When there always seems to be a never-ending list of new legislation for HRDs to accommodate in the here and now (the latest law to hit the statute books was last week’s Pregnant Workers Fairness Act – barring employers from discriminating against pregnant women), HR professionals can be forgiven for putting off thinking about stuff that isn’t due to land for another couple of years.
But according to Ansel Parikh, serial tech entrepreneur, and co-founder and COO of Finch, a payroll intermediary, HR professionals don’t have too much time to waste when it comes to thinking about how they react to the upcoming Secure Act 2.0 – even though it’s not due to be effective until…wait for it… January 2025.
For those unfamiliar with the finer details Secure 2.0, this important piece of legislation hopes to be the boos Americans need to enable them to stop working at a reasonable age, and have a sufficient income for their retirement.
There are a number of new provisions, but most the most important one is the introduction of the concept of auto-enrolment, where employees will henceforth be automatically be enrolled into a 401(k) with a default contribution rate of at least 3% of an employee’s salary.
This contribution will increase by 1% annually until it reaches at least 10%. The key thing here is that employees must proactively opt out, and pension saving is presumed unless otherwise stated.
It’s aim is stop statistics like the fact 50% of women and 47% of men between the ages of 55 and 66 have no retirement savings from being continued.
It also aims to boost the eventual size of people’s pension pots. Even amongst those who do have pension savings, data find less than half have less than $20,000 and so by enrolling new entrants to the workforce straight away, the aim is to give them the nest-egg they’ll need and prevent the estimated $137 trillion retirement income gap (the difference between what savers should have and what they’ve actually saved), that is predicted to exist by 2050.
As well as this main provision, there are other elements that the act also brings into play, such as enabling employees to add ‘catch-up’ contributions, and the ability to move a pension easier if someone moves jobs.
So far so good.
But, even though the introduction of the act may seem like a long way off still, Parikh argues HR professionals really need to start looking at this issue right now to give them time to be prepared.
So why the urgency?
TLNT decided to sit down with him and find out more…
Q: Auto-enrolment sounds pretty simple – that people get automatically enrolled. Doesn’t this mean HR sets the parameters up and lets it happen? Why the need to think about this now?
A: Auto-enrollment certainly has the appearance of being about setting up payroll rules, and then letting things run smoothly. And it will be a huge change, allowing participation for many people not previously engaged in pensions, such as ethnic groups, and even those who have part-time jobs. But just making things default is only the start of the process. There’s a lot of new rules to consider around eligibility. For instance, in relation to part-time workers, previously someone needed to have worked for their employer for three years, working at least 1,000 hours a year to be eligible for pension enrolment. Now they only have to work 500 hours a year, and have worked for their employer for two years, but be over 21 by the end of their second year of employment. Many firms may not be able to determine exactly how many hours their part-time employees will have historically worked, especially if these employees are near the threshold, and some employees may not be enrolled when they should be.
Q: It still sounds like a spreadsheet could simply be created with these new rules – why can’t this be the answer?
A: “The main issue here, is that companies have to report all this new information – which staff are eligible – to their 401k provider. You would think this is automated, but it really isn’t. There is a huge potential for error, and for these errors not to be picked up early enough.
Q: Does this same advice apply to other provisions?
A: “Yes, very much so. Catch-up contribution are another huge area of complexity – the ability of people to be able to add money without paying tax on it, because you’re using money you’ve already paid tax on. It exciting on one hand, but it creates problems in payroll systems, and money has to be reclassified, and this makes the process of doing payslip declarations harder too. People may also move in and out of different tax brackets. This is not including the issue of people who have decided to opt-out of auto enrolment, which means it creates further opportunities for error. If changes don’t get corrected within the next pay cheque run, everything could be out of sync.”
Q: So what’s your advice?
A: “My advice really is that it’s never too early to start thinking about these things, and testing your systems to ensure they can cope. What HR has to remember, is that employees are putting a lot of faith into their payroll departments, to ensure they are doing things correctly.
Q: Should HR be testing their systems?
A “Absolutely, yes. Pensions is an eco-system that moves very slowly. What you have to read into the legislation, is that if government is saying this is some way off still, the likelihood is that there will be less leniency when it comes to fines, because it’ll claim businesses have had long enough. The main thing is that companies can’t afford for this new legislation to be a surprise for them. Data typically gets tracked quarterly, so companies need at least a couple of quarters to test, and be confident that their systems are able to cope with the new rules.”
Payroll accuracy is already poor
EY’s recent 2022 HR Processing Risk and Cost Survey finds:
