Capital Ideas^™ 
Investment insights from Capital Group

Even in an era of extreme polarization, both sides of the political aisle can still come to a consensus on issues like retirement legislation. In 2019, a divided government easily passed the Setting Every Community Up for Retirement (SECURE) Act. And regardless of the balance of power going forward, another retirement law, dubbed the SECURE Act 2.0, is currently in the works.

SECURE Act 2.0 has a long road to walk before it becomes law. The timing of enactment is unclear. Cost has not yet been factored in. There is a high probability of changes as it winds its way through Congress. Passage, in fact, may have to wait until the legislation can be attached to bigger priorities, such as how the original SECURE Act was tacked onto a budget bill.

Still, financial professionals can start to think now about preparing clients for what appear to be significant enhancements to retirement plan savings incentives. 

What is the SECURE Act 2.0?

In October, Representatives Richard Neal (D-MA) and Kevin Brady (R-TX) introduced the Securing a Strong Retirement Act of 2020. Also known as the Neal-Brady bill, it builds on the 2019 Setting Every Community Up for Retirement (SECURE) Act.

Both congressmen were among the architects of the original SECURE Act, which expanded the start-up plan tax credit, made it easier to incorporate annuities into retirement plans and increased the RMD age to 72, among other changes. That bill passed the House in nearly unanimous fashion and easily cleared the Senate too. 

The original SECURE Act easily passed in a divided Congress
 

Like the original, SECURE Act 2.0 has bipartisan support and aims to improve how Americans save for retirement. The bill incorporates a number of proposals from the Retirement Security & Savings Act introduced in 2019 by Senators Rob Portman (R-OH) and Ben Cardin (D-MD). The wide bipartisan support for that attempt to make it easier for small businesses to offer retirement plans suggests Neal-Brady will enjoy similar support in the Senate as well as the House.

Still, the ink has yet to fully dry on the original SECURE Act, with guidance yet to be issued for certain areas like pooled employer plans and repeal of the stretch IRA. Plus, the Neal-Brady bill has not been officially scored. There will likely need to be some cost offsets, much as the original SECURE Act included provisions like the elimination of the stretch IRA.

Six key provisions of the Neal-Brady bill

The future of the SECURE Act 2.0 isn’t entirely clear. Still, looking at some of the more notable provisions of the Neal-Brady bill can at least provide a glimpse of how Washington may try to make it easier for individuals to save for retirement and draw down assets:

1. Requiring new defined contribution (DC) plans to enroll participants automatically with at least a 3% contribution rate and increase the rate through auto-escalation by 1% per year until it reaches 10 percent.
2. Offering a new credit to businesses with 100 or fewer employees to offset up to $1,000 of employer contributions for each employee, which gradually phases out over five years.
3. Raising the required minimum distribution (RMD) age from 72 (set by the original SECURE Act) to 75 for DC plans and traditional IRAs.
4. Exempting individuals with retirement account balances of $100,000 or less from RMDs.
5. Increasing catch-up contribution limits to $10,000 (for 401(k) and 403(b) participants) and $5,000 (for SIMPLE plan participants) for those ages 60+ (up from $6,500 and $3,000).
6. Allowing 403(b) plans to invest in collective investment trusts (CITs), which can potentially reduce costs.

Will other retirement legislation be in the pipeline?

With divided government looking likely to continue for the near future, some of the more partisan retirement issues like national mandates for all employers to offer retirement plans or restructuring of the tax incentives for retirement appear to be off the table for now. Instead, the SECURE Act 2.0 will likely focus more on incrementally incentivizing employers to expand access to retirement plans and encouraging individuals to save for the future.

Until there’s a better picture of how Washington will operate in 2021, the SECURE Act 2.0 seems to be the clearest change that could start to affect financial professionals and their clients’ financial plans.