The Hire thru Retire Podcast
Mike Hadley Returns (again) to Talk SECURE 2.0
We’re excited to be back after the holidays and starting off 2023 with a “three-peat” guest to talk about the SECURE 2.0 Act of 2022. Joining Bill today is Mike Hadley of Davis Harman, to discuss the details of the final bill that will be most impactful when it comes to expanding participant coverage and increasing savings for individuals today. Tune in to hear more about what the bill entails and what employers need to be thinking about today as it pertains to the rollout.
Bill Harmon is a registered representative of Voya Financial Partners, LLC (member SIPC).
Neither Mike Hadley nor Davis & Harman LLP is affiliated with the Voya® family of companies.
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We’re excited to be back after the holidays and starting off 2023 with a “three-peat” guest to talk about the SECURE 2.0 Act of 2022. Joining Bill today is Mike Hadley of Davis Harman, to discuss the details of the final bill that will be most impactful when it comes to expanding participant coverage and increasing savings for individuals today. Tune in to hear more about what the bill entails and what employers need to be thinking about today as it pertains to the rollout.
Bill Harmon is a registered representative of Voya Financial Partners, LLC (member SIPC).
Neither Mike Hadley nor Davis & Harman LLP is affiliated with the Voya® family of companies.
CN2671604_0125
You are listening to The Hire Through Retire podcast with Voya's Bill Harmon tackling all things from 401ks to HSAs and everything in between. We are talking to the best and brightest in the industry to bring you the latest in benefits, savings, and investment trends in the workplace. Come along with us on our journey to help all Americans become well-planned, well-invested, and well protected.
Speaker 2:Welcome back to The Hire Through Retire podcast. We're excited to be back after the holidays and starting off 2023 with one of our favorite repeat guests. Actually, he's a three-peat guest since he's here now on his third appearance on the pod. I'm talking about the legislative guru Mike Hadley of Davis Harmon, who is here to talk about the final version of the Secure 2.0 Act of 2022. Hey, welcome to the pod Mike. We're thrilled to have you. We've got lots to talk about, don't we?
Speaker 3:We sure do, and thanks for having me back and I'm, I'm honored to be a, a three Peter.
Speaker 2:Yeah, I guess we'll have to get you like a special jacket, um, or something like that for that's, except I guess it's a podcast. No one will even see it. We'll just have to go and describe it. Again. This is perfect timing to have you here because really in previous conversations we talked a lot about retirement legislation and we talked about what we think might be coming and what are the odds that this will come. Well, you know what the good news is, we're gonna talk about Secure 2.0 because it was passed. And so let's just jump right into it. Mike, there have been significant updates since its first introduction in 2021, and while the final bill includes several provisions,<laugh>, in fact, there's 92 provisions to be exact. We're gonna talk about some of those today. And really, Mike, at the high level, what do you think would be the most, the things we should talk about, the ones that are most impactful when it comes to expanding participant coverage in increasing savings?
Speaker 3:Well, thanks for having me again, and I'm, I'm, I'm really honored to be talking about this with 92 provisions. We can't possibly talk about all of them unless you're gonna have a two hour podcast. Even I can't listen to myself that long. So in, in terms of what are the ones that structurally are most impactful long term to make our system better, I, I guess I'd mentioned three categories. Uh, for those of you that are, that know a lot about our system, you know, that automatic enrollment is one of the best tools we have to get people saving. And the bill com significantly enhances automatic enrollment by requiring many new plans, uh, starting in 2025 to have automatic enrollment. They'll also create, it's a couple years out, but eventually we'll create a new matching contribution that the government will give lower income folks to help match any savings that they put into a plan or ira. And then lastly, for business owners or those that help business owners, there's some significantly enhanced startup credits, business credits that are available to you as a, a small business owner. If, uh, you start up a plan for the first time and those, all those things together, hopefully will get more people into the system and saving more.
Speaker 2:It's so good to hear that. Well, obviously the government is looking at, uh, at Americans and trying to do what they can to help them save. And I've heard you in past conversations say that it was really neat to watch this legislation go through the system on a bipartisan basis so our listeners can say, you know what? This is highly supported by the government. If you have a quick comment on, on the process that it went through.
Speaker 3:Yeah. For those of you that watched, uh, the goings on in the House of Representatives recently, you might think that Congress is broken and, and sometimes it feels that way, but this bill is an example of, of the government working the right way. We had four markups in committees, all basically unanimous as we talked about last time, almost unanimous vote in the house of the House version. And, uh, a lot of compromise made by a lot of members of Congress to accommodate a lot of different interests. That means the bill's not perfect. Uh, and there's certainly things in there that I don't like, and there are things that are not in there that I wish had been in there. But by and large, this is an example of something that I say lots, lots and lots of times. And that is that both Republicans and Democrats really do wanna make it easier for people to have a secure, uh, retirement. And they're willing to work together to come up with ways to, to improve our system to do that.
