22 September 2021

How SECURE Act 2.0 Gets Americans on a Surer Glide Path Toward Retirement

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The advisor community has been watching the progress of the Improving Access to Retirement Savings Act—otherwise known as SECURE Act 2.0. As of this writing, there are two different bills, one in the House and one in the Senate. The House version is out of committee and enjoying bipartisan approval; It’s not quite as far along in the Senate, but stands a good chance of approval and making it onto the President’s desk. One thing is clear: Republicans and Democrats agree that Americans are not on track for retirement.

With SECURE 2.0 looking like it will become law, 401(k)s and other retirement plans may finally have a chance to recover some lost ground from traditional pensions having given way to defined contribution plans. Here I’d like to discuss the new act, and in particular how it’s opening the way to rethink retirement investment time horizons and reduce the need for members of underfunded plans to undertake bigger risks as they get closer to their retirement date. It also plays into my firm’s mission of rethinking the traditional 60/40 portfolio mix and protecting the American worker from downside risk.

What Is SECURE 2.0? 

First, a bit about the new legislation. The SECURE Act 2.0 offers savings stimuli to employees and employers alike in the form of automatic enrollment for newly created retirement plans; tax incentives for small business employers to offer plans to their employees sooner; and a new national online database of lost retirement accounts.

The two bills currently in Congress have still not quite married up to the final proposal—but as an example, the House’s version asks for provisions that would require employers to accelerate their offering of plan participation to employees.

This constitutes a tangible change that would serve to stretch the time horizon on an individual’s retirement account—by beginning an investment program earlier, there are more years to accumulate savings.

The bill also calls for a redefinition of minimum eligibility requirements, though to my ear, the better term might be ‘maximum eligibility requirements.’ While the old rule allowed an employer to prohibit someone from entering their retirement plan if they worked 1,000 hours or less, the new language may shorten that cap to 500 hours, thus redefining and expanding who is eligible.

Other encouraging and expansive items in the bill include provisions for military spouses—a recognition that they often haven’t had a conduit to invest. The new law would encourage employers to allow people who aren’t actually their employee to participate in and benefit from an employer-based plan. For Congress, this a fairly novel thought process, and they deserve recognition for trying to answer to new societal needs and work patterns, particularly around the gig economy.

What Was Wrong with SECURE 1.0? 

It’s worth asking the question, why a SECURE Act 2.0? What was wrong with the first one? To my way of seeing it, this update is only looking to improve on what was begun in SECURE 1.0. There is a sense of government trying to get out of way, allowing for retirement plans to exist in more effective and successful forms.

One way we’re seeing this is how required minimum distributions (RMDs) have been floating up from 70.5 to 72 years old—a provision of the prior law. Now in this new version, Congress is proposing that RMDs go up to age 75. This is another sign of extending time horizons so that people won’t outlive their retirement savings.

Another step in the right direction is the law’s stance on auto-escalation: the House proposal asks for an auto-enrollment figure which is then to escalate by 1 percent every year until it hits 10 percent.  This gives especially small plans incentive to get employees started saving.  We are creatures of habit—as a people, we hate change, even when it’s good for us. Auto-enrollment and auto-escalation of deferral rates are two ways the bill is addressing this in-built aversion.

Behavioral science asserts that if you get people started contributing regularly and increasing the amount they contribute each year, most will maintain the habit. Even though, as a consumption-driven society, we are likely to spend whatever is left, most people quickly realize that they can live with the remainder after they’ve contributed to their retirement account. Auto-enrollment and auto-escalation are just two ways they won’t have to think about it as much.

So in sum, this new version of the SECURE Act is an attempt by Congress to say not so much what was wrong with the first one—it was a step in the right direction—as an attempt to continue closing the retirement gap by empowering investors to compound their money for longer. In addition to the above mentioned provisions for delaying required minimum distributions, the bill proposes increasing access to certain investment fund types for a broader range of employers.

What Does This Mean for Investors? 

I promised a look into why SECURE Act 2.0 aligns with my firm’s need to rethink the traditional 60/40 portfolio mix. I’ll keep it brief here. The ‘40’ in that mix usually refers to fixed income vehicles, notably bonds—which globally constitute a larger market than the ‘60’ portion of equities, or stocks.  Bonds have long been a stable source of long-term investment yield. However, as our economy recovers from the pandemic with signs of inflation setting in for the first time in 30 years, there are suddenly problems looming for traditional fixed income. After seeing too many rational investors who’ve worked hard for their retirement accounts despair when they see negative numbers—the shock is far greater than the elation  from the positives—my firm has set out to rethink 60/40. In terms of retirement savings plans, not only have defined contribution plans left people to figure out their own investment strategy, but the conservative side of their portfolio is now facing unprecedented risk.

So this proposed law is an admission, from a bipartisan Congress and with support from the industry, that the retirement gap is real and that we have not done enough to address the root reason for our existence as fund managers—which is the outcome of a dignified retirement for American workers.

Still, we cannot legislate our way out of the retirement gap.

We need to dare as an industry to continue to focus on better-outcome solutions. This means not only advocating for SECURE Act 2.0, but also being hyper-curious about how we can do better with our investment funds and as a professional community. The average client—the American retiree or soon-to-be retiree—doesn’t necessarily want to know how the watch works, they just want to know that it works and is accurate. If this is important to you as an investment manager or as an investor, you will need to spend time on it. Likewise, plan managers should produce investment solutions that work, getting investors to retirement without sending them on an emotional rollercoaster as they get closer to, and through retirement.

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