesses as employers and the cost to small businesses of offering retirement plans to their employees. Half of all working Americans are employed by small businesses, and yet the cost of providing retirement plans to employees has historically been beyond the means of many small businesses. Prior the passage of the SECURE Act, half of all private-sector workers — 55 million Americans — did not have access to a retirement plan through an employer.
According to Bernadette Geis, U.S. asset manager and wealth management leader at PwC, a large part of the solution is multi-employer defined contribution plans (MEPs), whereby multiple small businesses are able to pool resources and reduce costs to offer their employees retirement plans similar to the employees of larger companies.
“If there was greater adoption of these multi-employer plans and greater participation,” Geis told Yahoo Money, “you’d get the saving rate up just by that alone.”
The SECURE Act expanded access to retirement plans for millions of Americans in several important ways — most importantly by allowing unrelated employers to participate in a MEP. MEPs existed prior to the SECURE Act, but participating businesses were required to be related in some way — geographically or through membership in a common industry or trade association. The SECURE Act waived this requirement, greatly facilitating the adoption of open multi-employer plans by new and small businesses.
The law also eliminated the IRS’s “one bad apple” rule — a major obstacle to the formation of MEPs because it stipulated that all participating employers could face adverse tax consequences if only one participating employer failed to satisfy the tax qualification rules of the MEP. In addition, the law provided a start-up retirement plan credit for smaller employers of $250 per non-highly compensated employees eligible to participate in a workplace retirement plan. If the retirement plan includes automatic enrollment, an additional credit of up to $500 is available.
On May 5, the Securing a Strong Retirement Act — bipartisan legislation often referred to as “SECURE 2.0” — was passed out of the House Ways and Means Committee by a unanimous vote. In a joint statement, Committee Chairman Richard Neal (D-Mass.) and Ranking Member Kevin Brady (R-Texas) said: “The retirement crisis in America is real, and will only get worse without easier pathways to saving and encouraging workers to start planning for retirement earlier in life. This legislation expands automatic enrollment, simplifies many retirement plan rules, and strengthens small businesses’ ability to offer workplace retirement plans, to make it easier for Americans to plan for their golden years.”
Then last week, on May 21, Sens. Rob Portman (R-Ohio) and Ben Cardin (D-Md.) reintroduced their Retirement Security and Savings Act, which largely parallels SECURE 2.0.
The bipartisan, bicameral legislation is well-timed, as the strength of the post-COVID economic recovery depends on a more entrepreneurial, flexible, and resilient U.S. economy — one that meets the realities and financial security needs of entrepreneurs, “long-term part time” employees, independent contractors, and gig economy workers.
“SECURE 2.0” would build on the original SECURE Act by making a number of additional enhancements to retirement security law, including:
- Requiring most employers that establish defined contribution plans after 2021 to automatically enroll new employees. Far too many Americans don’t take advantage of their company-sponsored 401(k) plans — mandated enrollment will dramatically improve participation rates. According to Fidelity Investments, 90 percent of employees automatically enrolled in their 401(k) plan remain enrolled.
- Allowing 403(b) plans — principally used for employees of public schools, churches, and other tax-exempt organizations — to participate in MEPs, including relief from the “one bad apple” rule.
- Increasing the credit for small employer retirement plan startup costs.
- Raising retirement contribution catch-up limits for people 62, 63, and 64 years of age.
- Further expanding the eligibility of long-term, part-time workers to contribute to their employers’ 401(k) plan by shortening the period for eligibility that starts in 2021 from three years to two.
- Permitting employers to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments.” This important provision is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions for retirement plans.
The COVID-19 pandemic greatly accelerated the already rapidly evolving American workplace — dramatically expanding remote and “long-term part-time” work arrangements, broadening and deepening the adoption of worker collaboration technologies, and sparking an historic increase in new business applications as entrepreneurs strike out on their own. Many experts predict such changes to endure beyond the end of the pandemic.
Public policy must now respond to facilitate and codify this accelerated evolution of the American workplace, and to further address the nation’s ongoing retirement security crisis. SECURE 2.0 is the retirement law modernization the post-COVID 21st century American workforce needs now.
John R. Dearie is the president of the Center for American Entrepreneurship.