As 2025 portends to be filled with political, legislative and regulatory uncertainty, defined contribution plan executives are focusing on what they can do and should do — rather than what might happen.
“Uncertainty creates inaction,” said Mikaylee O’Connor, head of defined contribution solutions at NEPC.
That’s why consultants are reminding clients to implement mandatory requirements for SECURE 2.0; decide what — and if — retirement income products are best suited for their employees; and review plan documents to determine how sponsors can reduce litigation risk.
"There's no real clarity about retirement plan policies" when a new president, new Congress and new regulators take office in 2025, said Michael Volo, principal and financial adviser for CAPTRUST Financial Advisers.
"This doesn't appear to be creating concern for plan sponsors at this time," he said. "Many clients have seen it pays not to be too proactive about potential changes in regulations."
For Volo's clients, one top priority is implementing the expanded catch-up contributions for people ages 60 to 63, which takes effect in 2025. Beginning Jan. 1, individuals ages 60 to 63 can contribute more to 401(k) plans, as well as most 403(b) and 457(b) plans. The current catch-up contribution for people over 50 is $7,500. For people ages 60 to 63, the limit goes up to $11,250 in 2025, but it will return to $7,500 when someone turns 64.
For everyone else, individual contributions will rise to $23,500 in 2025, up $500 from 2024.
The other top priority for sponsors is coordinating with their record keepers to implement the change in DC catch-up contributions for high earners starting Jan. 1, 2026. Participants earning $145,000 or more will be required to make catch-up retirement contributions via Roth rules, which fund accounts with after-tax money, compared to traditional rules that fund accounts with pretax money.
The IRS granted the DC industry a two-year delay in implementing the Roth rules, and consultants said they will need every extra minute.
Record keepers “have dragged their feet,” said Michael J. Francis, president and co-founder of retirement plan consulting firm Francis LLC. Although SECURE 2.0 was enacted in December 2022, the IRS published guidance in August 2023 while agreeing to a delay in enforcing the law, he said.
“Record keepers say they are still working on the program,” Francis said. His clients are being told their record keepers will have their systems ready by the first or second quarters of 2025.
Optional provisions
SECURE 2.0 “has kept most sponsors making sure they are compliant with the mandatory provisions,” said Julija Kod, senior investment consultant for Wilshire Advisors. “They are moving more slowly on the optional provisions."
The key optional elements are linking emergency savings and student loan payments to retirement plans.
SECURE 2.0 allows employers to create emergency savings accounts within their retirement plan. Participants can be automatically enrolled at up to 3% of their pay, and they can opt out. After-tax contributions are capped at $2,500. Participants must be allowed to take at least one withdrawal per month, and the first four withdrawals per year cannot be subject to fees.
Sponsors are interested, but the SECURE 2.0 rules are sufficiently cumbersome that emergency savings programs offered outside of the retirement plan are more popular, Kod said.
(A December 2024 survey by the Plan Sponsor Council of America said that only 1% of respondents said they are adding the emergency savings feature. The survey covered the 2023 plan year)
Even more complex from an operations and administration standpoint, she added, are the SECURE 2.0 rules linking the paying off student debt to retirement plans. “Our clients haven’t moved on this,” she said.
SECURE 2.0 permits employers with a 401(k), 403(b), governmental 457(b) or SIMPLE IRA plans to provide matching contributions based on student loan payments instead of based only on participants contributions to retirement plans.
(A December 2024 survey by the Plan Sponsor Council of America said that only 2% of 709 respondents said they are adding an employer match on student loan payments. The survey covered the 2023 plan year.)
The law's student loan provision took effect in 2024, but the IRS issued a notice in August seeking public comment for additional regulations. Until then, the IRS' 28-page notice will serve as guidance for the additional regulations, which will take effect in 2025. The notice includes eligibility rules such as dollar amounts; guidelines on employee certification that the law's requirements have been met; and procedures that sponsors should follow.
