Compliance January 24, 2024

SECURE 2.0 Will Help Young Savers the Most, Research Shows

Automatic features and the saver’s match will bring more security to those currently in their 30s than those in their 50s, EBRI research finds.

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Preliminary research from the Employee Benefit Research Institute says that the SECURE 2.0 Act of 2022 will bring modest benefits for those approaching retirement but will have a larger impact on younger workers. The report also found that the automatic enrollment and saver’s match provisions will have the largest positive effect on retirement security nationally.

The research findings were presented Tuesday by Craig Copeland, EBRI’s director of wealth benefits research, at the 2024 Retirement Symposium hosted by EBRI and the Milken Institute. The full research report is expected by mid-March.

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SECURE 2.0 requires all plans started after December 29, 2022 to automatically enroll their participants at a savings rate of between 3% and 10% of pay, unless they opt out or elect a different contribution, starting in 2025.

In 2027, savers with an income below $20,500 or $41,000 for married couples qualify for a 50% match to their individual retirement account or an eligible workplace plan from the federal government up to a maximum match of $1,000. The income thresholds will adjust for inflation beginning in 2027. The match is cut gradually until an individual has income of $35,500 or $71,000 for married couples to prevent a sudden loss of the match. The saver’s match replaces the saver’s credit.

EBRI’s research says these two provisions will likely have the most effect on retirement security for American workers, a key goal of SECURE 2.0. Copeland explains that these provisions are uniquely powerful at bringing more low-income people into the retirement system. The saver’s match “helps the most vulnerable group contribute more savings” by matching their contributions, and this match can be in addition to an employer match.

Copeland adds that low-income workers are “far more likely to participate with automatic enrollment.”

Younger vs. Older

EBRI’s research also shows that SECURE 2.0 will have much greater impact on today’s younger workers. Copeland explains that this is because the benefits of the legislation will need time to compound, and younger workers have time on their side.

In addition, the automatic enrollment provision does not apply to plans that existed at the time SECURE 2.0 was passed, which means this powerful provision does not apply to most plans that currently exist.

Over time, as new plans are launched, and as new firms and even new industries are created, this effect of plans grandfathered without auto features will decline in relative impact, Copeland explains, and many plans that were grandfathered in will voluntarily adopt automatic enrollment. Since this process will take time, it will naturally impact younger workers more.

EBRI finds that that workers between the ages of 35 to 39 who are projected to run out of money during retirement would decline by 4.7 percentage points as a consequence of SECURE 2.0, but workers between 55 and 59 would only see theirs decline by 0.1 percentage points.

Further, the average savings deficit for workers age 35 to 39 would decline by 14.4%, EBRI finds, but only 0.3% for those age 55 to 59.

Compliance January 23, 2024

DOL Modifies PTE Application Process

The changes include more explicit criteria and modified definitions of what it means to be an independent fiduciary and appraiser.

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The Department of Labor on Tuesday finalized changes to the process by which prohibited transaction exemption applications are approved. The amendments are based on a proposal from March 15, 2022, but the final version removed many of the elements identified as controversial during a public comment period.

Under the Employee Retirement Income Security Act, plans cannot engage in transactions with “parties in interest,” a category that can include a wide range of actors that have a relationship to the plan. That rule can be bypassed if the plan fiduciary submits and receives an individual or class exemption from the DOL. An individual exemption is given to one party for particular circumstances and cannot be widely relied on, whereas a class exemption is given for a category of actor.

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The process for applying for these exemptions is itself governed by regulation. According to the DOL’s finalizing release, “One concern that the Department shares with many of the commenters is that the process was starting to become more drawn-out and longer than necessary.”

The DOL explained that the main factor in prolonging the PTE application process was the fact that the DOL often had to return applications to applicants requesting more information. “This timeline was frustrating to everyone, and commenters noted it throughout their comments,” the finalizing release stated.

To remedy this, the DOL proposed to have applicants explicitly state the information needed in the application. The DOL wrote in the amendment that “some of the friction associated with the exemption process can be reduced because the Department will have less need to request additional information from applicants.”

Changed Definitions

The initial proposal by the DOL also would have revised the definitions of “qualified independent appraiser” and “qualified independent fiduciary” to be more strict. The final rule scales back most of the revised changes due to pushback from commenters.

According to current rules, an appraiser is automatically considered independent if they receive no more than 2% of their revenue under one particular PTE. The final rule modifies this to a facts-and-circumstances test, whereby an appraiser could be deemed to be not independent even if their total revenue falls below 2%. As an example, the DOL said that an appraiser who expects to be retained by a fiduciary for other appraisal work based on their work under a PTE could lose their independent status.

The DOL made essentially the same change for the definition of “qualified independent fiduciary.”

Proposed changes were, for the most part, dropped, except for an amendment in the final rule stating that a fiduciary that receives less than 2% of their revenue from a transaction is no longer automatically deemed independent, as under previous rules, and is now subject to a facts-and-circumstances test.

The effective date for the rule is 75 days after its entry into the Federal Register.

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