Time for SECURE 3.0

America has a retirement crisis, and SECURE 2.0 takes some important steps to address it, but they are not enough. 

In late December 2022, Congress and the White House passed the legislation that has been nicknamed SECURE 2.0. There is much to celebrate but, once the victory lap is over, there is much more to be done.

America has a retirement crisis, and SECURE 2.0 takes some important steps to address it. It allows people to save longer in defined contribution retirement plans before required minimum distributions kick in. It allows older participants to make larger “catch-up” contributions, and it increases the possibilities for rolling an account from a prior employer’s 401(k) into a new employer’s 401(k). These are important, but they are not enough. At least three additional changes should be part of SECURE 3.0.

First, SECURE 2.0 requires employers that offer a new DC plan to auto-enroll employees at a contribution rate of at least 3%, rising to 10% over time. This is a tremendous step forward. However, it does not apply to existing DC plans started before 2020, and it does not require that the employer actually offer any workplace retirement plan at all.

Many states, including Oregon and California, have adopted legislation that does require workplace retirement plans: Employers must either provide one or enroll employees in a state-run plan. Similar legislation has recently been introduced in Congress, designed by Teresa Ghilarducci, a Democrat and professor at the New School for Social Research and Kevin Hassett, a Republican and former chair of the White House Council of Economic Advisors. This legislation would allow employers to set up their own 401(k)s as they do now, but if an employer does not provide a 401(k), then it would be required to assist in enrolling the employee in a plan similar to the Federal Thrift Savings Plan—essentially the defined contribution plan for federal government employees.

Republicans may blanch at the idea of a mandate, but the actual inconvenience to the employer is minimal, whereas the benefit to the employees is quite powerful, especially to lower paid employees. If the incentive to save is based on a tax incentive, as it is with IRAs and 401(k) plans, then that incentive is far less valuable to someone who earns less. Instead of an incentive to join the DC plan, the employee is automatically enrolled in it. She can opt out if she wishes to, but the place to begin is with auto-enrollment. This would mean people at the bottom of the economic ladder would begin to build wealth.

However, there is a flaw in the DC model. That is where the second part of SECURE 3.0 should come in. The flaw in the DC model can be found in the name: defined contribution plans. The purpose of 401(k) and other DC plans is not contributions, and it is really not even savings. The real point is income in retirement. DC plans are great at accumulation, but they are not well-designed for decumulation.

Besides requiring auto-enrollment, the law should require that employees be enrolled in a plan that provides guaranteed lifetime income—just like the defined benefit pension plans of old. Guaranteed lifetime income solutions allow employees to take advantage of the same powerful tool that made defined benefit pension plans work: the power of pooling.

We pool risk all the time: auto insurance, health insurance, life insurance. But we do not pool the risk of outliving our savings. In a defined benefit pension plan —and in the kind of guaranteed lifetime income solution we are discussing here—the people who die early subsidize the people who die late. That is the power of pooling. If an employee doesn’t want the lifetime income benefit, he can opt out. But this is where the discussion should begin: “Hello, new employee, and welcome. You are enrolled in our DC plan that provides lifetime income. If you want something else, you are free to opt out.”

Finally, DC plans should be permitted to invest in alternative assets. Technically, they are permitted to do so under current law. But plan sponsors fear litigation over fees and appropriateness, and the market seems to expect daily liquidity and daily valuation. The Department of Labor has issued regulatory guidance that these assets are permitted, but the guidance has been contradictory, politicized and confusing. Nothing works like black letter law.

Why does this matter? Alternative assets can provide much-needed diversification in an investment portfolio. That can mean greater returns or less risk or a combination of both. These investments would not be chosen by individuals, but they could be added professionally to target date funds, which is where the majority of DC assets are now invested.

Corporations that have defined benefit plans are permitted to use these alternative assets to potentially increase returns and decrease required contributions to the pension. Wealthy individuals are also able to invest in alternative assets. But the working-class employee who needs the DC plan to provide income in retirement is essentially denied the use of this important investment alternative.

Additionally, there are far fewer publicly traded companies today than there were 20 years ago. Since the late 1990s, the number has dropped by 25%, making the investable universe smaller and inherently less diversified. Congress needs to make it clear that DC plan participants and their target date funds are permitted and encouraged to include these kinds of investments.

The original SECURE Act, as well as SECURE 2.0, were passed nearly unanimously. Congress knows that retirement reform is desperately needed. These proposals may not receive unanimous support, and they will surely be negotiated along the way. But let’s keep the momentum going and make sure that SECURE 3.0 is quickly developed and includes these necessary reforms.

Charles E.F. Millard, New York, serves as a senior adviser for Amundi US. He is a former director of the U.S. Pension Benefit Guaranty Corporation. This content represents the views of the author and not necessarily those of Amundi US.

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services Inc. (ISS) or its affiliates.