Major changes are ahead for 401 (k). Here’s what you need to know

Congress is now seeking to help the United States save by funding 401 (k) programs – tax deferrals, corporate-funded retirement accounts that employees can provide income to, and employers can balance their contributions.

A new bill, expected to reach President Joe Biden’s desk by the end of the year, could require most employers’ retirement plans to register their employees automatically, making it easier for student loan borrowers to save and for senior employees to make contributions. It will also reduce costs for smaller businesses.

Retirement savings in the United States have long been thought of as a tripod slow. Americans had a pension system, social security benefits and a premium system such as 401 (k). Not anymore.

Pension systems are almost extinct. About half of the employees in the private sector were under these so-called benefit-related plans in the mid-1980s, but by 2021 only 15% of employees in the private sector had them.
Social security payments still provide about 90% of the income for a quarter of older adults, according to surveys by the State Social Security Institute. But the Social Security Fund is facing a 75-year deficit and without intervention it will be depleted by the mid-1930s. Police officers have faced a decades-long political stalemate over how to fix it.
What remains is 401 (k), which 68% of private sector workers have access to, but only 50% use.

“I do not think it was ever intended to be the mainstay of the stalemate,” said Jonathan Barber, head of Ayco’s payroll and benefits policy research unit. Goldman Sachs, which provides investment services to hundreds of US companies and more than a million corporate employees.

In fact, the 401 (k) was never designed to be the primary retirement plan for Americans when it was introduced into U.S. tax law in 1978. “When it does work, it works very well,” said Sri Reddy, Deputy Director of Retirement Affairs. and revenue solutions for Principal Financial Group.

401 (k) naturally appeals as a means of saving money to Americans who bring in more money, critics say. According to the current plan, an employee in the highest tax bracket saves 37%. But an employee in the lowest tax bracket would have the advantage before taxes of saving only 10% on deferred income.

Tax incentives for these retirement savings are expected to cost the state nearly $ 200 billion this year, with most of those benefits going to the top 20 percent of workers, according to the Center for Budget and Prioritization.
Less than 40% of lower paid employees have retirement accounts, compared to 80% of middle- and upper-income families, according to Vanguard. Making a 401 (k) plan more accessible does not help Americans who do not have the money to save in the first place.

Yet the parliament believes it is a solution.

In late 2019, one of the most important retirement laws of the past 15 years was signed by President Donald Trump: the two-party Setting Every Community Up for Retirement Enhancement, or SECURE Act. The bill removed the maximum age limit on retirement contributions, provided a small tax deduction for small businesses to offer their employees 401 (k) plans, and extended retirement benefits for some long-term but part-time employees.

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

Here’s a look at how the US Retirement Savings Plan could soon change.

Automatic check-in

In what would be the biggest change to the 401 (k) plan, SECURE 2.0 would require employers to automatically enroll all eligible employees in their 401 (k) plans with a 3% payroll savings rate. (Many employees now have to opt in and then choose their contribution level.) The new rule also applies to 403 (b), a similar scheme for employees of certain public and tax-exempt institutions.

The contribution rate for registered employees would automatically increase each year by 1% until their contribution reaches 10% annually.

Although employees have the option of opting out of the program or changing their contribution level after signing up, automatically enrolling employees in these programs would make a big difference to the participation of younger and lower paid employees in the program.

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

Leave a Comment