Speaker 2:Yeah, thanks Mike. Cause I think it is worth, uh, mentioning that, that we've got a government that really wants to help all of us, and they're putting in these provisions to, to do so both on the employer side and on the employee side. You mentioned these, but there are two particular provisions that are getting a lot of media attention, and those are specific to emergency savings and student loan debt support. So let's start with emergency savings. Secure 2.0 contains two main provisions related to emergency savings, both of which are optional for plan sponsors starting in 2024. Can you tell us more about what this entails?
Speaker 3:That's right, bill. Yeah, and I, and I would put this under the rubric of Financial Wellness. Congress has really heard this idea that we need to do a better job of helping people with their broad financial wellness, not just saving the plan, not just dealing with one-offs. And, and these emergency savings ideas are exactly along those lines. As you said, there are two different ideas that are built into Secure 2.0, and in both cases they're optional. One would is sort of simpler. It allows a 401K 4 0 3[inaudible] 4 57 plan to offer a distribution of up to a thousand dollars, sort of no questions asked for some emergency need that a uh, participant has. And that thousand dollars can, could be taken out once a year would be exempt from the 10% penalty. And the only real requirement is that before you could take another one, you would need to essentially make enough contributions back into your plan to, to replenish whatever you took out. So if you took out 500, you'd have to contribute at least 500 back in order to take another one of these distributions. So fairly simple, um, provision. The other one creates a somewhat more complex account inside a plan, what you might call it a sidecar. Um, it's called a pension Linked Emergency Savings account, or police a, so there's a new acronym we gotta learn, and that would allow, uh, emergency account of up to$2,500 saved on a Roth basis. So after tax and invested in some sort of principle protected investment such as a money market fund or stable value fund for which you could take distributions and for which, uh, eventually no questions asked. And that would allow you to have this little, little account inside your plan with that was tax advantaged. Um, but which is available to you as a, as a participant. Importantly, in a last minute change, uh, this would not be available to any employees who are considered highly compensated employees. So those folks that are considered what we call hce for your non-discrimination testing, et cetera, could not take advantage of this. Only folks below that, that income limit. Um, and both of these ideas, as I said, are optional available in 2024. But, um, they're the government sort of looking at, looking at this issue we've, that we know is there that before people can save in their retirement, sometimes they need to build up a small emergency reserve. And you sort of harness the power of the, of the plan to help do that.
Speaker 2:And, you know, we've actually even seen from some of our customers through some data analytics that some employees don't feel comfortable saving in a retirement plan, may be thinking it's a illiquid, because what happens if something happens? I don't have a a an account that would pay for that. Something happens. So then once they have that emergency savings account, they feel more comfortable saving in a retirement plan. So this kind of leads to my next question is that, well, you know, once employers now have the chance to implement the new features into their offerings, like, like this emergency savings, we know that employee adoption can be a challenge even despite what I just said. So what advice would you have for employers looking to implement this solution when it comes to getting their employees interested and involved in sort of the global savings process?
Speaker 3:That's a great question, and I, I think the first point I'll make is that even though I tried to describe both those things very simply, I'm not sure I did a good job.<laugh><laugh>, uh, there are a lot of complications that come along with it, including the need to make sure that you're, you're following all the rules that your, your, uh, payroll system and the record keeping system where your plan all working together and there's a lot of challenges. And even though they're effective in 2024, I'm not sure we'll even be ready by then to build it. But, but the point really is that there'll be some administrative challenges. What I will say is all plan sponsors need to think about meeting their participants where they are. Is this something that they need? And if so, is this the best way to make it work for them? I'll mention one thing about that pension linked emergency savings account, or please, a, under the the bill you can use automatic enrollment. So you could have your employees automatically enrolled at up to 3% of their income and have it go into the emergency savings account. And that's one way to sort of harness the power of, of automatic enrollment, again, optional, um, until that 2,500 gets filled up. So as you're thinking about, do I want to implement this? And if so, how, consider whether you might want to have automatic enrollment a again, to get people sort of use the power of inertia to get them to build that emergency savings account.
Speaker 2:Let's switch over to the other topic that I mentioned earlier, and that's student loan debt. And it's, it's certainly another hot topic. We know that those monthly payments can be a barrier to saving, whether that be for a big purchase, like a down payment on a house or toward financial goals like emergency, uh, funds or retirement savings. Let's talk a little bit more about this, this student loan debt provisions. Is it a game changer and what should employers know about it?
Speaker 3:I think it's a wonderful option, of course, optional, and I think it really is another example of the government trying to give you an option as an employer to help meet your participants where they are. And as you said, a big issue is a lot of young savers have student loan debt, which prevents them from saving in the retirement plan, which they need to do. And that's fine. They need to pay those student loans. The problem is that if you offer a matching contribution, they're giving away free money, right? And many employers are happy to provide the match, but you've gotta contribute. So what this provision does is it says to an employer, Hey, if you'd like, you can offer a feature whereby if you've got an employee who can't contribute to the plan because of a student loan, you can kind of pretend they contributed. So take an example. Let's say you have a 50% match. If I'm a new employee, rather than putting a hundred dollars into the plan and getting that free$50, instead I use the a hundred dollars to repay my student loan. And the employer can offer the ability to say to that, uh, young employee, Hey, we'll still give you the$50 match. Now you need to have some sort of certification. So they certify, Hey, I did make the a hundred dollars, um, payment, but the, uh, the secure 2.0 facilitates that by dealing with a lot of the little details that have, have to be worked out. If you offer such a program, it's available in, uh, 2024. And as I said, uh, it would be optional, but it's a nice option that you could think about as an employer, especially if you've got a workforce really saddled by debt who you think are not contributing as much as they should be to the 401K plan and thereby giving up some of those matching contributions that you are happy to provide.
