SECURE 2.0: A win-win for small businesses, employees and forward-thinking advisors

The new law bolsters small businesses' ability to provide retirement benefits to their employees by offering tax credits to offset costs; however, for advisors, it's an unprecedented opportunity to tap into a new revenue stream.

Matt Zokai | Director, Retirement Solutions
As featured in Benefits Pro

The SECURE 2.0 Act, officially known as the Setting Every Community Up for Retirement Enhancement Act, represents a significant milestone in the evolution of U.S. retirement planning. Building upon the foundation laid by the original SECURE Act of 2019, the updated legislation aims to further enhance retirement security for American workers while addressing evolving challenges.

Enacted to encourage retirement savings and alleviate financial burdens on retirees, particularly lower-income households, SECURE 2.0 introduced over 90 new provisions with effective dates ranging from 2022 to 2028 and beyond. The updates also aim to bolster small businesses' ability to provide retirement benefits to their employees by offering tax credits to offset the cost of plans while simplifying administrative processes.

The benefits extend beyond the immediate impact on individuals and small businesses. By promoting long-term financial stability, the legislation contributes to the nation's overall economic wellbeing. With life expectancy in the U.S. projected to increase in the coming decades, SECURE 2.0 represents a strategic response to retirement planning, fostering a culture of financial preparedness and resilience.

Forward-thinking financial professionals are presented with a unique opportunity to scale organically by offering their services to smaller retirement plans and small businesses. Let's examine two critical changes that usher in an extraordinary window for practices to efficiently grow their book.

Ability to replace SIMPLE IRAs with a safe harbor (401)k plan midyear

For the first time, SECURE 2.0 gives business owners the flexibility to terminate their Savings Incentive Match Plan for Employees (SIMPLE) IRA plans midyear and seamlessly transition to safe harbor 401(k) plans. As an added advantage, the two-year rollover limitation for converting SIMPLE IRAs to a 401(k) plan is waived. This marks a substantial departure from the previous year-end limitation, enabling advisors to provide comprehensive planning throughout the year. The provision also introduces significant advantages for business owners contemplating the switch.

One primary benefit is the ability to enhance contribution limits within the 401(k) framework, which significantly surpasses the limits a SIMPLE IRA offers investors. For 2024, employees may contribute up to $23,000 to their 401(k) with a $7,500 catch-up contribution for those aged 50 or older—versus $16,000 and $3,500 respectively for a SIMPLE IRA. This means employees can save at least $7,000 more per year toward their retirement, if they're under age 50.

Another benefit of switching to a safe harbor 401(k) is the heightened level of flexibility in the structure of the plan, including giving employers the ability to optimize plan design to benefit key employees and owners. This flexibility allows businesses to explore multiple plan designs versus two for SIMPLE IRAs, which is a stark contrast. The diversified plan designs under a 401(k) also provide businesses with the ability to customize other key plan provisions, such as eligibility and vesting, to align with their unique needs and financial objectives. The updated legislation facilitates a more strategic and adaptable approach for businesses when it comes to managing their retirement plans, and for employees when it comes to saving for their golden years.

Automatic 401(k) plan enrollment

The reforms introduce another significant change, requiring employers to establish automatic enrollment and saving options for new defined contribution (DC) plans— a previously optional practice. Under this requirement, any plan established with an effective date after Dec. 29, 2022, must add auto-enroll no later than Jan. 1, 2025. While the provision does not take effect until the 2025 plan year, many employers are electing to adopt the provision now instead of waiting. Employers introducing new plans must implement an automatic enrollment process for new hires, setting a minimum saving rate of 3% of pay. There is also an obligation to automatically escalate the savings rate by a minimum of one percent annually up to a minimum of 10% and a ceiling of 15%.

Vanguard research underscores the positive impact of automatic plan enrollment on saving and participation rates. The study discovered a 91% participation rate in 401(k) plans with automatic enrollment, versus 28% for voluntary enrollment. Because of this, plan sponsors overseeing plans that lack automatic features may benefit from the addition of these provisions, as inertia tends to be an employee's best friend or worst enemy. The same study found that nine in 10 of participants who were auto-enrolled increased their deferral rates over time, whether automatically or voluntarily.

It's not just employees who stand to benefit – businesses implementing new plans can ease the financial burden of establishing them via enhanced tax credits. SECURE 2.0 credits offer significant offsets for the entire startup cost over the initial three years, up to $5,000 per year plus an employer contribution credit of up to $1,000 per eligible employee phased down over five years. Eligible employers can also claim a tax credit of $500 per year for adding the auto-enrollment feature, for a three-year taxable period beginning with the first taxable year the employer includes it.

The time for advisors to act is now

As we entered 2024, the enhancements created by SECURE 2.0 marked a win-win for all parties involved. For employers, there has never been a better time than today to consider establishing a plan, given the tax credits available to offset the cost of starting a new 401(k) plan. Employees benefit through myriad tax advantages, auto-enrollment, potential employer matches, portability, enhanced investment options and the ability to take control of their financial wellbeing.

For advisors, SECURE 2.0 is an unprecedented opportunity to tap into a new revenue stream by embracing smaller plans and supporting the businesses offering them. The American Retirement Association estimates current and proposed legislation could create 62 million new retirement savers and add $7 trillion in retirement savings over the first 10 years – creating a path for high-volume, efficient and sustainable growth.