Assets and Taxes - What's REALLY Happening with SECURE 3.0? | Episode #5

Episode Date: December 5, 2024

Is SECURE 3.0 coming? Join us as Asset Strategy's Director of Retirement Tim Black and American Funds Senior Retirement Specialist John Doyle break down all things in the retirement landscape. They talk about various topics such as retirement fatigue, how legislators in Washington DC feel about ongoing retirement law changes, employer sponsored retirement plans, how AI plays a role in retirement planning, and more. DOWNLOAD OUR FREE FINANCIAL GUIDES: https://assetstrategy.com/financial-guides/ BOOK A DISCOVERY CALL WITH US: https://assetstrategy.com/contact/#AS... Contact Tim: [e-mail] (0:00) Introduction (3:42) What is a Retirement Strategist? (5:29) How are legislators feeling about retirement law changes? (8:00) Is SECURE 3.0 Coming? (10:00) What does coverage mean in retirement? (11:50) How do you increase retirement participation (14:50) Where is the retirement industry going from here? (17:40) What is financial wellness? (19:05) How do you know if your retirement plan is successful (23:00) How is AI transforming the retirement planning space (26:20) Cybersecurity in Your Retirement Accounts (29:13) Retirement Savings Advice for younger people (30:31) Conclusion

Are you confident that your retirement plan is setting you up for long-term success? Whether you're an employer designing the best benefits for your team or a participant planning for the future, employer-sponsored retirement plans play a pivotal role. Welcome back to another episode of Assets and Taxes. I'm Tim Black, Director of Retirement here at Asset Strategy. In today's episode, I had the pleasure of sitting down with John Doyle, Senior Vice President and Senior Retirement Specialist at American Funds, part of Capital Group. We tackled some critical components regarding employer-sponsored retirement plans. We dove into topics like retirement fatigue, how legislators

in Washington, D.C. are feeling about the ongoing updates to retirement laws, and whether new changes might be on the horizon. We also discussed how half of all working Americans don't have access to employer-sponsored retirement plans, and how to increase participation for those who do. From engaging employees in their 401ks to the rising retiree population and even the role of artificial intelligence and cybersecurity in retirement planning, this episode covers it all. Are you ready to take your retirement plan to the next level? Whether you're an employer or a participant, Asset Strategy can help you optimize your financial future. Book a discovery call with us today and let's find the right solutions tailored to your needs. So without further ado, here's Assets and Taxes. Today, I'm fortunate enough to have a colleague of mine

in the industry, John Doyle. So John is a senior vice president and senior retirement strategist at American Funds, home of Capital Group. He has over 30 years of investment industry experience and joined Capital Group in 2013. Prior to joining Capital Group, John held senior positions with Fidelity, with T. Rowe Price, and with Hartford Investment Management. John is a frequently sought-after speaker on issues and topics important to the success of the defined contribution retirement system. John holds an MBA from the F.W. Olin Graduate School of Business at Babson College and a bachelor's degree in economics from Georgetown University. I was fortunate enough to have a five-year overlap with John earlier in my career when we both worked

together at Fidelity, where we teamed up on multiple product development projects, including the development and rollout of target date funds. Now, interestingly enough, before we get started, what's not on John's resume, John was a great tennis player. So I played frequently with John and the outcome was always the same. John won, I lost. But probably another item no one knows about John is he is fluent in Italian. So we have a lot in common. John speaks Italian, I eat Italian. So John, welcome. I'm glad to have you here today. Let me begin with your job title. you are the Senior Retirement Strategist at American Funds. And what is a Senior Retirement Strategist and what does that person do? So thanks, Tim. I appreciate the introduction, kind words.