Speaker 2:Boy, wouldn't it be nice cuz now you've got that employee that's starting to see that they have an account balance that's growing that kind of gets them some incentive to continue to contribute when they're able to do so once they pay off that student loan debt. Knowing that our audience includes employers and sponsors, what are the most important things they should know as it pertains to the rollout of these provisions? And and are there any provisions that they should be thinking about now?
Speaker 3:Yeah, that's a great question. I think what I would highlight is two provisions that I would say probably require, uh, the immediate attention of most planned sponsors that, uh, sponsor a 401K plan. 4 0 3[inaudible] plan 4 57. The first one is in a little bit of a surprise effective this year, the required minimum distribution age. That's the age at which you've gotta start taking money out of your plan or I r a, uh, that age was changed from 72, which was done by the first secure act to 73 effective in 2023. So right now, the R M D age was moved up a year. What that means is, if you have somebody who is gonna attain age 72 this year, they, um, thought they had to start taking RMDs, but in fact they don't. And so that's something you need to, to, um, to start thinking about immediately, uh, because it's something you, you've gotta implement. The second thing I, I think is worth focusing on immediately is a mandatory change that goes into effect in 2024. Why am I talking about it now? Because it's going to require some significant lift, uh, especially for certain types of plans, and that's a new provision, uh, in secure 2.0 that requires that catch up contributions. Those are those contributions you have to make or you can make when you reach age 50. Catch up contributions must be made on a Roth basis after tax if your employee, uh, makes over a certain threshold$145,000. And what that means is that if you've got employees who make more than that or over 50 in making catchup contributions, your plan needs to offer the ability to make RO Roth contributions not all due. And, um, you need to make sure that you're ensuring that those, uh, participants over that, uh, wage level, um, that their catch contributions are treated as Roth. Again, that means it's taxable now, but won't be taxable later. And that's gonna be a big surprise to some of them. And while it's early 2023, I'll say, bill, I think this is the one that we really need to be focusing on immediately. And that is a especially true if you are a plan sponsor or a consultant in the educational space, the nonprofit space, governmental 4 57. And the reason I say that is because only a small percentage of those plans offer Roth now and they need to build that feature in and have it ready to roll out by 2024. Those are the two that I would say, Hey, if there's two things that I would take away from, uh, what Hadley's saying on this podcast, ask yourself. I need to be focusing on those right now because those are ones that are gonna affect most plans, um, and really are gonna require, um, some immediate attention.
Speaker 2:And I think, you know, you and I have talked about this too, being from the record keeping side, we're focusing on these and a lot of those provisions cuz it's gonna require some building and some technology, you know, obviously enhancements and adjustments to go ahead and help record keep some of these provisions. But for those on the plan sponsor side to take a look, and I I like your guidance right there. Like take a look at your employee base. Do you have a group, group of employees that are age 50, uh, making over 145,000? Do you have a Roth provision? If not, you need to, uh, look at adding one. Mike, I I tell you, I wanna thank you for your time and guidance and as always, we're so happy to have your expertise here to help us better understand this legislation. As we mentioned, the passing of secure 2.0 has been long awaited, uh, we really wanted to expand participant coverage, um, and increased savings. So we appreciate your help as always, breaking it down into plain English, giving us those examples that really make sense. Before I let you go, Mike, is there anything else you think folks should know about this important legislation?
Speaker 3:I'd say with 92 provisions, there are many that won't affect you and many that will, I think over the next year. The first thing I would say is be patient. There's a lot of unanswered questions that we'll need to get guidance from the regulators. Be patient as we're waiting for that. Number two, start talking to your consultant, your outside counsel about those optional provisions you'd like to implement. And then as you make those decisions, start working with your outside provider, your record keeper, um, who is I'm sure working diligently. I'm sure many of your colleagues Bill are working hard to kinda get ready. Um, but there's gonna be a, we'll need to have some patience cuz a lot of these things are gonna roll out over time and we'll need to decide kinda what makes sense for your plan and, and what doesn't. So, um, there are some things you need to start thinking about immediately, but just as importantly, be patient. Uh, we'll have lots of time to learn more about how this will work and how it will roll out.
Speaker 2:You're right, and, and you know, of course all of us in the industry know that this is just the beginning. We have a lot of questions, uh, throughout the industry. So right now is where the work begins, but it's all to support the most important end goal and that is greater outcomes for American workers. So with that, I wanna thank our listeners for joining us. We do hope this conversation was valuable to you and keep your out. Uh, more episodes looked to drop from us this year. Thanks again for joining us today. Stay well.
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