Critics say SECURE 2.0 did little to help the economically insecure

By Steven A. Morelli

As advisors help clients understand the benefits provided by SECURE 2.0, critics are saying that the provisions did little to assist people who actually need retirement help.

Retirement savings provisions known as SECURE 2.0 were wrapped into the omnibus spending bill in December. Among the measures, it requires employers with retirement plans to automatically enroll eligible workers starting in 2025, while exempting some small employers.

Although proponents of the measures say they will allow savers to put away billions of dollars toward retirement security, some critics contend the new rules will do little to help those who need it most.

“It is shameful that we have to give so much to high earners to get a few crumbs for lower earners,” said Alicia Munnell, director of the Center for Retirement Research at Boston College, to The New York Times.

Another critic was from Teresa Ghilarducci, economics professor at the New School for Social Research, who wrote about the provisions’ shortcomings in Bloomberg News.

“SECURE 2.0 does little to spread retirement plans to the 57–63 million workers without one or make marked improvements for workers who have an inadequate plan,” Ghilarducci wrote. “The people the legislation is most likely to help are professionals in the retail money management industry and households with substantial assets. … Because it’s so hard to save any money on a low income, these changes will do little to help the working poor save more for retirement; they also seem unlikely to help manual laborers who often must retire earlier after a life of hard, physical work.”

The latest criticism was from tax attorney Albert Feuer, who published the article “Secure Act 2.0: A Missed Opportunity to Enhance Retirement Equity” in Bloomberg Tax saying the measure may have had good intentions but were only half steps.

“This disappointment is a result of the draftspersons missing an opportunity to shift significant retirement tax incentives from those with few retirement concerns to those struggling to accumulate sufficient savings to retire comfortably, and to improve compliance with the retirement tax rules,” Feuer wrote. “Instead, the draftspersons reduced retirement equity by giving small incentives to struggling workers while giving far larger incentives to the wealthy, by encouraging more noncompliance, and by adding undue administrative complexity.”

“It is shameful that we have to give so much to high earners to get a few crumbs for lower earners.” Alicia Munnell, director of the Center for Retirement Research at Boston College

Organizations that helped craft and promote the rules said the provisions significantly helped American workers. Whit Cornman, American Council of Life Insurers spokesman, said in an e-mail that SECURE 2.0 paved the way for more retirement savings participation and more will be done.

“Addressing challenges to Americans’ retirement security remains a bipartisan focus in Congress,” Cornman said. “Retirement security policy will continue to evolve as people’s needs change and as new challenges to saving emerge.”

Cornman said that based on analysis of a revenue estimate of the legislation by the Joint Committee on Taxation, ACLI found that the bill would increase savings over 10 years for specific groups of Americans who need help the most including:

$40.5 billion in increased savings for new workers
$20.5 billion for small business employees.
$9 billion for older workers.
$8.5 billion for student loan borrowers.
$2.7 billion for low- and middle-income earners.
$1.5 billion for long-term, part-time workers.
$865 million for nonprofit workers.
$117 million for military spouses.

Dan Zielinski, Insured Retirement Institute spokesman, also said the provisions would have people who need it most, such as military spouses and those with student loans, and workers across the board with auto-enrollment.

“Auto-enrollment provisions will increase access to retirement plans for workers, particularly small business employees,” Zielinski said in an e-mail. “Enhanced tax credits for small business employers to help cover costs of starting a plan should spur the creation of many new retirement accounts for lower-income small business employees. The legislation also lowers the threshold for when part-time employees may be eligible to participate in a workplace retirement plan.”

Little for those with the least?

Feuer said in his article that four sections of SECURE 2.0 directed at workers who have difficulty saving for retirement did not meet their mark. They are:
Section 101 requires new 401(k) or 403(b) plans to provide an initial automatic deferral contribution of least 3% but not more than 10% of each worker’s compensation, but does not require employer matches. Feuer wrote that this provision would be “far more equitable if the requirement applied to all employers that now maintain or wish to implement a new 401(k) or 403(b) plan, and the initial automatic percentage was raised to at least 5%.”

Section 103 changes an annual savings credit of up to $1,000 annually to an EARN act savings match contribution of up to $1,000 to an employee’s individual or employer-sponsored retirement plan. Feuer said the rule is complex and phases out at a relatively low wage scale of $35,500.

