Safeguarding Retirement Savings: Inside Secure Act 2.0 Key Priorities
Written by: David Martinson, CPA
Most of the 90-plus provisions included in the SECURE 2.0 Act of 2022 (“Secure 2.0”, “the Act”) are aimed at preserving and enhancing the retirement savings of working Americans and improving the effectiveness of retirement plan administration for plan sponsors.
A key priority of the Act is to strengthen retirement savings by keeping employees connected to their retirement accounts as they move from job to job while also reducing leakage of retirement savings out of ERISA plans. The Act stipulates the creation of a lost and found database to assist retirement plan participants in locating retirement accounts from former employers. The Act seeks to streamline the movement of retirement benefits to reduce either misplaced monies or prematurely distributed funds, which is referred to as automatic portability. In keeping with this goal, a provision of the Act mandates development of a system that automatically rolls over retirement savings to a new plan when employees change jobs (essentially tethering a participant’s assets to them).
The “Lost and Found” Database
Section 303 of Secure 2.0 directs the U.S. Department of Labor (DOL) to create a national online searchable lost and found database that plan participants who have lost track of their retirement benefits can use to search for the contact information of their plan administrator. The DOL is seeking more than $4.5 million in funding in fiscal year 2024 in order to implement this legislation. While the law stipulates that the database be implemented by December 2024, some industry experts are cautious that it will take additional time for the DOL to implement. According to Norma Sharara, Managing Director in BDO’s National Tax Office, “Progress is being made, and the DOL has requested the needed appropriations from Congress, but the funding has not yet been approved. And even once it is, the development process will be lengthy.”
In the Meantime
While the database development is in process, there are several existing resources that plan sponsors may utilize to address their on-going fiduciary responsibility to track missing participants. For immediate and specific sponsor needs (such as if a plan sponsor is terminating a plan), the Pension Benefit Guaranty Corp (PBGC) has a voluntary missing participants program that is available for sponsors of certain plan types, including defined contribution [DC] plans. Plan sponsors can also follow the DOL and IRS guidelines for locating missing participants as a best practice, regardless of the impending changes.
A New Level of Automatic Portability
Section 120 of the Act calls for the adoption of automatic rollovers of retirement plan assets from an employee’s account into a new employer’s plan after termination of employment. The law currently allows for an employer to roll over this distribution into a default IRA if the account balance is at least $1,000 and the participant does not affirmatively elect otherwise. The Act’s provision enhances portability by allowing the plan sponsor to now transfer the former employee’s default IRA assets (established at termination) into the participant’s new employer’s plan. The provision both curtails asset leakage from ERISA plans and helps alleviates the missing participant issue.
In a related provision, Section 304 of Secure 2.0 increases the dollar limit for plan sponsors to automatically cash out a former employee’s retirement plan from $5,000 to $7,000 starting in 2024. While the law does not mention automatic portability in relation to this provision, the higher limit will allow a higher percentage of participant accounts to be eligible for automatic rollovers.
Vendor Assisted Rollovers
Plan sponsors may choose to work with a vendor for assistance in implementing automatic rollovers. One current option is the Portability Services Network that was created in collaboration with some of the key retirement plan industry providers and Retirement Clearinghouse (RCH).
Meeting Your Fiduciary Obligations
With Secure 2.0 implementation, benefit plan administration continues to evolve. Plan sponsors seeking enhanced ways to fulfill their fiduciary duty will need to consider all available tools, both those existing/being improved and those under development.
