Revamping American Retirement: The SECURE Act 2.0 Explained

ARTICLE | December 07, 2023

The SECURE Act 2.0 of 2022, a comprehensive legislative package comprising over 90 provisions, is set to redefine the landscape of retirement and college savings in America. Its key objective is to preserve and enhance the retirement savings of the American workforce while making the administration of these plans more efficient for sponsors.

Something new.

One of the primary goals of the Act is to ensure that employees remain connected to their retirement accounts as they transition between jobs, thereby reducing the leakage of retirement savings from Employment Retirement Income Security Act (ERISA) plans. To this end, the Act mandates the creation of a lost and found database to assist plan participants in locating retirement accounts from previous employers. This provision aims to streamline the transfer of retirement benefits, reducing the likelihood of misplaced funds or premature distributions, a process referred to as automatic portability.

The lost and found database, as outlined in Section 303 of the Act, will be managed by the U.S. Department of Labor (DOL). The DOL has requested over $4.5 million in funding to implement this legislation by December 2024. While progress is underway, experts anticipate a lengthy development process and potential delays.

In the interim, plan sponsors can utilize existing resources to fulfill their fiduciary duties. They can use services such as the Pension Benefit Guaranty Corp's voluntary missing participants program and follow DOL and IRS guidelines for tracking missing participants.

Further enhancing the automatic portability of retirement savings, Section 120 of the Act allows for automatic rollovers of retirement plan assets from an employee's account to a new employer's plan upon termination. This measure enhances portability and reduces asset leakage, thereby alleviating the missing participant issue.

In addition, SECURE Act 2.0 brings transformative benefits to college savings plans. With this legislation, unused funds from 529 plans can be converted to a Roth IRA, providing parents with a flexible option for their child's future financial stability. However, certain criteria must be met for a successful conversion, such as the 529 plan being at least 15 years old, the beneficiary having earned income equal to the conversion amount, and abiding by the IRA annual contribution limits.

While the IRS is yet to clarify certain aspects of this provision, the ability to convert unused 529 funds into a Roth IRA offers a new level of flexibility, allowing families to adapt their financial strategies as circumstances change. However, it's essential to remember that the primary purpose of 529 plans is still education savings, and the conversion to a Roth IRA is only an option if the funds are not used for qualified educational expenses.

Lastly, the IRS has postponed a rule initially set to take effect in 2024 under the SECURE Act 2.0, which would have required high-income workers to make their catch-up contributions to an after-tax Roth account. The implementation of this rule has now been delayed until 2026.

The SECURE Act 2.0 presents a paradigm shift in how Americans plan for retirement and education expenses. While these changes offer promising possibilities, it's crucial to make financial decisions in the context of your overall financial picture. As these changes unfold, consulting with a financial advisor can provide invaluable guidance in navigating this evolving landscape.

In conclusion, SECURE Act 2.0 is a significant step towards enhancing the financial stability of American families. With appropriate planning and strategy, these changes can bolster both retirement and education savings, paving the way for a future characterized by financial security and peace of mind.