SECURE Act 2.0: Potential Employer Impact
As the legislative landscape evolves, companies need to stay ahead of the curve. Morgan Stanley at Work walks through what the latest SECURE Act 2.0 provisions might mean for your retirement + student loan benefits.
Capitol Hill plays a critical role in shaping the corporate landscape, but even to the trained observer it can be difficult to discern how new changes in retirement legislation may affect your business. How can you deliver more value to your employees through your benefits offerings when the rules of the road continue to shift?
In the case of the pending Securing a Strong Retirement Act of 2021, also known as SECURE Act 2.0, there are a few provisions that would directly affect workplace benefits—and the companies that rely on these critical tools for motivating employee recruitment, productivity, and retention. Here’s what you need to know.
These proposed changes in legislation were developed to combat the ever-growing American retirement savings gap. The initial bill passed through the House in a near unanimous bi-partisan vote, demonstrating that Capitol Hill recognizes the need to prevent a retirement crisis.
The legislation includes changes that could potentially increase uniformity across employee segments, and help you leverage your workplace benefits to accelerate your employees’ journey on the road to financial wellbeing.
The bill, expected to reach President Joe Biden’s desk by the end of the year, could require most employer-sponsored retirement plans to enroll their workers automatically, making it easier for student-loan borrowers to save, and for older workers to make catch-up contributions. It will also lower costs for smaller businesses.
There are over 50 provisions in the bill, but here are standouts with the most significant impact to employers and employee retirement planning:
- Increasing the small employer pension plan start-up credit to cover 100% of the cost to small employers to implement a 401(k) plan for the first three years
- Creating an additional new credit to encourage small employers to make direct contributions to their 401(k) plan for their employees, offsetting up to $1,000 of these employer contributions for each participating employee
- Expanding automatic enrollment in 401(k) plans by requiring 401(k), 403(b) and SIMPLE plans to automatically enroll participants in the plans upon becoming eligible, with the ability for employees to opt out of coverage
- Allowing employees to earn employer matching contributions by making eligible student loan payments in lieu of making their own contributions to the company’s retirement plan
- Increasing the age for required beginning date for required minimum distributions (RMDs) from 71 to 75 years over time (73 on 01/1/22, 74 on 01/01/29, and 75 on 01/01/32)
- Giving employers more time to adopt beneficial discretionary retirement plan amendments up until the due date of the employer’s tax return
- Broadening the scope of the SECURE Act’s pooled employer plan or open multiple employer plan provisions to allow unrelated public education and other non-profit employers to join a single 403(b) plan
- Providing a safe harbor for corrections of employee elective deferral failures by extending the time a plan sponsor has to self-correct qualified non-elective contribution (QNEC)
Because linking matching employer retirement contributions to employee student loan repayments may seem counterintuitive, it’s helpful to take a step back to better explain why this connection can have such a profound impact on your employees’ individual finances.
By treating qualified student loan repayments as matching contributions, employees who weren’t previously able to budget retirement contributions will be able to take advantage of their employer 401(k) match. Businesses will also be able to better utilize their retirement plans by subtracting any student loan payments employees make from their salaries and treating them as an elective deferral or an elective contribution.1
Student loans are the second-largest source of debt in the US, with 43.2 million Americans owing over $1.71 trillion.2 When student debt is measured as a percentage of first-year income, it can range from 70%-110% of income, depending on demographic status (for example, women of color owe far more than average). It’s an unequal challenge, and not just for recent college graduates:
- Americans over 50 carry 22% of the country’s student loan debt,3 whether because they are still repaying their own debt or because they took out education loans to help support a child or grandchild.
- Similarly, Americans over 60 collectively still owe over $86 billion in student loan debt.4
- Women carry two-thirds of the national student debt burden,5 even though they represent 56% of college students.6
- Also, women and people of color tend to borrow more, earn less, and struggle more to repay their loans compared to their white, male peers.5,7,8
Taken together, it’s easy to see how these factors can compound financial pain points for many of your employees.
TJ Donovan, Executive Director at Morgan Stanley at Work, has worked with many employers to tackle the challenge of student debt. “It’s difficult to overestimate the impact of student loan debt crisis on future financial planning and outcomes for employees, particularly women and people of color,” he says. “When you know you should be saving for retirement but are mired in debt, it can feel like an either/or choice.”
Saving for a comfortable retirement can be a significant challenge—just 62% of workers are confident they will have enough put away9—and many of your employees may feel forced to choose between repaying their student debt or saving for the future. However, business leaders are beginning to understand they can play a more active role in removing some of these obstacles from their employees’ lives.
Legislation like SECURE Act 2.0 can empower the private sector to make real change. We’ve seen many clients take advantage of a favorable legislative landscape to expand their benefits and offer meaningful support to their employees.
SECURE Act 2.0 expands on this logic to help companies help their employees in two critical financial arenas at once. Legislative updates like the proposed SECURE Act 2.0 provide an opportunity not only to reinvigorate your offerings, but also to raise awareness and help employees learn more about how many ways you can support them in their financial journeys.
At the end of the day, more comprehensive solutions are needed to address both the student debt crisis and employee retirement planning needs, and SECURE Act 2.0 appears to offer opportunities for forward momentum on both fronts.
SECURE Act 2.0 may give companies a way for employees to continue to repay student debt and start saving for retirement—at the same time, and at the same out-of-pocket cost for the employee.
Use any legislative updates as an opportunity to educate your workforce on the benefits you provide them and raise awareness on the good work you’re doing to take care of your people.
Morgan Stanley at Work empowers companies and employees wherever they are on their unique financial journey, and we’re here to help companies navigate today’s financial services landscape and latest legislative changes with confidence. Learn how Morgan Stanley at Work can help.