“SECURE 2.0” is the Retirement Security the Post-COVID American Workforce Deserves

In an astonishingly cynical critique of the Securing a Strong Retirement Act of 2022 published in the Washington Post on April 20, 2022, Daniel Hemel, a professor at the University of Chicago Law School, acknowledges the reality of America’s retirement security crisis, asserts that by his own calculations an individual making maximum 401(k) contributions since 1990 and investing in an S&P 500 index fund would have accumulated retirement savings of more than $7 million – and then condemns the very system that produced those remarkable results as “fraud.”

That peculiar logic may fly in faculty lounges, but not at the kitchen tables of American entrepreneurs and other working Americans.

The COVID-19 pandemic amounted to a severe stress test for the nation, revealing a number of serious socio-economic deficiencies and vulnerabilities.  One serious ongoing vulnerability is the fact that a quarter of American adults have no retirement savings at all and millions of others aren’t saving nearly enough.  With ten thousand Americans turning 65 every day through 2030, the retirement savings deficit is a looming threat to the economic security of millions of Americans and a ticking time bomb for the U.S. economy.

According to a recent analysis by PwC, a major cause of the problem is the disconnect between the importance of small businesses as employers and the cost to small businesses of offering retirement plans to their employees.  Half of all working Americans are employed by small businesses, and yet the cost of providing retirement plans to employees has historically been beyond the means of many small businesses.  Until recently, half of all private-sector workers – 55 million Americans – did not have access to a retirement plan through an employer.

The economic security of American entrepreneurs, small business employees, and gig economy workers was significantly enhanced on Dec. 20, 2019 when the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law.  The SECURE Act expanded access to retirement plans for millions of Americans in several important ways.

Most importantly, SECURE modernized retirement security law to allow unrelated small businesses and startups to pool resources and reduce costs by offering their employees multiple-employer 401(k)-like retirement savings plans, or “MEPs,” similar to the retirement plans offered by larger companies.  MEPs existed prior to the SECURE Act, but participating businesses were required to be related in some way – geographically or through membership in a common industry or trade association.  The SECURE Act waived this requirement, greatly facilitating the adoption of open multi-employer plans by new and small businesses.

The law also eliminated the IRS’s “one bad apple” rule – a major obstacle to the formation of MEPs because it stipulated that all participating employers could face adverse tax consequences if only one participating employer failed to satisfy the tax qualification rules of the MEP.  In addition, the law provided a startup retirement plan credit for smaller employers of $250 per non-highly compensated employees eligible to participate in a workplace retirement plan.  If the retirement plan includes automatic enrollment, an additional credit of up to $500 is available.

On March 29^th, the House of Representatives passed the Securing a Strong Retirement Act of 2022 – often referred to as “SECURE 2.0” – by the overwhelmingly bipartisan vote of 414 to 5.  Far from amounting to fraud, the Act would build on the original SECURE Act by making a number of additional enhancements to retirement security law important to new and small business employees, including:

• Requiring most employers that establish defined contribution plans after 2021 to automatically enroll new employees.  Far too many Americans don’t take advantage of their company-sponsored 401(k) plans – mandated enrollment will dramatically improve participation rates. According to Fidelity Investments, 90 percent of employees automatically enrolled in their 401(k) plan remain enrolled.

• Allowing 403(b) plans – principally used for employees of public schools, churches, and other tax-exempt organizations – to participate in MEPs, including relief from the “one bad apple” rule.

• Increasing the credit for small employer retirement plan startup costs.

• Raising retirement contribution catch-up limits for people 62, 63, and 64 years of age.

• Further expanding the eligibility of long-term, part-time workers to contribute to their employers’ 401(k) plan by shortening the period for eligibility that starts in 2021 from three years to two.

• Permitting employers to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments.”  This important provision is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions for retirement plans.

The COVID-19 pandemic greatly accelerated the already rapidly evolving American workplace – dramatically expanding remote and “long-term part-time” work arrangements, broadening and deepening the adoption of worker collaboration technologies, and sparking an historic increase in new business applications as entrepreneurs strike out on their own.  Many experts predict such changes to endure beyond the end of the pandemic.

Public policy must now respond to facilitate and codify this accelerated evolution of the American workplace, and to further address the nation’s ongoing retirement security crisis. SECURE 2.0 is the retirement law modernization the post-COVID American workforce needs and deserves.

John Dearie is the president of the Center for American Entrepreneurship.