SECURE Act 2.0 Startup Opportunity & Finch’s Universal Employment API

By: Victoria Cheng, Partner at Pruven Capital & Rohit Ramkumar, Investor at Pruven Capital

A year ago, Congress passed the SECURE Act 2.0, expanding the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, and further strengthening the retirement system throughout America. The SECURE Act 2.0 adds new provisions designed to make it easier for Americans, both who are on the verge of retiring and those who are far away from it, to save for retirement in individual retirement accounts (IRAs) and workplace plans. While some of the changes went into effect this year, many are still to come.

As we reflected on what that means for the FinTech industry, we are excited for the many opportunities for startups to use technology to address the increasing operational complexity that comes with these changes, and for startups to create net new products in response to these regulatory updates.

Regulatory Background

For those in the workforce who are coming up on or in retirement, the Act provides:

1. Changes to required minimum distributions from 72 to 73 in 2023 and 75 starting in 2033.
2. Increase in catch up contributions from $7,500 to $10,000 annually starting in 2025.
3. Employer matches: employers can now make matching contributions directly to an employee’s Roth 401(k) and the funds can grow tax free, with tax-free distributions in retirement.
4. Expanded rules for qualified charitable distributions (QCDs)

For employees who are still far away from retirement, the SECURE Act 2.0 is an attempt to improve retirement outcomes for the young Americans in the workforce during a time where ~28% of adults have no retirement savings whatsoever and less than a third of those who aren’t retired feel their retirement savings are on track, down from 40% in 2021 (Report on the Economic Well-Being of U.S. Households in 2022 — May 2023). Provisions include:

1. Automatic 401(k) enrollment of eligible employees into new 401(k) or 403(b) plans at a contribution rate of at least 3% starting in 2025.
2. Optionality to link one’s retirement account to an emergency savings account where the first four withdrawals aren’t subject to taxes or penalties.
3. Allowing 529 beneficiaries to roll over up to $35,000 from a 529 account into a Roth IRA. (529 plan must be 15 years old, and one cannot roll over the whole sum at once)
4. Employers can now make 401(k) matching contributions to an employee’s plan based on employees’ qualified student loan payments.

The Infrastructure Opportunity & Finch

As these changes continue to take place over the next few years it is more important than ever for all employers to have infrastructure in place to offer a seamless experience for employees. The team at Finch (https://www.tryfinch.com/), led by Jeremy Zhang and Ansel Parikh, have been working tirelessly to allow retirement benefits providers to onboard sponsors seamlessly and adapt to new regulations like the SECURE Act 2.0 to provide valuable savings products to the U.S. workforce. The company has built a unified employment API that unlocks access to information housed in over 200 payroll and HR systems via explicit employer consent. This connectivity allows retirement benefits providers to easily onboard new employees to existing plans with organization data, audit contributions with pay statement details, and manage deductions and contributions by writing changes directly into pay runs.

Without Finch, the employment industry has traditionally operated via flat files — sent back and forth via SFTP or by downloading CSVs and communications via email to benefits providers. Many retirement benefits companies have to build separate file mapping capabilities for each system in order to make changes and draw insights. This can be an extremely manual and arduous process. With Finch’s platform, reading critical organization and payroll data as well as managing payroll deductions, is a frictionless process, making the entire benefits lifecycle more automated. The company is well on their way to executing on this vision of building a connected and programmable employment ecosystem, having scaled to 30,000+ employers and 2M+ employees connected through their infrastructure.

At PruVen Capital, we are excited about the compounding advantage that Finch gains as it builds out the default infrastructure layer in the employment data ecosystem, powering all future innovation in benefits, HR tech, fintech, and insurance. Today the platform powers hundreds of B2B solutions including 401(k) providers, health benefits, compensation management, employee engagement, tax credit, FP&A, and insurance, among many other use cases. We are excited to be a part of the company as they expand into other data models, customer types, and client use cases.

As investors in other API platforms such as Plaid, we saw the value of providing data interoperability with comprehensive coverage, exceptional developer experiences, and high reliability. These tools are particularly needed in industries like financial services and HR benefits where the providers (bank + payroll/HRIS companies) are highly fragmented and run on legacy software systems.

As we close out this benefits enrollment cycle, we could not be more excited to support Jeremy, Ansel, and the Finch team as they lead the way in ushering in an era of “programmable” benefits in America over the next decade.