Whenever the topic of retirement is making headlines, it seems to come with some level of bad news. From new requirements that make saving more challenging to the latest statistics noting how few people are financially prepared for the future, retirement news is rarely a cause for celebration.
Recent conversation around the new Secure Act 2.0, however, is bringing some positivity to the conversation as provisions around retirement could help both working and retired Americans get or stay on track to hitting their financial goals. For financial professionals, understanding how this proposed legislation could change the rules for different types of clients is important to helping those clients achieve a more successful retirement.
The bill, which is still making its way through Congress, could be beneficial to clients in a variety of ways. It builds on the 2019 Secure Act with the intent to get more people to save and improve retirement preparation.
The good news is, it seems like legislators were really listening to the public when drafting the Secure Act 2.0 because, as of this writing, it reflects consumer sentiment about retirement planning from the recent Allianz Life 2022 Retirement Risk Readiness Study.* The study, conducted in February, surveyed three categories of Americans to get different perspectives on retirement: pre-retirees (those 10 years or more from retirement); near-retirees (those within 10 years of retirement); and those who are already retired.
The study found that workers who feel confident about their financial preparation for retirement are in the minority with 63% of non-retired respondents saying they fear running out of money more than death. In addition to highlighting the disparity in retirement confidence among retired and non-retired Americans, the 2022 study identified how the pandemic has caused financial fatigue, potentially putting non-retirees’ financial future at risk. In fact, more than half (54%) of working respondents admitted to spending money on things they didn’t need, with the majority regretting that decision.
Thankfully, the new bill has provisions that can help address these challenges for working Americans and also for those who are already in retirement. Here are a few highlights from the House of Representatives version of the proposed Secure Act 2.0 you should keep in mind for discussing during your next client meeting.
Auto Enrollment
Employers that start retirement plans like 401(k)s would be required to automatically enroll employees when they are hired at a pre-tax contribution level of 3%, or may be as high as 10%, although the employee will have the option to elect out or elect a different percentage. There would be an automatic 1% increase every year (up to at least 10% but not to exceed 15%), but the plan participant could opt out or select a different percentage. That means while an employer must automatically enroll employees, the employee can decide not to put money into the plan. This helps remove a major barrier to saving for many people, which is simply the act of getting started. Since time is one of the biggest assets to achieving retirement goals, the sooner you start the better. Not all employers provide a retirement savings plan or company match.
The new auto enrollment provision would remove a psychological barrier that holds back too many people from saving for retirement. The key with auto enrollment is clients won’t miss money that never passed through their bank account. This will give them a better foundation to build on and more confidence in their overall savings strategy. A significant balance may start to accumulate with the 3% auto enrollment, the automatic 1% increase, and possibly a company match.
If your client isn’t enrolled in their company’s qualified plan or has been hesitant to increase contributions, this could be a good opportunity to discuss the significant benefits of participation.
Credits For Student Loan Payments
The need to make student loan payments and the desire to pay them off quickly can sometimes deter young people from saving for retirement. A provision in Secure Act 2.0 allows employers to offer matching contributions to employees who are paying off student loans.