From Vision to Validation

As new mandatory and optional provisions from the SECURE [Setting Every Community Up for Retirement Enhancement] 2.0 Act of 2022 have gone into effect this year, plan sponsors are relying on their recordkeepers to administer and support the plan changes and enhancements necessary to comply with the law.

When it comes to the mandatory provisions, Catherine Ellis, vice president and financial adviser at CAPTRUST, says, recordkeepers are “absolutely prepared” to administer these for plan sponsors. With optional provisions such as emergency savings and student loan matching, however, that might be a different story.

Ready for Mandatory Provisions

Some of the mandatory provisions are changes to the required minimum distribution rules, allowance for long-term part-time workers to participate in employer-sponsored plans, and an increased limit for catch-up contributions.

Ellis notes that if the IRS had not extended the deadline on the requirement for catch-up contributions to be designated as Roth for higher-income participants, many recordkeepers would have been unprepared to implement that feature this year. Plan sponsors and recordkeepers now have until 2026 to administer Roth catch-ups.

She says recordkeepers are still waiting for additional guidance from the Department of Labor and IRS regarding the mandatory catch-up provision. They are also watching to see how payroll providers, if a system will not be set up in-house, are making adjustments to comply with the DOL regulation, she says.

David Stinnett, principal in strategic retirement consulting at The Vanguard Group, says, while Vanguard is “delighted to have the extra time,” it is important to not be “lulled into a sense of security.”

“There’s a lot of work to be done for the recordkeepers, for plan sponsors [and] for payroll providers,” Stinnett says. “So even though we have an extra two years to phase that in, that’s still taking a lot of focus.”

Tim Rouse, executive director at the SPARK [Society of Professional Asset-Managers and Record Keepers] Institute Inc., agrees that the industry is ready to implement the new requirements related to SECURE 2.0.

“Our industry has been actively working through some of the operational details that still remain unanswered by regulators,” Rouse says. “However, our members are very resilient and prepared to navigate those uncertainties.”

He says operational questions that remain include how to treat Roth employer money and the tax reporting for it, as well as how to handle distributions to terminally ill participants and how to properly identify long-time part-time employees.

Rouse says he believes some provisions, such as the refundable Saver’s Match, could take a few years to implement. SECURE 2.0 revises what is known as the Saver’s Credit, which has allowed qualified individuals—namely, low- and middle-income workers—contributing to a retirement plan or an individual retirement account to receive a nonrefundable tax credit of up to 50% of a maximum $2,000 in contributions ($4,000 if married filing jointly). The Saver’s Match will replace the Saver’s Credit, changing it to a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan. The match is equal to 50% of IRA or retirement plan contributions, up to $2,000 per individual.

Rouse says he meets with regulators on a periodic basis to talk about the various implementation issues and notes that discussions are ongoing about finding missing participants—and finding the most efficient ways to do that.

Progress on Optional Provisions

As to the optional provisions that went into effect January 1, Ellis says, plan sponsors first need to understand what a provision has to offer their participants and then determine if it is appropriate for their employee population.

“It’s been difficult for plan sponsors to make any definitive decisions [about] some of those optional provisions because they just don’t fully understand yet what it might mean from an administrative [or cost perspective],” Ellis says. “… And I don’t feel like recordkeepers are prepared for all of the optional provisions that are available to plan sponsors to consider.”

She says this lack of readiness could, again, be partly due to waiting for additional guidance from the IRS, or for legislation to supply more details on the provisions—recordkeepers may want more guidance before spending the time, effort and money that goes into building out the technology.

A further hold-up may be that recordkeepers want time to assess the plan sponsor appetite, she says. “The plan sponsor can’t make any meaningful decisions until [it] understands the administrative and cost burden management, so we’re kind of in this back and forth,” Ellis says.

Based on a survey conducted with CAPTRUST’s top 12 recordkeeping partners in the fourth quarter of last year, Ellis found that recordkeepers are “overwhelmingly ready” to implement Section 312 of SECURE 2.0. This provision states that an employer may rely on employees self-certifying that they have had an event that constitutes a hardship in order to take a hardship withdrawal. Nearly 100% of recordkeepers said they were ready for this provision, she says.

In terms of the ability to offer a pension-linked emergency savings account, Ellis says, 62% of the top providers that CAPTRUST spoke with indicated that they would likely move forward with this option, but many said they are still waiting for plan sponsors to show interest.

Value of Third-Party Vendors

When asked about Section 110—which allows student loan payments to be treated as elective deferrals to the retirement plan and therefore to qualify for matching contributions—Ellis says this is something recordkeepers are interested in supporting. But, she adds, more than half of recordkeepers said they would prefer to use a third party to help them administer the benefit.

The majority of respondents said they will likely lean on a third-party vendor to support building a sidecar emergency savings account program, as well, she says.

“There are several third-party entities that have already invented the wheel, and they’re specialists in [the optional provisions],” Ellis says. “In terms of tuition repayment processes, [of] the streamlining of the administration, they’ve already built out the capabilities. They’re dedicated to this space, and it would be a huge time saver … for recordkeepers that are already feeling significant cost compression.”

However, she points out, plan sponsors are somewhat beholden to whatever vendor their recordkeeper chooses to partner with for these services.

Stinnett observes that many providers are choosing to work with a third party because a third party is still needed to verify the student loan payments, irrespective of participant self-certification. He explains that a third party or recordkeeper also must calculate what the matching contribution will be.

Vanguard partners with student loan debt vendor Candidly, for instance, to offer plan sponsors a student loan debt repayment program option for eligible employees.

Predictions for the Year

Stinnett predicts that 2024 will not necessarily be the year of “technical readiness” and actual implementation of the optional provisions, as plan sponsor committees are still working to understand them and deciding how implementation would affect their budgets. By mid-year, he expects most large plan sponsor committees to have done so and to have started conversations with their recordkeepers.

According to Stinnett, Vanguard’s team has been helping clients decide whether these provisions are suitable for their participants by coming up with a framework that involves three parts: urgency, desirability and feasibility.

“When we talk to clients, [we first talk about] urgency … Is [the provision] mandatory or optional?” Stinnett says. “Desirability: Does the optional provision improve financial wellness? How much does it fit in with the overarching employee benefit strategy, or is it something that’s very ancillary to that? And then feasibility: How disruptive is adding this feature, to the plan sponsor? What would be the ease in communicating it? How hard, from a participant experience, might it be?”

He adds that the emergency savings provision, which allows participants to withdraw up to $1,000 per year from their retirement account, has the “early lead” with client interest, mainly because it involves little administrative burden for sponsors to implement.

“It’s [a provision] that plan sponsors are further along in [implementing] compared with the other ones, such as [the] student loan matching provision, which [they]’re still in the middle of wrapping [their] heads around,” he says. —Remy Samuels