The automatic portability provider and rollover change may not be getting the attention it deserves. It could have a major impact on retirement plans by total amount of volume and potentially swell the number of participants… Research shows that this single change from SECURE Act 2.0 could reduce cash outs by half.
There is no shortage of articles on the new SECURE Act (Sometimes called SECURE 2.0) and for good reason. It’s great news on so many fronts for plan participants, investors, and plan sponsors. But once you’ve finished eating the cake and taken off your party hat, you may find the new act requires a bit of work for Plan Sponsors and those who handle the administrative side of benefit plans. The changes sponsors may be most happy about – extending the deadline to adopt amendments to plan from the end of the plan year in 2025 and creating safe harbor corrections for employee elective deferral failures– may drastically reduce your office’s intake of Excedrin over the next year, but a few other changes may be trickier.
We prepared a helpful list of the major provisions of the SECURE Act 2.0’s applicability and effective dates available here. We also sat down and discussed these provisions with our experts. They noted four main areas sponsors may want to consider: hardship deduction tracking; changes that could significantly increase or decrease the number of participants in a plan (and by association, your costs); and how forms are worded and stored.
Disasters Waiting to Happen: Take for example, the new law’s allowance for hardship deductions of $22,000 for needs related to federal disasters. Your office may want to consider what paperwork will be needed to record these deductions. Is your current hardship deduction form up to date? And, candidly, with so many weather-related crises, are you sure you are current on all of them? Sponsors may want to bookmark FEMA’s disaster page- https://www.fema.gov/disaster/declarations - according to that site, there have been 120 since January 2021. That site also allows for searching and filtering by the State or tribal area.
Thneeds Biggering?: Other changes could have an impact on the number of participants enrolled in a plan. Just like the Lorax, you might find these changes make your plan “go right on biggering…” and increase your (th)needs. Some of the changes could increase plan participants – like those making it easier for seasonal and part time workers to participate. Another provision that could increase enrollment concerns the ability of employees to rollover IRAs into a defined contribution accounts through automatic portability provider. In that provision, an automatic portability provider (APP) can rollover an automatic cash-out IRA from a participant’s prior provider into the new defined contribution employer sponsored plan. The best-known APP is Retirement Clearinghouse (RCH). This may be because “on July 31, 2019, the DOL issued an exemption to the RCH freeing them from the prohibited transaction restriction.”
This part of the Secure Act may not be getting the attention it deserves. It could have a major impact on retirement plans by total amount of volume and potentially swell the number of participants. “According to RCH …. the complicated process of initiating a rollover into a new employer’s plan leads to over 54% of participants with small-balance accounts instead choosing to cash out their savings within a year of changing employers…” Research shows that this single change from SECURE Act 2.0 could reduce cash outs by half “from $320 billion to $164 billion and increase roll-ins from $15 billion to nearly $130 billion over the course of 40 years for participants with small-balance accounts.” The Center for Retirement Initiatives at Georgetown University also notes that in the past the rollover cash out requirement disproportionately impacted Black and Hispanic retirement savers. This new change could help correct that. But it could also increase your administrative needs. Just as increased Thneeds caused problems for the legendary Lorax, increased needs could cost your plan in administrative costs, either from increasing your staff or via your TPA’s pricing structure.
The Rollover Doughnut: Other changes brought by the SECURE Act 2.0 could decrease your enrollment. One in particular includes the creation of a Retirement Lost and Found database housed at the Department of Labor (DOL). There plan participants can find their older plans, obtain their contributions, and roll them into qualified accounts. This may mean that plan sponsors may want to be ready for an influx of new changes and rollover requests. While this process may feel like a doughnut, with no beginning or end and a hollow sense in the middle, there are ways sponsors can get ahead of this potential change. Sponsors may want to consider asking their administrators or TPAs to run lists of plan participants who have not contributed in a specified number of years, such as a decade or more, to learn how many of these kinds of requests could be coming. Prior to the SECURE Act changes, the DOL required plan sponsors to take a series of steps to locate lost account holders. These steps were often more time consuming than resource consuming, but they generated headaches for many. Some sources reported “inconsistencies in enforcement and confusion among plan sponsors about exactly what steps are required.” The new act makes clear that the Lost and Found will be housed via the DOL and the ease of use of it for participants may result in reducing the number of passive participants in your plan.
Along the same lines, the SECURE Act 2.0 has provisions to help Plan Sponsors on how they can remove individuals who are eligible but not enrolled from their notices and disclosure requirements. It also increases the amount that plan sponsors can cash out terminated participants from $5000 to $7000. This could have a significant impact on how many plan participants are on your rolls. According to June 2022 data from Vanguard’s 2021 How America Saves Survey the median 401(k) balance for employees aged 25–34 was $13,265. While not a perfect data overlay, information from the PEW Research center puts this age group at about a third of the work force, or roughly 56%. The ability to reduce the number of participants could be a significant administrative reduction for many plan sponsors.
Firm Up Your Forms: Some provisions of SECURE 2.0 also reduce administrative hassles for plan sponsors who host both 403(b) and 401(k) plans. Provisions like autoenrollment for 403(b) plans may allow sponsors to synchronize the enrollment process for both plans to eliminate potential confusion among participants and administrators. The new act also provides a few self-certifying portions that sponsors may want to consider carefully with counsel regarding how those self-certification attestations will be handled. Specifically, new provisions allow self-certification for hardship provisions and unforeseeable emergency withdrawals and also allow for emergency personal withdrawals up to $1000 per year. These emergency and hardship withdrawals require only that the employee certifies the need for them. This provision for hardship withdrawals became immediately effective. The provision for emergency withdrawals becomes effective after January 1, 2024. The potential for confusion among participants and plan administrators is high, and it’s possible that the self-certification for these two withdrawals could require different record keeping and forms.
Other provisions allow for penalty-free withdrawals from plans in the case of domestic violence. In those situations, participants will also use a self-certification process to obtain the withdrawal. This provision becomes effective after January 1, 2024. Additionally, sponsors may need to consider whether state law requires these documents to have different treatment than other forms for confidentiality reasons. For example, would the domestic violence hardship waiver contain information concerning employee health? And if so, would it be subject to the protections of HIPAA or to a state’s mental health confidentiality requirements that are often stricter than HIPAA?
Similarly, the new act also makes changes to how matching contributions can be allocated. This includes both allowing student loan payments to be elective deferrals as matching contributions and an optional treatment of matching or nonelective contributions as Roth contributions. These new options may require a change to plan forms to capture these choices. Forms may need to be clear on the who, what and when of these choices.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.get xpress proposal