Managed accounts
Managed accounts will come under greater scrutiny by sponsors, predicted NEPC’s O’Connor, noting that participants’ willingness to provide detailed financial information is crucial to this feature’s success.
“The big focus is on the managed account provider to make sure managed accounts are understood (by participants) and adding value,” she said.
ERISA lawsuits against sponsors offering managed accounts “has caused a cooling effect or an inquiry effect,” she said. The primary complaint is that managed account fees are excessive.
“The main concern of sponsors is the need for participant input,” she added. “If participants aren’t engaging, then they are paying high fees” compared to a target-date fund.
O’Connor said she expected “a lot of pressure” on managed account providers to reduce fees.
“If we have our way, we are telling clients to go easy on the managed account product push,” said Francis, a long-time skeptic. "Target-date funds do the job at less cost.”
Retirement income
Target-date funds have emerged as a likely way to inject retirement income solutions into defined contribution plans, and they will continue to do so depending on sponsors’ evaluation of several factors, said Holly Verdeyen, partner and U.S. defined contribution leader at Mercer.
Sponsors must assess their workforce demographics, the cost sand their ability to keep retirees’ assets in their plans, “Once you have the answer, then choose the products,” she said.
Potential roadblocks include portability — whether a participant’s retirement income investment can be transferred to another sponsor following a job change — and the ever-present fear of litigation, “which can lead to inaction” by sponsors, Verdeyen said.
O’Connor noted that industries with frequent turnover make it hard for those sponsors to plan for lifetime income products. “Employee tenure is a structural challenge,” said O’Connor, agreeing that portability is a big issue.
One hurdle to faster adoption of retirement income solutions in target-date funds will be record keepers’ ability to modify their technology platforms, said Wilshire’s Kod. “It takes a lot of time,” she said. “The industry is removing obstacles along the way.”
Ironically, one source of delay in wider adoption is the recent proliferation of products and their complexity, she said. A few years ago, sponsors cited the absence of products to persuade them to pursue retirement income solutions.
“At this point, we are still in the educational phase for sponsors,” she added. “The momentum for implementation is going to be slow.”
Litigation risks
Litigation will play a role in DC plan management actions in 2025 even for the sponsors who haven't been sued because they - and their attorneys - will be monitoring what plaintiffs alleged against other sponsors.
One area is the recent proliferation of forfeiture lawsuits that lack clear trends so far among several judges' rulings.
"The cases are not uniform (but) there is some movement by sponsors to tighten up their plan documents," said Andrew Oringer, partner and general counsel for Wagner Law Group.
Tightening up — to Oringer and others — means sponsors deciding if they will use proceeds from forfeitures to reduce corporate contributions to their DC plans or reduce plan expenses.
Forfeitures occur when participants who are eligible for employer matches to their retirement accounts leave before they are fully vested.
Some vesting policies can run as short as two years; others can run five years. Forfeiture rules don't affect participants' contributions to their retirement accounts.
Most of Volo's clients use the forfeited funds to reduce corporate contributions to the plans. Clients must focus on plan documents that are "explicit and specific," he said.
Another looming legal issue for plan management is what constitutes prohibited transactions by service providers in their contracts with sponsors under ERISA. Federal appeals courts have issued differing opinions, prompting the U.S. Supreme Court to hold oral arguments in the closely-watched case of Cunningham et al. vs Cornell University et al.
The complaint by former participants in two Cornell 403(b) allege sponsors charged excessive fees, but more significantly claimed the relationship between the sponsor and record keepers violated ERISA.
“The Supreme Court needs to weigh the relationship” between sponsors and providers and whether the burden of proof in ERISA excessive fee cases belongs to the plaintiffs or sponsors, said Francis. A Supreme Court ruling “will help clarify to sponsors and especially to service providers” their responsibilities, he said.
In this 8-year-old lawsuit, which plaintiffs have lost at the federal district court and appeals court levels, the Department of Labor supports the plaintiffs through an amicus brief filed in December.
