Has SECURE 2.0 been overrated? Or will it prove to be a game changer? Financial experts are divided on this issue. One thing is certain, however: in some cases, the harsh force of reality can dampen the excitement of the headlines.
You can’t escape him. Everywhere you look you will find forecasters predicting the best of all possible worlds rising from SECURE 2.0. There is a problem with looking at SECURE 2.0 through rose-colored glasses. Some provisions do not take effect immediately. Others, like the once-promising PEPs from the original SECURE Act, may sound better on paper than they do in the real world.
“Honestly,” says Corey Noyes, owner and financial advisor of Balanced Capital in Heber City, Utah, “none of the parts that people expect are going to change the game.”
In the months leading up to its release, reporters trumpeted all the possible benefits SECURE 2.0 would offer. You’ve probably noticed the headlines since President Biden signed the Reconciliation Act, which included the language of the new pension law.
Does SECURE 2.0 live up to its hype?
“The hype surrounding SECURE 2.0 may be overblown, as some aspects of the program may not meet retiree expectations,” said Charles Leaver, chief financial officer at Healthier Trajectory. “For example, the program’s reliance on pensions may not be as attractive to retirees as hoped because pensions 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 because the stock market is notoriously volatile and may not offer the stability that retirees are looking for.”
If Leaver is right, this isn’t the first time a good product has underperformed market demand. When the SECURE Act was passed in 2019, many thought it would herald a new era of explosive growth for Pooled Employer Plans (“PEPs”). This growth has yet to be realised.
There are other benefits that may not live up to their touted promises.
“I think one area of SECURE 2.0 that has been over-hyped is the new level of data protection it offers,” said Mina Tadrus, CEO of Tampa-based Tadrus Capital. “People can expect SECURE 2.0 to fully protect their personal information, when in reality there are still vulnerabilities and security concerns associated with sharing sensitive information online. Additionally, even with the new protections in place, users may not be aware that malicious actors can access and misuse their data when stored on a vulnerable system or platform.”
The Student Loan Matching Program has inspired many, but there are unanswered questions.
“The concept sounds exciting, but there’s not a lot of concrete evidence that delaying saving to optimal levels works to pay off student debt,” said Joe DeBello, managing consultant at OneDigital in Atlanta. “While the provisions allow an employee to effectively participate in both, it is a reasonable conclusion that overall retirement savings (both employee and employer contributions) will be depressed and have natural incentives, not in the 401(k) plan to save Optional deferred basis. It will be interesting to see the results of the different approaches, but I sincerely hope that we don’t face any unintended consequences as we try to do the right thing for student loan payers.”
Perhaps the most exaggerated element of SECURE 2.0 was the prioritization of increasing retirement savings. This aspect has the potential to disappoint similar to the equally hyped government-sponsored retirement plans.
“It’s estimated that only 26% of small business employers offer a 401(k) plan,” says Jody D’Agostini, a finance professional at 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 who still do not benefit from Secure Act 2.0. still have access to a pension scheme. There is still no mandate that also obliges employers to submit a plan. If employees choose to save in an IRA, the limits are still fairly low, and the accounts likely won’t reach anywhere near the amount needed for a long retirement.”
In fact, the increased catch-up provisions in SECURE 2.0 do not apply to IRAs. But that’s not all.
D’Agostini says, “A few other overrated items. RMDs for those who have already started must continue. Employers with ten or fewer employees or companies that have been in business for less than three years are exempt from the automatic registration and automatic deferral rules. The new rules will not be enforced until 2025.”
About these catch-ups. According to a report by the National Association of Plan Advisors (NAPA), SECURE 2.0 turns out to have a technical flaw that does not allow any pension plan participant to make catch-up contributions to their pre-tax or Roth accounts. NAPA says it’s not clear if the fix will require action from Congress or if the IRS can address it through the regulatory process.
Much of what is included in SECURE 2.0 will not be fully realized until regulators have a chance to finalize the rules. You may know what is intended, but you don’t yet know how to get there.
“One part that needs clarification is that the surviving spouse who inherits an IRA can receive the required minimum distributions (RMDs) based on the notional age that the deceased spouse lived in each year that they lived. achieved,” said Matt Rogers, director of financial planning at eMoney Advisors in Conshohocken, Pennsylvania. “It can be disappointing to learn that this is only beneficial to couples where there is a significant age difference and the younger spouse dies first, allowing the surviving spouse to take RMDs based on their presumed age. Most married couples are the same age or the older spouse usually dies first, which has little or no value in this scenario.”
The new RMD rules are complicated because they depend on age, type of plan, and calendar year. Also, what appears to be an advantage can actually be a disadvantage.
“Most disappointing is the fact that Roth 401(k)s no longer have required minimum distributions (RMDs),” said Nate Hoskin, founder and lead advisor at Hoskin Capital in Denver. “The day you leave your employer, it’s possible to transfer those accounts to a Roth IRA that 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 assets into a Roth IRA may still be the best course of action.”
Delaying RMDs can also have negative tax implications for you. You can end up with higher dollar RMDs which can increase taxes. Also, if you die before you’ve used up your IRA funds, you could leave behind a large tax bill from your estate.
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 practical implications?
The new law provides a “unique 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 Trustee and Trust & Advisory Practice Executive at Northern Trust Wealth Management in Chicago. “This change creates the impression that you can move money tax-free and pass it on to future beneficiaries through these charitable foundations. It is being exaggerated because the maximum amount that can be moved is $50,000. CRUTs and CRATs can be extremely useful, but they are complex—it would be hard to justify the $50,000 cost of creating and maintaining these trusts.”
Lest you think all is lost, there are a few benefits you can start reaping almost immediately from SECURE 2.0.