It is no secret that Americans are not saving enough for retirement. According to the Boston College Center for Retirement Research, the US faces a $7 trillion deficit in retirement assets and progress toward improvement has been slow. Nearly half of working adults do not have access to an employer retirement plan and many who do are not contributing sufficiently. A new law signed by the President on December 29 includes some of the most significant and beneficial enhancements to retirement savings options in a generation.
In 2019 Congress adopted the Setting Every Community Up for Retirement Enhancement or SECURE Act which made several changes to the rules around retirement planning. The omnibus spending bill passed in December inluded a major rework known as SECURE 2.0 that goes far beyond the original act in improving access to and participation in employer retirement plans. The bill was aggressively lobbied for by the financial industry, but in a felicitous confluence of interests, individual investors and taxpayers will also benefit from the changes.
Interestingly, a central theme in the Secure 2.0 Act has been dubbed “Rothification”, an increased emphasis on directing retirement investment into Roth accounts funded with after-tax contributions. Congress likes the approach since it front loads tax revenue, while savers benefit over the long-term thanks to tax-free returns. The package contains over 90 separate provisions, but here are a few highlights.
Retirement plans. Beginning in 2025, all new 401(k) or 403(b) plans with over 10 employees will include automatic enrollment with a minimum employee deferral of 3%. Contributions increase by at least 1% annually to between 10% and 15%. Definitive research has demonstrated that default choices impact behavior and that automatic enrollment significantly improves participation. Employees may opt out, and existing plans are currently grandfathered.
Employer plans that include a Roth option will now be able to make matching and nonelective contributions to the employee’s Roth account. Currently, employer contributions must be pretax. Roth employer matches would be reported as income to the participant. In addition, Simple and SEP plans may now also accept after-tax Roth contributions.