“Annual $1,000 matches are unlikely to significantly increase many American workers’ retirement readiness, particularly if, as with SECURE Act 2.0, very few are entitled to a match close to $1,000,” he wrote. “Nevertheless, the new saver’s match could be made more likely to create positive results for the more than 100 million low-income American workers estimated to be eligible for the match19 if the match became first available in 2023 rather than in 2026, thereby giving workers three more years to accumulate those retirement benefits, the maximum match was doubled to $2,000, and the maximum matching percentage was 100%.”

Section 110 permits employer to treat plan participants’ ‘‘qualified student loan payments’’ as tax-deferred plan contributions match contributions to a 401(k) plan, 403(b) plan, a SIMPLE IRA, or a government 457(b) plan for plan years beginning 2024.

"The provision would be far more equitable if it applied to all tax-qualified employer benefit plans...” Albert Feuer, tax attorney

“However, it should be noted that the size of the match for any participant depends on the employer’s generosity and the participant’s willingness and ability to make significant loan payments,” Feuer wrote. “This provision would be far more equitable if similar relief were made available to tens of millions of workers who work for employers that maintain no plan providing for matches (or no plan at all) as well as to gig workers and more traditional self-employed workers for whom no third party will make matching contributions.”

Section 125 requires employers to allow long-term part-time workers to participate in the employer’s 401(k) plan or 403(b) plan beginning 2025.

“The provision would be far more equitable if it applied to all tax-qualified employer benefit plans, including some for which employer contributions are mandatory such as money purchase plans,” Feuer wrote. “Even with such expansion, the provision would give no assistance to part-time workers working for employers who maintain no plan or to gig workers and more traditional self-employed workers who do not maintain such a plan.”

Helping the fortunate?

Five major SECURE 2.0 sections help those with “few” retirement concerns, Feuer wrote.
Section 603 requires that catch-up deferral contributions to 401(k) plans, 403(b) plans or 457(b) plans may only be made as Roth contributions, except by participants whose compensation from the plan sponsor in the prior year was less than $145,000 for plan years beginning in 2024. This section shortchanges savers by reducing the compounding power of the savings by current taxation, while also taking away future revenue that could have been taxable outside the 10-year window that Congress uses to estimate cost. Basically, the measure was included to reduce the overall revenue impact but it puts savers at a disadvantage with little actual revenue change.
Section 604 requires employer matching or non-elective contributions be made on a Roth basis.

“Because matches and non-elective contributions are usually made available across the board, this means that those without retirement concerns will be able to more easily make Roth choices and obtain greater tax benefits than those struggling to accumulate retirement savings for the exact same kind of contributions. Thus, this provision will further reduce retirement equity.”
Section 207 raises the required minimum distribution (RMD) beginning age from 72 to 73 this year and to 75 in 2033. “This provision will not affect those without sufficient retirement assets to live comfortably because they must withdraw retirement benefits to pay their retirement expenses.”

Section 126 allows beneficiaries of 529 higher education savings accounts to roll over up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA. Feuer said this should have been omitted because “undistributed earnings are not taxed, and no tax is imposed on those earnings when the distributions are used to pay higher education expenses.”

Equitable Limits on Retirement Tax Incentives. “The measure could and should have required those with an individual retirement plan or employer-sponsored retirement benefit plan account whose balance exceeds a large sum (often called ‘‘Mega IRAs’’) to make minimum annual distributions of part of the excess (in addition to the usual RMDs) because such excess may not be expected to be used to pay for the participant’s retirement, which is the purpose of the tax incentives.”

Feuer also wrote that the rules added complexity, particularly sections 109, 115, 121 and 127: “Such complexity will reduce retirement equity by discouraging employers from adopting and maintaining tax-favored retirement plans and by discouraging workers from participating in such plans.”

He concluded that SECURE 2.0 did improve some tax incentives for Americans struggling to save, but did not offer much help for those who needed it most while weakening compliance rules.

“Congress can do better and did so three years ago when it enacted the original SECURE Act,” Feuer wrote. “For example, Section 401 of that Act reduced the period over which benefits must be distributed to most non-spousal beneficiaries and this section accounted for 95% of the estimated costs of the SECURE Act’s reallocation of retirement tax incentives of approximately $16 billion.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].