How the new proposed Secure Act 2.0 could change the way people save for retirement

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.

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.

This would eliminate the need for younger Americans to choose between saving for retirement and paying off student loans, allowing them to start building for their future in multiple ways.

Getting close to retirement can be nerve-wracking if people feel they have not saved enough or haven’t developed a plan for determining where retirement income will come from. Secure Act 2.0 could help those who may have under-saved by increasing 401(k) catch-up contributions to $10,000 for those aged 62-64. Right now, it maxes out at $6,500 for those who are 50 or older.

This is the last chance to save money while in the workforce. Catch-up contributions are designed specifically for people who are closer to retirement so they can put away more money at a time when they may have the means to do so. If a client makes these catch-up contributions into a Roth arrangement, it builds up the potential for even more tax-free income later. The current version of the bill includes a provision that would require all catch up contributions be made to Roth arrangements. There would be no tax deduction for Roth contributions, but these savings eventually lead to potentially higher tax-free withdrawals and increased net income during retirement.

It’s also important to note that Roth IRA conversions may be something for people already in retirement to consider as it helps them diversify the types of tax arrangements held and avoid being too heavily invested in pre-tax qualified arrangements that will be taxable when distributions are taken.

Last but not least, simply having new proposed legislation around retirement saving could spur more interest in financial planning for all Americans.

Conversation around the proposed Secure Act 2.0 could prompt more clients to want to discuss saving and spending habits, and how they can add more protection to their portfolio, including risk mitigation strategies that offer protection but still allow room for growth. This is a great opportunity for financial professionals to highlight buffered strategies within ETFs, fixed index annuities (FIA)s and registered index-linked annuities (also known as Indexed Variable Annuities) that can help clients feel more prepared for the next big event.

As the rules change, financial professionals should check in with their clients about how new legislation can affect which retirement saving strategies to consider.