But I'm not going to let you get away with some of the comments without at least some sort of shot back. So as far as the quote-un unquote great tennis player, great is a relative term, basically relative to the individual I might have been playing. So I'll leave it at that. Probably an average tennis player, but it was fun. I enjoyed it. There you go. So benchmarking once again. So benchmarking is important. We can talk about that later. So anyways, to your question, what exactly is a retirement strategist? So I kind of define it, and I've had to do this even with my family and describe what my job is. I see my job as being fluent in all things related to defined contribution plans. So what that means

is staying on top of trends, understanding what's been going on, what's important to fiduciaries, plan sponsors, consultants, and participants to make the plan work better and make the system meet its objectives. I also spend time in Washington, so I know what's going on from a regulatory point of view, both what we've already seen and what could potentially be coming down the pike. I'm fortunate enough to live in the D.C. area and really get down to a number of functions down there and an opportunity to go on Capitol Hill every once in a while to talk to some of the legislators, mostly staffers,

but some of the senators that have been very involved in that. I work internally as a subject matter expert and externally to really help our field force work with their important clients. And just also that provides me with the opportunity to get a feel for what is important to plan sponsors and committees. And I meet directly with a number of committees, a number of plan sponsors on topics on an ongoing basis. And to me, that informs me as much as me talking to them about what we see happening in the industry. Super. Thanks, John. So we're in an election year right now. So you hear an awful lot

about all the gridlock down in Washington, D.C. An awful lot has been actually accomplished in the retirement space in the past few years from a legislative perspective. Now we're hearing about this new concept called retirement fatigue. Can you comment on your thoughts on how legislators feel about what's going on there? So it's an interesting term, right? Because you can apply it to a lot of different areas of the retirement business. You think about what we've experienced out of Washington in the last four to six years. We had the SECURE Act, we had the CARES Act, which came along because of COVID, and then we had SECURE 2.0. So we've got a couple of things that have come

through the system in what is otherwise a gridlock system. And we'll get back to why that's important, but in terms of the fact that retirement is kind of top of mind in Washington. But part of it is because they've been able to get it through in an environment where nothing else is going through. But I think what's happened now is you have legislators that have been trying to learn and understand the retirement system, because remember, they've got a lot on their plate. They don't all necessarily understand even some of the legislation they've written. And you have a lot of plan sponsors, record keepers, and administrators in the D.C. and the defined contribution business that's had to apply those regulations. Sometimes when they weren't fully thought through or fully baked, yet they still have to be ready to implement in the system.

So I think we have fatigue with the legislators that say, you know, let's just let this settle for a while and then start taking a look at things down the road because we've spent a lot of time on this in the last five or six years. You have administrators and record keepers who are trying to decide what do they need to prioritize to put in place from a technology point of view to execute on the legislation that's been put in place over the last few years. And then you have the plan sponsors and the fiduciaries of the plan trying to decide what do they want to implement, because it's not all mandatory. The fact that it's not mandatory is a good thing, but it also means more effort, more work on the part of the plan sponsor. So I think we're actually seeing fatigue at all those

levels. It's like, okay, let me figure out what to put in my plan, make these decisions, and when do I want to do it? What can my record keeper do? What of these provisions that are voluntary are ready now, and what provisions may not be ready for another year or two? And as far as the government goes, we're still looking for technical corrections on Secure 2.0, we're looking for technical corrections on CARES, and we're looking for technical corrections on Secure 1.0. So we need to get that done before we start looking at additional retirement legislation. That, to me, is the retirement fatigue that we're seeing across all of those parties. Fatigue sets in, but there's still the opportunity or possibility that there is new legislation that's being considered. Are you able to comment on that at all?

The nice thing about talking about future legislation is like predicting the weather. I can be right or I can be wrong. It really doesn't matter. I think there's still a lot of talk about what's next. And I think that because retirement legislation has come through the system, it's bipartisan in many cases. There's always an argument here or there. But there are a lot of sections of Congress that kind of want to get on board and be able to play a part. So even though we're probably not expecting anything major in the next few years, other than those technical corrections, because of this fatigue, there's already talk about what's next. What will be in Secure 3.0? I hope they

