By now most 401(k) plan sponsors have learned about the long-awaited passage of Secure 2.0 which was signed into law as part of the 2023 Consolidated Appropriates Act on December 29, 2022.
However, it is important to note that the effective date of the provisions cascades over a number of years all the way out to 2033 with the postponement of the Required Minimum Distribution (RMD) rules to age 75.
It is refreshing to see a bipartisan approach to retirement policy albeit with some offsetting tax
provisions to pay for more flexibility and increased deferral limits. At the same time, the industry is
pondering how to implement a number of the features, if adopted.
It is fair to say that the primary objective of a 401(k) plan is to help workers accumulate adequate retirement income. Going back to their inception, 401(k) plans were often a companion to a pension plan or an added feature to an employer profit-sharing plan. Now in most cases, they are the sole retirement vehicle.
As a result, plan sponsors will have to decide over the coming three years whether they want to
implement automatic enrollment (mandated for most new plans), count student loan repayments
towards their matching contribution if they have one, allow for emergency savings flexibility,- and
perhaps the most vexing provision - to allow for the employer matching contribution to be treated as a
Roth contribution, which requires the value of the contribution to be treated as an after-tax
Without getting mired in the details, the larger point is that plan sponsors need to take a step back and
introspectively consider what their needs are from a demographic and business standpoint. What types
of employees are they trying to recruit and maintain? What are their needs and which provisions will serve that purpose versus which ones will remain unused and add to participants’ confusion?
In other words, how transactional do they want their 401(k) plan to be? The trade-off being how much time and effort will be involved from a payroll and human resource standpoint in communicating and administering those provisions.
It is worth keeping in mind the lesson posited by psychologist Barry Schwartz in his book The Paradox of Choice, "Why More is Less". Schwartz argues that eliminating consumer choices can greatly
reduce anxiety for shoppers. The same holds true for 401(k) plans when plan sponsors learned that
offering a diversified but smaller roster of investment options produces wiser decisions and outcomes.
Deciding where you want your 401(k) plan to be on the plan design spectrum is more important than
ever. To that end, we offer one prediction: the Secure Act 2.0 provision, allowing the option of receiving matching contributions on a Roth basis, will rarely be adopted because few employees will be interested in using it.
Take advantage of the new flexibility being afforded, but don't be held captive to it. If you're looking for a hassle-free solution to set up and manage your employee 401(K)s, look no further than GGA Retirement.
As an experienced 3(38) investment fiduciary with almost two decades of delivering top-notch service, we can simplify your company's retirement plan process. Plus, our personal investment education platform, exclusively available to your employees, can boost participation in your company retirement plans. Trust us to handle your 401(K) plan and ensure the long-term safety and health of your staff contributions.