Americans have been warned for years of an impending retirement crisis. In 2019, Boston College estimated there was a $7.1 trillion retirement-savings shortfall among American households, with half of them facing a lower standard of living once they stop working. For many Americans, Social Security benefits are the only source of income during their retirement, but it was never meant to be the sole source, though.
The good news is that Americans are more likely to save for retirement if they have access to a retirement savings plan at work. The bad news is that according to the Bureau of Labor Statistics, only 67% of private industry workers had access to employer-provided retirement plans in March 2020. This means one out of three workers are on their own to figure out how to save for retirement. Thankfully, legislation passed in recent years has tried to make this process easier and more accessible.
SECURE Act 2.0, the Sequel
The SECURE 2.0 Act of 2022 follows on the heels of the original version passed in 2019 and aims to make saving for retirement easier by expanding retirement plan coverage, increasing retirement plan savings, and simplifying and clarifying plan rules. Below are some of the provisions that are aimed to help encourage more Americans to save for retirement.
- Automatic Enrollment. Most new 401(k) and 403(b) plans established in 2024 or later must include automatic enrollment, which significantly increases participation by employees—although they can still opt out if they want to. The initial automatic deferral amount must be at least 3%, but not more than 10% of salary. Deferrals must automatically increase by at least 1% of compensation, up to a maximum of at least 10%, but no more than 15%.
- Small Employer Tax Credit. Only about 30% of small businesses offer retirement plans, primarily due to costs of establishing and maintaining them. SECURE 2.0 increases the startup credit from 50% to 100% for employers with up to 50 employees up to $5,000. The new credit also offsets up to $1,000 of employer contributions per employee in the first year, phased down gradually over five years —though not for employees making more than $100,000 (indexed for inflation).
- Small Incentives to Contribute to a Retirement Plan. Employers can offer small financial incentives (e.g., low-dollar gift cards or t-shirts) to help boost employee participation in a workplace retirement plan.
- Higher Catch-up Contribution Limit. Right now, if you are 50 or older you can make catch-up contributions to your retirement plan up to certain limits. SECURE 2.0 increased the catch-up contribution limits for those 50 or older, beginning in 2025, to the greater of $10,000 or 50 percent more than the regular catch-up amount if you are 60, 61, 62, or 63 years old. After 2025, those amounts will be indexed for inflation. This gives those who delayed saving for retirement a better chance to catch up and bolster their savings before reaching their later years.
- Employer Fund Match for Student Loan Payments. Employers can make a matching contribution to your retirement plan account based on your student loan payment amount. This is designed to address the fact that high student loan debt can keep people from saving for retirement.
- Saver’s Match replaces the Saver’s Credit. Beginning in 2027, the nonrefundable Saver’s Credit for certain IRA and retirement plan contributions will be replaced with a federal matching contribution that is deposited into your IRA or retirement plan. The so-called Saver’s Match will be 50% of IRA or retirement plan contributions up to $2,000 per person. However, some income limits and phase-outs will apply.
- Expanded Coverage for Long-Term Part-Time Employees. Part-time employees who have worked two consecutive years and completed at least 500 hours of service each year will be eligible to enroll in their company’s 401(k) or 403(b) plans.
Auto-IRAs Can Help Close the Retirement Savings Gap
Many states and several cities are now sponsoring auto-IRA plans to help ease the burden on individuals. In states that have enacted auto-IRA programs, they are typically mandatory for certain employers. If a company has a specific number of employees (often 5 to 10 or more) and does not offer another qualifying retirement plan, the employer is required to automatically enroll eligible employees in the auto-IRA program for their area. It’s also encouraging companies to start offering a 401(k).
According to research from Pew Charitable Trusts, in the first year after the first three auto-IRA programs launched (Oregon, Illinois and California), there was a 35% higher growth rate among new 401(k) plans at private businesses in those states versus other states.
Here are some of the benefits of state- or city-sponsored auto-IRA plans:
- Makes saving for retirement much easier for employees. For employees of small businesses or companies that don’t offer retirement plans, the auto-IRA may be the best option for initiating and automating retirement savings. This takes the time and effort off their plate by not having to research funds or set up their own contributions.
- Enrollment is automatic. Enrollment into an auto-IRA is automatic for eligible employees at affected companies. This eliminates much of the confusion or possible procrastination that could derail an employee’s savings efforts.
- Contributions are automated and the investments are managed by an administrative team. An employee’s payroll deductions will default to the program’s default contribution rate—usually 3% or 5%—and can be changed later on. Rather than seeking out their own plan and adjusting the investment(s) regularly, this task is passed off to an administrative team.
- Tax-free withdrawals. For plans using a Roth IRA, you can withdraw your contributions before age 59½ with no penalty or income taxes. To withdraw earnings early, however, there could be a tax and/or penalty.
Of course, there are a few disadvantages to keep in mind with the auto-IRA program.
- Not all states offer an auto-IRA. Currently, auto-IRAs are available in eight states and two major cities. Additional states have similar programs, and many others are expected to develop their own programs in the future, but as of now they are limited.
- Employers cannot contribute to the auto-IRA. Other employer provided retirement plans may include an employer contribution match to help supplement employees’ savings. With an auto-IRA, however, your employer cannot contribute or match your contributions in any way.
- Employees may be able to find better investments and/or lower fees elsewhere. Each auto-IRA program involves its own investment options and strategy, as well as fees. While this may be the easier option for eligible employees, they may be able to find better options and/or lower management fees on their own.
- There may not be tax benefits. Some auto-IRAs use Roth IRAs while others use traditional IRAs. Depending on which applies to your program, contributions may or may not be tax-deductible.
- Contribution limits also are lower than in 401(k) plans. You can only put up to $6,500 in a Roth or traditional IRA in 2023 compared to $22,500 in a 401(k). Also, anyone age 50 or older is allowed an additional $1,000 “catch-up” contribution.
With increased and easier access to retirement savings vehicles, more American will be able to close the retirement income gap. We still face one major obstacle: ourselves. Our brains have a hard time giving up immediate gratification for future rewards, especially when that future is decades away. The key is to start saving for retirement early on and develop good savings habits, as it’s much harder to start later in life. A financial planner can help you through this process and help plan for the future.