don't call it that, but maybe we just keep doing that. And a lot of it's going to depend on where the election takes us in November. But even that, it's not going to make a major difference in terms of legislation. Coverage is important. And I think Congress is looking at how can we make the system work better. There are kind of two schools of thought which have been interesting in the press recently. One is that the D.C. system only works for the rich, and so maybe we should look to a national system. And the other, same time, is the D.C. system works really, really well. Let's add on to it and make it more of a financial wellness program where you have a lot of other features. Kind of interesting

because they're both in conflict, yet you have the same people talking about it in the same vein. I think that there's an effort or there will be an effort to build on the current system, maybe stay away from a national system, but it'll come up. And the success of the current system needs to be emphasized because I think it really, when you think about where we've come in the last 20 or 30 years, 50 years of ERISA and 401k having been around, it works a lot better than it used to in terms of individuals saving for retirement. Hey, let me ask you just a clarifying question. You mentioned the word coverage. Sometimes people forget what that actually means. Can you maybe briefly describe what you're talking about when you mention

coverage in the retirement space? So I think what we hear about a lot is that only maybe a little over 50 percent of American workers in the private sector are covered by a retirement plan, meaning they have access to a retirement plan at work. Now, everyone has access to IRAs and other individual plans, but a retirement plan at work, which has been shown to be the best way to save for retirement at an individual level, because so many people work for small businesses, and a lot of small businesses don't have a 401k or a defined contribution plan in place. And I think what we've seen from Secure, Secure 2.0, is an effort to improve this idea of coverage, to make it easier for a small business to add a retirement plan.

Large companies have retirement plans. Almost all of them do. So it's really that gap in the small business area. So I think what we've seen in the last five or six years is how do we incent small business owners to put a plan in place? And I think what we'll see going forward is either more incentives or more mandates to have retirement plans available through the workplace that would improve the coverage from what's now 53, 54 percent of workers to as many as possible. So roughly half of all working Americans don't have access to an employer-sponsored retirement plan. But those that do, how do we get the underlying employees that are eligible, how do we engage them to make it so that the 401k plan

can be successful for them as they're planning for retirement? I know we don't get 100% participation across anyone who has access to a plan, but how do we continue to increase that level of participation? So it's a great question because there are kind of multiple ways to do that. When I, we do surveys of plan sponsors, a lot of others do, industry groups and individual organizations and record keepers and managers. And what has risen to the top over the last few years is as a top priority, if you ask a plan sponsor, what are your top three priorities for the next 12 months? Participant engagement has risen to the top over the last few years. And so you kind of

go back and say, okay, I understand why an engaged participant is more likely to save money. They're going to understand what they need to get in terms of retirement readiness and how much they need to save because that's going to be part of the engagement in terms of what they're doing with the plan and the information we're giving them. But it also helps the plan sponsor or the employer show the value of the benefit they're giving them. So when I think about the three reasons why you would put a plan in place in the first place as a business owner,

number one is attract and retain talent. Number two is focus on retirement readiness for your employees. And number three is provide a tax advantage solution that they can use to save. Now, the truth is, it's all three of them in most cases, not all cases. So engagement is important because you want people to save enough, but you also want them to understand the value of what you're offering as an employer. If you looked at each one of those as an individual goal, so for example, you talk about retirement readiness and engagement. If your only goal is get everyone ready for retirement, auto-enroll them, auto-escalate

them to a high amount, 10%, 15% as quickly as possible. Build in some sort of automatic retirement income like a defined benefit plan used to have. Don't give them any options. Don't give them access to those assets, and they'll be ready for retirement if that's your only goal. The problem is attract and retain is maybe more important at times. So you want to offer something that has some flexibility, that has other features that they would see as attractive to come to you as opposed to another employer. And so engagement becomes more and more important to achieve all your goals for the plan, not just to achieve one goal for the plan. And so I don't think engagement goes away. I think it's become even more important. And maybe with

