By providing plan fiduciaries with these critical updates, you can strengthen your long-standing relationships and earn new 401(k) business.
The SECURE 2.0 Act will undoubtedly have a major impact on plan sponsors, but many are unaware of the specifics. As a retirement plan specialist, you can seize this opportunity to stand out, deliver value and ultimately grow your business.
By understanding the rules and how they can be applied to different prospect and client scenarios, you can stay ahead of the curve with new business development campaigns. Let’s unpack a few of the top provisions and discover how to use them to increase your 401(k) business.
Roth Requirements
One of the first opportunities to highlight is the importance of the Roth provision. With 88% of plans offering the Roth feature, that leaves 12% without it.[1] You can identify plans by contacting your preferred Form 5500 database provider and asking them to run a list for you. This can serve as your prospect list for a Roth contribution campaign. Your campaign could include talking points from the following SECURE Act 2.0 provisions that require Roth:
Employer Contributions. Effective now, employers can amend their plans and allow participants to receive the employer matching and non-elective contributions as a Roth. (Check with the plan’s recordkeeper and payroll provider for implementation guidelines.)
Catch-up contributions. Starting in 2024, pre-retirees looking to make a catch-up contribution might be surprised to learn that if they earn more than $145,000 in W-2 compensation, those catch-up contributions need to be Roth (and that includes the owner). Employees who earn less than $145,000 can continue with pre-tax 401(k) contributions. [Note: Since this article was first published, the IRS released guidance granting a two-year delay in the provision’s effective date. As such, catch-up contributions can continue to be made on a pre-tax basis through 2025, regardless of income.]
Side-car accounts. Also, starting in 2024, employers can enroll non-highly compensated employees (NHCE) into “side-car accounts.” These accounts can be funded with after-tax dollars up to $2,500 for emergency access, and then any extra savings—you guessed it—goes into their Roth account.
Automatic Features
Another key provision of the SECURE 2.0 Act revolves around automatic features. As you know, SECURE 1.0 provided a $500 tax credit for the first three years if a plan added automatic enrollment. For employers unaware of this, it’s a great talking point to open the conversation.
With SECURE 2.0 doubling down on automatic features, starting in 2025, most new plans will be required to auto-enroll at a rate of 3%–10%. As studies have shown, employees are comfortably enrolled at around 6%, so advisors should prepare for two things:
- If a plan doesn’t have auto-enrollment, the company’s leadership should start to consider it.
- If the plan auto-enrolls at 3%, that low deferral rate should be reconsidered. This is an excellent topic to bring up with both clients and prospects.
Auto-escalation involves systematically increasing savings over time to nudge employees into saving more in the future. With SECURE 2.0, plans established after 2025 will be required to auto-enroll and auto-escalate their employees up to 10%–15% of compensation. So, if you’re already talking about auto-enrollment, you should also discuss auto-escalation as a worthy companion.
Additionally, if an employer does have auto-escalation in place, ask them how they decided on that percentage. Under SECURE 1.0, a safe harbor provision allowed employers to auto-escalate employees up to 15%. Under SECURE 2.0, that is (also) the high-water mark. In a subtle way, the government recommends that American workers save 15% of their salaries toward their retirement future, which is conveniently what our industry experts have been recommending for years.
By incorporating automatic features into your conversations, you can help plan sponsors optimize retirement savings and take advantage of the latest regulations.
Read more commentary by Rebecca Hourihan here.
Force Outs, Auto-Portability and Locating Participants
There are a few different themes here, but they are all connected. The government has identified that employees are under-saved, and when they move from job to job, the employees either cash out their retirement account (41% of the time) or they leave it where it is and forget about it (resulting in nearly 25 million missing accounts).[2]
Therefore, in an attempt to prevent cash-outs and forgotten small account balances sitting on employer books, there are a few solutions.
1. Force out provision. This is not new, and it’s a Safe Harbor option for employers. The Safe Harbor IRA provision removes the retirement accounts of former employees with between $1,000–$5,000 and places their savings into a Rollover IRA. Then starting in 2024, the amount range increases to $1,000–$7,000. Many recordkeepers have a partnership in place for rollovers. Now is the time to ask your clients and prospects what they are doing to prevent the accumulation of small account balances and potential future missing participants.
2. Auto-portability. This new section in SECURE 2.0 allows recordkeepers to seamlessly transfer former employees’ retirement accounts to their new employer’s 401(k) plan. This prevents the employee from receiving the money in hand. It stops the arduous task of contacting the transfer department and completing in-good-order paperwork to receive the funds. As this network of recordkeepers and clearinghouses expands, it will be exciting to see how this technology partnership might foster good savings behaviors through reducing plan leakage, account consolidation, and the reduction of future missing participants.
3. Missing participants. Not explicitly called out in SECURE 2.0, but with the formation of the Lost and Found database, it is an easy connection to make. Soon savers will be able to find out where/when they left former retirement plan dollars. Therefore, as consultants who instruct and guide your clients, why not get ahead of the conversation, and discuss the benefits of adding the Safe Harbor IRA and/or auto-portability to plans now?
As an idea to help employees consolidate accounts and encourage more assets into the plan, advisors should consider adding strong calls-to-action during enrollment and education meetings, as well as on new-hire paperwork. It promotes the features and benefits of the new workplace retirement plan, while offering a step-by-step one-pager explaining the process to roll in their previous 401(k) balance into their current workplace retirement savings plan.
Be the Early Bird
Adjust your sales conversations and business development campaigns to leverage the SECURE 2.0 legislation and capitalize on trending themes. By providing plan fiduciaries with these critical updates, you can strengthen your long-standing relationships and earn new 401(k) business.
Thanks for reading, and Happy Marketing!
Rebecca Hourihan, AIF, PPC, is the founder and CMO of 401(k) Marketing, which she founded to assist qualified experts operate a professional business with professional marketing materials and ongoing awareness campaigns. This column first appeared in the Summer issue of NAPA Net the Magazine.
