How SECURE 2.0 could accelerate personalization in DC investing

Key considerations for plan sponsors and advisors

It was about this time of year in 2019 when the SECURE Act passed the House of Representatives by the overwhelming margin of 417-3 and went on to be signed into law in the final days of 2019. This is one of several parallels that could be drawn to the recently introduced bill, Securing a Strong Retirement Act of 2021. Nicknamed SECURE 2.0, the bill is a sequel to the SECURE Act of 2019 from the same bipartisan sponsors: Ways & Means Committee Chairman Richie Neal (D-MA) and Ranking Member Kevin Brady (R-TX). It recently passed the U.S. House Ways & Means Committee unanimously by voice vote and is now on its way to the full U.S. House of Representatives for consideration.

Meanwhile, the Senate has its own version of broad bipartisan retirement policy reform legislation with the Retirement Security and Savings Act (RSSA). RSSA was originally introduced by Senators Portman and Cardin in May 2019, the same time SECURE 1.0 was making its way through the House of Representatives. Ultimately, several provisions from RSSA were included in the final SECURE Act of 2019 legislation. Upon passage of the SECURE Act in 2019, Senator Portman was quoted as saying, "There is still more that we can do to help more Americans save for their retirement. I believe that passage of the SECURE Act can help pave the way for bolder reforms in legislation I have introduced with Senator Cardin called the Retirement Security and Savings Act." Fast forwarding to today, the Retirement Security and Savings Act of 2021 has been re-introduced by Senators Portman and Cardin and includes more than 50 provisions aimed at improving retirement security, many of which are also included in SECURE Act 2.0.

Clearly, there is strong bipartisan support for retirement policy improvement in both the House and the Senate and passage of a significant retirement security package is likely this year. What remains unclear is how the House and Senate will synthesize their different versions of the legislation and move that combined package forward.

For a detailed summary of both bills, please see this analysis from 03 Plan Advisory Services. Here we outline a few key provisions from each bill and highlight some provisions that have overlapping support.

Key provision	Summary	Bill
Expands automatic enrollment in retirement plans by requiring all new 401(k) plans to have automatic contribution. Escalation and default investment to QDIA.	Employers that establish new 401(k) plans must automatically enroll participants into the plan at a contribution rate of at least 3% of pay, escalating each year by 1% up to at least 10%. Where participants have not made an investment election, contributions must be defaulted into a QDIA (target date fund, managed account, balanced fund).	SECURE 2.0
Increases tax credits for employer contribution and plan start-up costs for small employers	Reduces cost of sponsoring a retirement plan for small employers. Creates a new tax credit for employer contributions of up to $1,000 per employee for first four years and increases the start-up tax credit to 100% of the administrative costs for first three years.	SECURE 2.0
Expanded catch-up contribution limits and requirement that all catch up contributions be made on a Roth basis only.	Increases the catch-up contribution limit from $5,000 to $10,000 for ages 62-64 but as a revenue offset, requires that all catch-up contributions be made on a Roth basis only.	SECURE 2.0
New ADP testing safe harbor	Adds a new 401(k) actual deferral percentage (ADP) testing auto-enrollment and escalation safe harbor of at least 6% default contribution rate in first year increasing by 1% annual increments to 10% after the fourth full plan year.	RSSA
Allows for matching contributions for student loan repayment.	Allows employers to apply their regular matching contribution schedule to the repayment of student loans.	SECURE 2.0 RSSA
Increase the Required Minimum Distribution age from 72 to 75.	Changes the mandatory Required Minimum Distribution age from 72 to 75 (phased in from 2022-2032).	SECURE 2.0 RSSA

What does this mean for QDIAs?

This means that thousands of new plans formed each year that may have not adopted automatic enrollment and automatic escalation features will now have to, and in doing so will need to elect a qualified default alternative (QDIA) for their plans. Also, the increased tax credits for both plan start-up costs and employer contributions for small employers greatly diminishes the financial burden of sponsoring a retirement plan and should significantly increase the number of new defined contribution plans being formed and requiring QDIA selection.

TDFs have been a popular choice as QDIAs for their professional management and simplicity, but TDFs may not be optimal for all workers. There are other QDIA choices that provide additional benefits. Managed accounts are increasingly being designated as qualified default investment alternatives. Participants can also be automatically enrolled into a managed account. Just as with TDFs, sponsors who choose managed accounts for their DC plans need to make sure the managed account is consistent with the sponsor's objectives for defaulted participants. New managed account QDIAs have been developed that automatically collect participant information from the recordkeeping system, so that they can provide a customized asset allocation similar to a traditional managed account, but without requiring extensive input from participants. Managed accounts have the potential to improve outcomes, compared to a TDF, because professionally managed accounts can build a more personalized and precise glide path for each participant that can be adjusted based on progress toward a retirement income goal.

We hope that new legislation will pave the way for plan sponsors to reconsider what type of QDIA solution will be the better fit for their plans, both new and existing.