technology and other factors, we'll see different ways to get participants engaged in the program. So then with the age wave in the United States, you know, we've done a fair job of getting people into the plan using things like behavioral finance techniques, auto enrollment, auto increase. But now we're starting to see folks near that line where they're starting to think about taking money out of the plan. They'll be retiring today, tomorrow. You know, retirees are at an all-time high on a daily basis right now. What do you see going on in the industry from a focus on accumulating assets in your plan to decumulating or taking distributions from your plan? So you mentioned the age wave, and I think that's certainly part of it. I think the other reason why decumulation or retirement income has become such a hot topic

is you've got a wave of workers who have never had a pension plan. All of their retirement savings have come through defined contribution, 401K, 403B, something along those lines. So all of a sudden, you have people who are now retiring without any sort of guaranteed pension, and they need help. They need an understanding of how to convert those assets and that base of assets into a retirement income, into a paycheck, into a retirement paycheck. And what a lot of companies are finding, and by the way, the larger the company, the more likely they are to look at it this way, is retirees, since they don't know what to do, are staying, and they're staying in the plan. So now you've got a discussion going on about, as a fiduciary of the plan, can I, I don't want to say ignore them, because you're happy to have them, but do I have to have a solution that addresses their income needs

available for them in the plan? And so that's the topic. It's been talked about for years. I joke that my first retirement income initiative or project that I worked on was in 1995. We may have worked on it together. I'm not sure. And there's never been a silver bullet. And quite honestly, there never will be. But I think now what's become more important is as a fiduciary, as a plan sponsor, for those that stay in the plan, I don't care if it's 10% or 60%. It'll rarely be 60, by the way. It's more likely to be 10 to 20. But for those that stay in the plan, do I need to have a solution that would work for them as a retirement income vehicle?

And what does it need to look like? And what else do I need to provide in terms of education or access to advice? And I think that's the question that I'm getting a lot when I'm sitting in front of these committees, large or small. It's like, OK, what do I need to do? Even if they don't stay in the plan, what should I be doing? But we've got a wave of people, as you called them, who are retiring with a large amount of money and don't understand how

to make that last, but also how to efficiently use it. And I honestly think everyone needs help in that area, no matter how sophisticated you are, getting advice on when to take Social Security, how to take Social Security. Should I protect any of it with an insured annuity or something like that? Can I manage this? Do I need a managed account, et cetera, on and on? And I think we're all in that boat as we approach retirement, and that's why it's been such a big topic. And are all of those questions, and they're great questions, are all of those questions sort of a subset of the other buzzword we hear all the time, financial wellness?

Are those related? They're related, but it doesn't mean exactly the same thing. So if you put, and I've done this, 13 people around a table, leaders of some of the financial services organizations, and you talk about financial wellness, and you ask them to write down, define financial wellness. You write it down because you don't want them influencing each other. You're going to get 13 different definitions. And one of those will be retirement readiness and being ready to take that out. Maybe a couple of them will be. And it will certainly be included, but it might include college debt. It might include credit card debt. It might include other savings for other needs in retirement, not even in retirement, beyond

retirement. So financial wellness is important, whether it should be delivered alongside a retirement plan through an employer or whether it's something that should be made accessible through other means, I think is still out there and being discussed. There are a lot of firms that do it. But it's important, and a lot of companies feel it's important for their employees, so it's something that they're looking at. But the definition of financial wellness varies depending on the objectives of the plan or the objectives of the employer.

So with all these moving parts, what do you hear most commonly from plan sponsors specifically about what's the definition of a successful plan and how do I measure that? I don't hear a lot of definitions. I hear a lot of questions. It's, you know, the question is, how do I know whether my plan is successful? And what I try to do when I get that is back up a little bit. It's like, okay, well, do you remember why you put the plan in in the first place? And this could be a small business and it could be a large multinational. And you need to make sure that everybody is aligned on the objectives of the plan and why you have it before you start measuring whether

it's successful in meeting those objectives. And I'll go back to the three things I said before. Is it attract and retain? Is it get people ready for retirement? Or is it tax advantage solution? And again, it's probably all three. But if it's all three, then what are you going to measure? Are you going to measure whether you're attracting or retaining? And the answer is yes, you should. So you need to benchmark it. And you need to understand what your competitors are doing in terms of offering a benefit. And when I say competitors, I don't mean in your industry, I mean in your talent pool. So if you're recruiting and you're trying to attract and retain, benchmark it that way. Leverage the resources you have, either industry or your consultant

