The Intensity of Implementation

Recordkeepers are juggling competing priorities of new mandatory and optional plan features alongside demands for their platforms to support retirement income, personalization, financial wellness programs and more.

Significant levels of change in federal law regarding employer-provided retirement plans, including a variety of new optional and mandatory provisions enacted since 2019, have put tremendous pressure on plan recordkeepers after years of fee compression.

“Recordkeepers are the hub of everything retirement, financial and everything [related to] health,” says Pam Hess, executive director of the DCIIA Retirement Research Center. “We are asking them to do so much right now.”

PLANSPONSOR’s 2024 Recordkeeping Survey found that recordkeepers are overseeing $10.9 trillion in defined contribution plan assets for 129.6 million participants across more than 14 plan types. Recordkeeper firms are also increasingly tracking several relatively new plan types, including pooled employer and multiple employer 401(k) and 403(b) plans, which are tallied in the survey by number of plans, participants and assets for the first time this year.

The survey also found that a majority (61%) of plan sponsors maintain relationships of more than eight years with their recordkeepers. Those relationships are increasingly important as plan sponsors and their recordkeepers are butting up against logistical and technical issues that make it hard to bring the new plan provisions online at the same time.

The survey was fielded from April to May. Thirty-three recordkeepers of defined contribution plans participated and reported on their U.S. DC recordkeeping business as of December 31, 2023.

A review of certain early-June communications from a recordkeeper to its plan sponsor clients shows the firm trying hard to ensure that their clients are paying attention to upcoming changes.

Recordkeepers do not want their clients to miss out on their opportunities to include several optional hardship withdrawal features—all enacted as part of the SECURE 2.0 Act of 2022—but the firms also need insights regarding what plans are going to add. One of the communications from a recordkeeper makes it clear that if plans do not opt in during a campaign that kicks off later this month, the recordkeeper will not be able to set up participation in four SECURE 2.0 optional hardship withdrawal programs until 2025. The recordkeeper asked not to be named.

The hardship withdrawal provisions plan sponsors can adopt include a domestic abuse distribution, a distribution for people living in places declared federal disaster areas, certain kinds of emergency withdrawals and distributions to pay certain qualified birth or adoption costs.

In addition to the optional withdrawal provisions, recordkeepers and payroll providers are increasingly integral to making certain aspects of retirement plans possible, including different ways of generating income in retirement. That means adding systems to support the complex array of in-plan and out-of-plan options, including a range of annuities, systematic withdrawals and other offerings. While each firm is likely to address these areas differently, industry observers expect that in a few years, each will offer a standard selection of retirement income options and plan sponsors will not have to pick their offering based on their specific recordkeeper.

Another significant optional provision, for which plans and their recordkeepers are still awaiting federal guidance, pertains to so-called super catch-up contributions, which increases the age 50 catch-up contribution limits for participants for four years from the year they turn 60 until the year they turn 63. For that provision, at least one recordkeeper is using an opt-out campaign, ensuring that plans that already allow catch-ups will also offer the new option, unless a participant rejects it when asked by the recordkeeper.

Barbara Delaney, principal and founder of SS/RBA, a division of Hub International, says “the pressure recordkeepers are under and how each is doing things differently in dealing with” all the changes make things very complicated. Meanwhile, the expense of rebuilding recordkeeping systems means “the business model is very stressed right now.”

She anticipates that pricing for recordkeeping services may need to change to enable the firms to invest in systems.

Mandatory Provisions

Tim Rouse, executive director at the SPARK Institute Inc., pointed to mandatory SECURE 2.0 provisions around which recordkeepers are working to coordinate with payroll providers, including Section 603, regarding all catch-up contributions for participants whose prior year wages exceed $145,000. These contributions will have to be made on a Roth, after-tax basis. This would require all plans with employees earning above that level to add Roth features to their plans.

SPARK is planning its second workshop with payroll firms in July, following up on one held in March, to work on ways to ensure that recordkeepers have access to the payroll information necessary to do so.

“Prior year’s compensation is not known [by payroll providers] until late January or early February,” Rouse notes. But a participant could start making catch-up contributions at the start of a calendar year. It is important for the recordkeeper to know whether the contribution needs to be designated Roth or not. “When it comes to the individual ways of handling [administration of] different provisions, it is up to our members,” but all the provisions need to be thought through.

Another, SECURE 2.0 provision, the Saver’s Match, which is slated for implementation in the 2027 tax year, is a 50% federal matching contribution deposited directly into a taxpayer’s individual retirement account or retirement plan up to a maximum contribution of $2,000 (or $4,000 if married filing jointly). RRC’s Hess notes that it is “complicated but an important benefit to the part of the workforce that needs it the most.” She also acknowledged that, due to the work facing recordkeepers, “if employers are not asking for it, it will get pushed aside.”

Beyond those provisions, Nathan Voris, head of channel strategy at Morningstar Retirement, says the amount of compliance work recordkeepers need to do “means scale is more important than ever,” alluding to the potential for more consolidation in an industry that has been consolidating for a long time.

Right now, he says, spending by recordkeepers on regulatory compliance projects is “competing with money for [recordkeepers’] roadmap of innovation that [plan] advisers need and want to serve participants, because there are finite dollars and finite deadlines for development teams.”

—Amy Resnick