The Lost Opportunity of SECURE 2.0
Because it was enacted so close to the arrival of the pandemic and the subsequent CARES Act, the SECURE Act of December 2019 barely registers beyond the world of financial planners. And now we have a proposal for its successor, nicknamed SECURE 2.0. Given its bipartisan support, we can expect that SECURE 2.0 will pass eventually in some form. No one could possibly be against “[making] it easier for Americans to plan for their golden years” as Texas’ Rep. Brady purports that the proposed Act does.
Except that it doesn’t. It really doesn’t even try very hard. A signature feature of SECURE 2.0 is the increase in age for Required Minimum Distributions (RMDs), a matter of grave importance to wealth advisors and their clients and no one else. While there are certainly some provisions that could usefully encourage workers to save more for retirement (such as requiring employers to automatically enroll workers in a retirement plan, modest tweaks to catch-up contribution rules, and matching employer contributions for student loan payments), these all fall in the category of tinkering around the edges.
The essential problem is that 35% of Americans do not have access to a workplace retirement plan.
It is true that everyone (below an income threshold) can save for retirement in an IRA account. And to be clear, “saving for retirement” does not automatically mean “saving in a retirement account”; one can save for retirement quite handily, albeit less efficiently, without the tax benefit of a retirement account. (That said, it would be useful to increase the annual IRA contribution limit for persons without access to a workplace retirement plan.)
There are two essential factors that inhibit retirement savings, one of which a better SECURE Act could address. The first and most obvious is that if you do not have any leftover income to save due to low wages, you cannot save for retirement. That is a problem to be solved, but not by better retirement account legislation.
The real reason why an IRA — or a non-qualified investment account, for that matter — is a poor substitute for a 401(k) has to do with human behavior. Specifically, loss aversion and the endowment effect. Humans will fight tooth and nail to hold on to what we have. So, while you can set up an automatic transfer from your checking account to the investment firm of your choice to fund your IRA faithfully each week or month, there is inevitably a delay between when the money arrives in your checking account and when it leaves. And when it does leave, you feel its absence. What you once had, you do not have anymore. The result? Savers are less likely to automate the deposit in the first place, less likely to increase the amount over time if they do, and more likely to stop when the transfer becomes momentarily inconvenient. The reason that 401(k)s have been so successful in building retirement savings is that the money never arrives in your hand, even momentarily.
Payroll deduction is the killer app that makes retirement saving work.
A better SECURE 2.0 would take a page from the eight “Auto IRA” states and facilitate on a national scale what these states are doing in their respective backyards. Under these programs, workers without access to a 401(k) are automatically enrolled in a payroll deduction IRA program managed by the state.
And in fact, there was a similar national program once upon a time. Who among us remembers the star-crossed MyRA program of the Obama Administration? What it did right was set up a mechanism that allowed MyRA contributions to come directly from a worker’s paycheck, just as a 401(k) contribution would. (What it did wrong was not allow for automatic enrollment and, in the name of simplicity, offered no investment options beyond a basic savings option.) The basic blueprint is there; a SECURE 2.0 that was truly interested in solving the retirement savings crisis would build upon that.
But there is more. By now we are all familiar with the Federal Reserve research that showed that most people would struggle to produce $400 in an emergency. And again, while SECURE 2.0 cannot solve the underlying dynamic (wages not keeping pace with the cost of housing, lack of medical insurance, childcare costs, systemic racism, and I could go on…), extending the 401(k)’s key feature — payroll deduction — to emergency savings could be a game changer for many households.
So-called “sidecar” savings accounts build on the 401(k) infrastructure by allowing payroll deductions to be split into a retirement account and an emergency savings account. Prosperity Now, among other groups, have been advocating for this for years. Secure 2.0 is a perfect vehicle for Congress to provide the regulatory and legal clarity that has held back this effort. Sidecar saving accounts increase retirement security by making retirement account “leakage” less likely; persons strapped for cash will have less reason to take a loan or withdrawal from their retirement savings if they have access to an emergency fund.
It’s not too late, of course. SECURE 2.0 is still in its infancy. My hope is that supporters of real retirement security will use this occasion to advocate for improvements that more comprehensively address the retirement crisis.