and advisor, because they're out there in the same pool often talking and understanding, to just understand what an attractive plan would look like. So that's one way to measure. It's a little harder, I think, but I think intuitively you own it as an employer. I think then you look at the traditional measurements or key performance indicators of a plan. We see a lot of participation rate, which is, I think, pretty obvious and very valuable. Savings rate or deferral rate, again, pretty obvious and valuable. But then you start seeing other KPIs like average account balance. Well, you don't know where their money is if they're not in the plan. And the average tenure in the private sector is under five years.

So chances are they've been somewhere else and hopefully they have savings that they didn't roll into your plan. So that may not be as meaningful. That's one of the problems and challenges we've seen in terms of measuring success. If your goal is to get people ready for retirement, control what you can control. You can control participation and drive it up. You can control savings and drive it up. You can put a good investment lineup that gives a participant the ability to either use a QDIA or build their own portfolio.

One of the things we've talked about in the past is using the QDIA, so the target date fund, for example, as the benchmark for investment performance for the individuals in the plan. So in other words, as a fiduciary, you're doing a lot of work to pick the right QDIA. And you're constantly looking at how it's doing relative to the market, relative to others. What you're not looking at is how the participants that aren't using the QDIA are doing with their portfolio. You may have the best 12 funds available in every category, but if they're not using them right, then it's not really helping you successfully get them ready for retirement. So look at the personalized rate of return of the individuals who are doing it themselves and compare it to the QDIA. There's your benchmark.

And then if you're finding they're not doing as well, which history will say they're not, then your communication strategy to achieve success is to maybe move them to the QDIA. Maybe not help them build a better portfolio. You've already built that for them or selected that. So that becomes one of the success built that for them or selected that. So that becomes one of the success measurements that nobody talks about a lot. I think they worry about the individual funds, not the individual participants in terms of what they're doing.

So just leveraging and influencing what will make a difference and what you can control. So record keepers now are able to collect a lot more ancillary data about the participants in their 401k plan. What are we seeing them using that data for in terms of can we use artificial intelligence at all to accomplish these tasks? Or can we simply create mass personalization in messaging? What are you seeing out there? So everyone loves talking about technology and personalization and being able to leverage it. The more and more data we have on the participant, the more and more we can personalize their experience.

And that's fine, but you have to remember that the output is only as good as the data input. I joke, people have heard me say that, you know, everyone loves to talk about the online retailer that provides the personal experience, that sends you personalized emails so that they know what you're looking for. And they'll send you something targeted to your interests. And you're going to edit this out when I say it. But I love getting those emails that say, did you enjoy the little black dress that you ordered last week? OK, I mean, it's data in, data out. And I think that that's one of the challenges with this idea of technology is what data are you getting that's relevant? I think that whether it's AI or some other form,

but I think AI is a good way to define this. Using personalized data, understanding the demographics of your plan, you can put together a personalized communication program. And you can target the underserved if they're not saving enough. There are a lot of things you can do to leverage that data. I think it's harder when you try to use that to put together a personalized portfolio because now it's a little bit more defined. You're making adjustments to a portfolio based on the data you have that may not be a complete picture. And that's why I think one of the challenges we're finding with this idea that, well, it's personalized, it must be better. I think that may work when it comes to communication.

I'm a little more nervous when it comes to investments because we don't have the whole picture. We may be dialing down risk when it should be dialed up, or dialing up risk when it should be dialed down. And on top of that, and you talk about measurement, success measurement, you have to define what you consider success in a personalized investment environment. Because when I talk to a lot of sponsors, they're like, well, better outcomes and better results for participants. Well, if you dial down risk, then your expected return over that period will come down. And so just pure performance isn't going to be a good measurement of success.

