Big changes are coming to your 401(k). Here’s what you need to know

Now Congress is seeking to help Americans save by bolstering 401(k) programs — company-sponsored tax-deferred retirement accounts to which employees can contribute income and employers can match their contributions.

A new bill, expected to reach President Joe Biden’s desk by the end of the year, could force most employer-sponsored pension plans to automatically enroll their workers, allowing student borrowers to save more easily and for older workers to make purchases. -up dues. It will also reduce costs for small businesses.

Retirement savings in the United States has long been considered a three-legged stool. Americans had retirement plans, social security benefits, and defined contribution plans like the 401(k). Not anymore.

Pension plans are almost extinct. About half of private sector workers were covered by these so-called defined benefit plans in the mid-1980s, but by 2021 only 15% of private sector workers were covered.
Social Security payments still provide about 90% of the income of a quarter of older people, according to Social Security Agency surveys. But the Social Security Trust Fund faces a 75-year deficit, and without intervention it will be depleted by the mid-2030s. Lawmakers have faces a decades-long political stalemate on how to fix it.
What remains is the 401(k), which 68% of private sector workers have access to, but only 50% use.

“I don’t think it was ever anticipated that this would be the first leg of the stool,” said Jonathan Barber, head of compensation and benefits policy research at Ayco, a unit of Goldman Sachs which provides investment services to hundreds of American companies and more than one million employees.

Indeed, the 401(k) was never intended to be the primary retirement tool for Americans when it was introduced into the US tax code in 1978. “When it works, it works great,” said said Sri Reddy, senior vice president of retirement. and income solutions for Principal Financial Group.

The 401(k) naturally appeals as a savings vehicle to Americans who bring in more money, critics say. Under the current plan, an employee in the highest tax bracket saves 37%. But an employee in the lowest tax bracket would get a pre-tax benefit by saving just 10% on deferred income.

Tax breaks for such retirement savings are expected to cost the government nearly $200 billion this year, with most of those benefits going to the top 20% earners, according to the Center on Budget and Policy Priorities.
According to Vanguard, less than 40% of the lowest-paid workers have retirement accounts, compared to 80% of middle- and upper-income families. Making a 401(k) plan more accessible doesn’t help Americans who don’t have money to save in the first place.

Yet Congress thinks there is a solution.

In late 2019, one of the most significant pieces of retirement legislation in the past 15 years was signed into law by President Donald Trump: the bipartisan Setting Up Every Community Up for Retirement Enhancement Act, or SECURE Act. The bill removed maximum age limits for pension contributions, provided tax credits for small businesses to offer their employees 401(k) plans and extended retirement benefits to some long-term employees. but part time.

Last week, Congress almost unanimously passed another bill, SECURE 2.0, which includes even more significant changes. The Senate is expected to adopt its version in the coming weeks.

Here’s a look at how the main retirement savings plan in the United States may soon change.

Automatic registration

In what would be the most significant change to the 401(k) program, SECURE 2.0 would require employers to automatically enroll all eligible workers into their 401(k) plans at a savings rate of 3% of salary. (Many employees currently must enroll and then choose their contribution level.) The new rule also applies to 403(b), a similar program for employees of certain public and tax-exempt organizations.

Contribution rates for registered workers would automatically increase each year by 1% until their contribution reaches 10% per year.

Although workers have the option of opting out of the plan or changing their contribution level after joining, automatically enrolling workers in these plans would significantly change the participation of younger, low-wage employees in the program.

A 2012 study cited in the SECURE 2.0 Bill found that “

Leave a Reply

Your email address will not be published.