SECURE Act 2.0 and retirement reform hang in the balance

Mike Dullaghan

Mike Dullaghan
Accredited Investment Fiduciary®, 12/13/22

Following on the heels of a closely divided election, our industry is in wait-and-see mode. Divided control resulting from the midterms has complicated the calendar and agenda for the lame duck (post-election) Congress. Hopes for collaboration on retirement issues in the late stages of the 117th Congress may be in doubt. Will the nation's political leadership be in the mood for compromise?

Legislation commonly known as SECURE ACT 2.0 hangs in the balance. At stake are rules affecting auto-enrollment, IRA required minimum distributions (RMDs), catch-up contributions, and qualified charitable distributions, among others. Senate vote moves retirement reform one step closer to the finish line.

With new mandates driving the emergence of state-facilitated automatic-IRA savings plans, lawmakers may also decide about enhanced tax credits for start-up plans. The new state mandates, affecting mostly smaller companies with minimal or zero retirement plan assets, are placing new stress on America's private defined contribution (DC) savings system. Plan recordkeepers report an uptick in the rollout of start-up private plans. This is not surprising. The Pew Charitable Trusts reports most businesses prefer to offer traditional private savings plans because the auto-IRA plans do not allow an employer match.

Anecdotal evidence collected at the Retirement Leadership Forum (RLF) 2022 meeting for DCIO firms and recordkeepers, "Building Profitable Partnerships," suggests that the industry is working hard to bolster necessary infrastructure to meet the demand for new private plans.

On the regulatory side, the retirement plan industry received on November 22, 2022, a final rule that retirement plan fiduciaries can consider climate change and other environmental, social, and governance factors when they select investments for retirement plans like 401(k)s. The final rule, which now explicitly allows for ESG investing, "can be useful for plan investors as they make decisions about how to best grow and protect the retirement savings of America's workers," the DOL said.

The ruling also allows fiduciaries to consider climate change and ESG factors when selecting a qualified default investment alternative (QDIA) and exercising shareholder rights, such as proxy voting. This clarification removes a significant roadblock to ESG adoption in qualified plans.1

The need for retirement income, combined with increased participant and plan sponsor desire for "advice," is generating interesting crosswinds and accelerating the trend toward "QDIA 2.0" — a combination of managed accounts, advisor managed accounts, and TDF personalization.

According to Lee Stevens, head of institutional sales and consultant relations for T. Rowe Price's Retirement Plan Services (cited in the 2022 Recordkeeping Survey of PLANSPONSOR magazine):

We're at an interesting point in the cycle, where the industry is really coming together to put retirement in a broader context, and there's an opportunity for plan sponsors, recordkeepers, and investment firms to work together to keep making improvements. That's beneficial from a fiduciary standpoint because plan participants are getting more out of the plan. But it also requires deeper analysis of plan needs so that any changes are still in the best interest of the plan's participants.

It's worth noting that the imagination of the product innovators can sometimes run far ahead of those tasked with efficient and effective operational execution. The following chart from the Retirement Leadership Forum (RLF) hints at the layers of partnership needed to execute retirement income/decumulation.

Retirement income requires partnership

Retirement income requires partnership chart

Source: Retirement Leadership Forum.

Among other requirements, data needs to flow between recordkeepers, middleware providers, and product manufacturers and asset managers. This data needs to move as seamlessly as possible, notwithstanding the friction created by the ever-present need for ironclad cybersecurity.

Emerging trends in plan design and in DC investment are interdependent. As the RLF's "Building Profitable Partnerships" meeting made clear, the best possible outcomes for plan participants can only be achieved when plan advisors/consultants, recordkeepers, plan sponsors, asset managers, and middleware providers work together.

The rise of Managed Accounts (MA), Advisor Managed Accounts (AMA), and personalized TDFs as components of the QDIA 2.0 movement is a noteworthy development. RLF surveys indicate that each of the five participant-focused trends — personalization, CITs/SMAs, participant advice, benefits integration, and MEPs/PEPs — are ranked as "somewhat or very important" by the majority of large-market record keeper survey respondents.

A focus on the participant

Large-market recordkeepers' views on how important the following trends are to the evolution of the DC landscape across the next 3–5 years, 2022

A focus on the participant chart

Source: Retirement Leadership Forum.

Watch for action on SECURE 2.0

The DC workplace savings industry has grown to over $10T in assets under management, serves more than 78 million participants, and added more than 86,000 new plans in 2021. Yet, we find ourselves at a crossroads. DC savings have become an embedded part of the U.S. economy, treasured by many workers. We now need to extend this benefit to tens of millions more.

From the "Field of Dreams" perspective, (if you build it, they will come), our story is a glass half-full — but far from overflowing. We have work to do, determining what is needed to attract uncovered workers, while at the same time serving aging workers moving from the accumulation to decumulation phase of their retirement savings journey. But there's every reason to be optimistic. Our story of steady, incremental improvement has been built on the firm foundation of 40 years of innovation and trust.

One thing made clear at the SPARK Forum 2022 is Collective Investment Trusts (CITs) are likely to play a prominent role in DC product development, especially as it relates to QDIA 2.0 and retirement income offerings. Given this CIT momentum, we have recently released a CIT FAQ, which is now available on our enhanced CIT web page. Please give both resources a look.

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