There may be others, and there are intangibles. You know, participation rate might go up because they feel they're getting something personalized, or they may feel they may save more because they feel it's more personalized. But when you look at a lot of the claims that are being made around personalized solutions, in a lot of cases, they are saving more, but they opted into it because they were already engaged and they were more likely to save more before that. So go back to my original point. Define what success is for the plan and then for the personalized solutions, be it investments or not, and then measure what you expect success to be. I think

we're going to see a lot more use of technology. I think what's going to be important, though, is we understand the limitations and the risks that go with it. You're leading me to my next question. So for most Americans approaching retirement age, their two largest assets are probably their home and their retirement account, their employer-sponsored retirement account. Now, we're putting all this other information into their retirement plan so we can personalize and customize. risks are you hearing about out there from both plant sponsors and from government officials about controlling the data from a cyber attack and liability perspective? So the broad category of cybersecurity is huge. And it's also hard to get your arms around. I think it was three or four years ago, the Department of Labor put out kind of their tips on cybersecurity. And they had one, they were for the fiduciaries. This is how you vet your vendor. This is how you vet yourself. And this is what you need to put to give your participants because they all play a role in

cybersecurity. And by the way, this is a start, but we really don't know where this is going. So it's not definitive. It's simply tips. I think the Department of Labor has included a cybersecurity category in every audit that they do. They want to see that you as a plan sponsor are doing something to stay on top of cybersecurity, but they don't even know what that something should be. So, you know, you look at the budgets on cybersecurity across the board, not just retirement plans. They continue to go up and they'll continue to go up. They're probably increasing, I don't know, 10% to 12% a year. I mean, you're talking about a fairly significant line and increase over time. But then you look at the advent of AI and all the other things that AI can bring you just within a retirement plan. You as a fiduciary need to understand the risks

associated with that because in the end, you're picking the vendor that uses AI, the advisor or consultant that uses AI, the participant experience that uses AI, and ultimately, who's liable or responsible if that breaks down? And as a fiduciary, the chances are you've got an element of risk there. But by the way, if you don't use it, you've got an element of risk there too because the argument could be made you needed to use it. One of the things that I do suggest, and again, we're at the early stages of how this will work, but just like investments, you've got an investment committee as part of the broader committee. ERISA is about documenting process.

And if you do your due diligence and understand what your vendors do or what you're using for your participant, and maybe you have an AI subcommittee, then that's something, or use your advisor. That's something that you can document. I did my due diligence. I stayed on top of it because this is not going to be a one-and-done due diligence. And I can document why I made those decisions. Like everything else within the plan, it's about what the process you used, not where you ended up. Sage advice, John. So listen, you and I both have children that are early career in age.

What do we tell our kids at that age point now about saving free time? What's the one or two most important things they need to know? Save as much as you can, as early as you can, and increase as often as you can. When my oldest son signed up for his retirement plan, he goes, well, how much should I save? I said, well, I think you should start at six. Well, they had automatic enrollment. He goes, how much should I? I'm sorry. They had automatic enrollment. They had automatic escalation too. He said, how much should I escalate? Because he had the option. I said, do 2% every year. So he signed up at 6% with a 2% increase. The planned anniversary was three weeks later. He got bumped up to 8% within three weeks of starting. It's like, I'm good with that. And he's fine. But I want to say all of my

kids, my youngest is about to start her first real job as a nurse in a couple of weeks. But all of, I won't say all of my kids, my youngest is about to start her first real job as a nurse in a couple weeks. But the others have been working, you know, and listening to me talk 401ks at the dinner table for years. So it's a little bit easier to get them to understand. But I do try to get them to talk to their friends, because I think if it's not front of mind, and I do think younger workers are better now than they were when I started, but it's still something that, you know, this engagement we talked about has to start right at the beginning. Well, John, you are just so ingrained in so many topics, retirement-related, assets and taxes-related. So on behalf of my colleagues here at Asset Strategy, I really want to thank you for taking the time out today to just let us know what's going on out there in the business.

And I look forward to our next installation. Thanks very much. Thanks for the opportunity. Really enjoyed being here. Thank you.