The Secure Act 2.0—and retirement industry trends—create meaningful service opportunities for financial professionals.
Ask any group of retail investors to rank their financial goals and they’re likely to agree some variation of “my future financial security” has the highest frequency and greatest urgency among the reasons they turn to you for wealth management advice and solutions. And for the majority of clients, this means they want your help preparing for a long and comfortable retirement.
For many clients, an employer-sponsored retirement plan may be the cornerstone of their retirement savings. According to recent retirement industry research conducted by Vestwell, there are several trends that may be relevant to how you expand your qualified retirement plan business to help more clients more effectively prepare for a financially secure retirement.
Among these trends are employers’ desire for deeper relationships with their financial professionals, as well as employers’ inclination to upgrade their plans’ offerings with additional features, like auto-enrollment. More broadly, the Vestwell 2023 Advisor Trends Report uncovers a few key takeaways you may want to consider in your business plans for the year, such as:
As people live longer, saving enough for retirement continues to be an ongoing challenge. To help address this issue, the federal government enacted new legislation in late 2022 called the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act. Similar to the first SECURE Act that was passed in 2020, the new legislation aims to encourage Americans to save for retirement through a series of changes to retirement accounts.
“The new SECURE Act is good for both retail investors and financial services providers, because the Act increases and enhances retirement savings options,” says Brett Thorne, president of RBC Clearing & Custody. “The act includes a little something for everyone at every stage of life.”
Here’s a look at some of the SECURE 2.0 Act provisions that might have the biggest effect on your retirement planning business, and how a broad range of your clients—from younger Americans just starting their careers to those approaching retirement—could stand to benefit.
The SECURE 2.0 Act included changes to catch-up contributions, an annual limit that allows people age 50 and up to make additional contributions to their retirement savings accounts over the standard contribution limits. Starting in 2024, the legislation will require catch-up contribution limits to be automatically adjusted for inflation each year.
“This is the first increase in the catch-up contribution limit since 2006,” says Aaron Funk, director of Wealth Strategies for RBC Clearing & Custody. “And though the adjustments will be modest each year, any additional savings opportunities are always welcomed and can make an impact over time.”
Starting in 2025, catch-up contributions can be even bigger for people between the ages of 60 and 63 with qualified employer-based retirement plans, such as a 401(k). For the first time, those in this age group will be allowed to make additional catch-up contributions equal to $10,000 or 150 percent of the standard catch-up amount permitted in 2024, whichever is greater. This will help more people who are nearing retirement build up their savings more quickly.
Additionally, after 2023, all catch-up contributions will be treated as Roth (after-tax) contributions for people earning more than $145,000 per year. While that means savers can’t delay paying taxes on the extra catch-up contributions, the earnings on those savings will be tax-free when they make withdrawals in retirement.
The original SECURE Act increased the age at which required minimum distributions (RMDs) must be taken from retirement plan accounts from 70 ½ to 72, and the SECURE 2.0 Act increases this age to 73, with an additional increase to age 75 in 2033.
This will benefit people who may not need their RMDs right away, Funk explains, providing extra time for those accounts to grow.
“Clients who have other sources of income for living expenses will be able to postpone RMDs, defer taxes on distributions and give their retirement account assets more time to grow,” he says. “This provision recognizes that many people are working longer to increase their savings.”
The SECURE 2.0 Act will also expand automatic enrollment in workplace retirement plans, which could be a particularly big boost to younger workers just getting started with saving for retirement. Beginning in 2025, companies will be required to automatically enroll eligible employees in new 401(k) and 403(b) plans.
Initially, the employee automatic contribution amount must be at least three percent, with a 90-day employee voluntary opt-out feature. Each year, the percentage amount is automatically increased until it reaches at least 10 percent but not more than 15 percent. Some employer plans are exempt from this automatic enrollment provision, including government and church plans, SIMPLE IRA plans, small business owners with 10 or fewer employees and new employers that have been in existence less than three years.
Another part of the SECURE 2.0 Act that will impact younger Americans is the provision allowing for employers to make matching contributions on behalf of employees who make qualified student loan payments (broadly defined as any sort of indebtedness incurred by a plan participant in order to pay off qualified higher education expenses).
Previously, employees who were focused on repaying student loans rather than saving for retirement may have missed out on those matching contributions to their retirement account.
This provision, which goes into effect after Dec. 31, 2023, may enable employees who may not otherwise be able to afford to save for retirement due to student loans and debt obligations to receive employer matching contributions by way of repaying their qualified student loan payments.
The SECURE 2.0 Act will also allow for tax- and penalty-free rollovers from 529 college savings accounts to Roth IRAs. This change will affect people who have completed their education but may still have leftover funds in their 529 college savings accounts. However, it comes with a number of “caveats, limitations and restrictions,” according to Funk.
For example, if your child received a scholarship and didn’t need all the funds you had saved in their 529 account, there previously wasn’t much you could do with the leftover funds without taking a penalty. Now, the new SECURE Act allows owners of 529 accounts that have been open for at least 15 years to roll over balances into Roth IRAs as long as the Roth IRA is owned by the beneficiary of the 529 plan—in other words, the student, not the parent. However, contributions made to the 529 plan in the past five years (and any resulting growth) are ineligible for the rollover.
Any funds rolled over from a 529 into a Roth IRA will be counted toward the annual IRA contribution limit of $6,500. And 529-to-Roth rollovers are capped at a lifetime maximum limit of $35,000.
“Your clients’ children or grandchildren who have completed their education and still have funds remaining in their 529 accounts can now use those funds to jump start their retirement savings with a Roth IRA, but they must adhere to these limitations,” Funk explains.
That change to 529 plans, along with the other provisions of the SECURE 2.0 Act, has the potential to make a difference for Americans no matter where they may fall on their retirement planning journey.
“Overall, the new law offers a number of favorable changes that can make a positive impact on retirement savings,” Funk says.
If the headaches and costs associated with doing qualified retirement plan business are preventing you from having meaningful conversations with clients about this important financial tool, we have a solution for the firms we serve to explore.
RBC Clearing & Custody has entered into an exclusive marketing and referral arrangement with Vestwell, a digital recordkeeping provider, to help financial services providers scale their 401(k) & 403(b) business—on their own terms. Conduct your own due diligence, and we believe you will discover how effectively and efficiently Vestwell re-architects retirement plans; so they’re easy to use, customizable and delivered at a fraction of the cost.
When your firm is served by RBC Clearing & Custody you can offer revenue providing services using the innovative technology, world-class products and wealth management expertise available from us, including:
Vestwell will provide qualified retirement plan capabilities, such as:
Vestwell is a cloud-based modern recordkeeping platform providing the underlying infrastructure to power workplace savings programs, leading with the 401(k) and 403(b) solutions. They help small businesses offer, administer and access workplace investing programs with ease. Additionally, Vestwell’s configurable, unbundled and open-architecture is built to provide the qualified retirement plan flexibility and affordability.
At RBC Clearing & Custody, we’re committed to helping you make a difference in your business—and your clients’ financial lives. Contact us today for a complimentary consultation.
RBC Clearing & Custody does not provide tax or legal advice. All decisions regarding tax or legal implications of your investments should be made in connection with your independent tax or legal professional.