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

Now, Congress is seeking to help Americans save by strengthening 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 hit President Joe Biden’s desk by the end of the year, could require most employer-sponsored retirement plans to automatically enroll their workers, making it easier for borrowers to save. loans for students and for older workers to take advantage of. -upload contributions. It will also reduce costs for smaller businesses.

Retirement savings in the United States was long thought of as a three-legged stool. Americans had pension plans, Social Security benefits, and defined contribution plans like 401(k). No longer.

Pension plans are almost extinct. About half of private sector workers were covered by so-called defined benefit plans in the mid-1980s, but by 2021 only 15% of private sector workers had them.
Social Security payments still provide about 90% of income for a quarter of seniors, according to surveys by the Social Security Agency. But the Social Security trust fund faces a 75-year deficit and, without intervention, will run out by the mid-2030s. Lawmakers have faced a decades-long political deadlock over how to fix it.
What remains is the 401(k), which 68% of private industry workers have access to, but only 50% use.

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

In fact, the 401(k) was never designed to be the primary retirement tool for Americans when it was introduced into the US tax code in 1978. “When it works, it works very well,” said Sri Reddy, vice president retirement senior. and revenue solutions for Principal Financial Group.

The 401(k) naturally appeals to Americans who contribute the most money as a savings vehicle, 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 advantage by saving just 10% in deferred income.

Tax breaks for these retirement savings are expected to cost the government nearly $200 billion this year, with most of those benefits going to the top 20% of earners, according to the Center on Budget and Policy Priorities.
Fewer than 40% of lower-wage workers have retirement accounts, compared to 80% of middle- and upper-income families, according to Vanguard. First, making a 401(k) plan more affordable doesn’t help Americans who don’t have money to save.

Still, Congress believes there is a solution.

In late 2019, President Donald Trump signed into law one of the most important retirement laws of the past 15 years: the bipartisan Establishing Every Community Retirement Enhancement Act, or SECURE Act. The bill eliminated maximum age limits on retirement contributions, provided tax credits for small businesses to offer their employees 401(k) plans, and extended retirement benefits to some long-term but part-time employees.

Last week, Congress almost unanimously passed another bill, SECURE 2.0, which has even broader changes. The Senate is expected to approve its version in the coming weeks.

Here’s a look at how America’s premier retirement savings plan could soon change.

automatic enrollment

In what would be the biggest change to the 401(k) program, SECURE 2.0 would require employers to automatically enroll all eligible workers in their 401(k) plans at a savings rate of 3% of salary. (Many employees currently have to opt in 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.

The contribution rates of affiliated workers would automatically increase each year by 1% until their contribution reaches 10% per year.

While workers have the option to opt out of the plan or change their contribution level after enrolling, automatically enrolling workers in these plans would make a big difference in the participation of younger, low-wage employees in the program.

A 2012 study cited in the SECURE 2.0 bill found that, ”

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