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

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Congress is now looking to help Americans save by strengthening 401 (k) programs – tax-deferred retirement accounts sponsored by companies that employees can make a profit on and employers can match their contributions.

The new bill, which is expected to hit President Joe Biden by the end of the year, could require most employer-sponsored retirement plans to automatically enroll their employees, making it easier for borrowers to save on student loans and older workers to raise money. -to contributions. It will also reduce costs for small businesses.

Retirement savings in the United States have long been considered a three-legged stool. Americans had retirement plans, social security payments, and defined contribution plans such as 401 (k). Not anymore.

Retirement plans are almost over. About half of private sector workers were covered by these so-called defined benefit plans in the mid-1980s, but by 2021 only 15% of private sector workers had them.
According to surveys by the Social Security Agency, social security payments still provide about 90% of the income of a quarter of older people. But the Social Insurance Trust Fund is facing a deficit for 75 years, and without intervention it will be exhausted by the mid-2030s. Lawmakers have faced decades of political stalemate in how to fix it.
There remain 401 (k), to which 68% of private industry workers have access, but only 50% use.

“I don’t think it was ever assumed that this would be the main leg of the feces,” said Jonathan Barber, head of research on compensation and benefits policy at Ayco, a division. Goldman Sachs, which provides investment services to hundreds of U.S. companies and more than a million corporate employees.

Indeed, the 401 (k) was never designed as a major retirement tool for Americans when it was introduced into the U.S. Tax Code in 1978. “When it works, it works very well,” said Sri Reddy, senior vice president of retirement. and revenue decisions for the core financial group.

401 (k) naturally appeals as a means of saving for Americans who make more money, critics say. Under the current plan, the employee with the highest tax design saves 37%. But the employee with the lowest tax group will benefit from paying taxes, saving only 10% on deferred income.

Tax benefits on these retirement savings are expected to cost the government nearly $ 200 billion this year, with most of these benefits going to 20% of the most earned, according to the Center for Budget and Policy Priorities.
According to Vanguard, less than 40% of low-paid workers have retirement accounts compared to 80% of middle- and higher-income families. Making the 401 (k) plan more affordable doesn’t help Americans who don’t have the money to save.

However, Congress believes the solution is there.

In late 2019, President Donald Trump signed one of the most significant pension laws of the last 15 years: the two-party Law on Establishing Each Community to Increase Pensions, or the Security Act. The bill abolished the maximum age limit for pension contributions, provided tax breaks for small businesses that offer their employees 401 (k) plans, and expanded pension benefits to some long-term but part-time workers.

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

Here’s a look at how the plan for basic retirement savings in the US may soon change.

Automatic registration

What will be the biggest change in the 401 (k) program, SECURE 2.0 will require employers to automatically enroll all relevant employees in their 401 (k) plans with savings of 3% of salary. (Many employees now have to attend and then choose their level of contributions.) The new rule also applies to 403 (b), a similar program for employees of some public and tax-exempt organizations.

Employee contribution rates will automatically increase by 1% each year until their contribution reaches 10% annually.

Although employees have the option to withdraw from the plan or change the level of contributions after registration, the automatic inclusion of employees in these plans will lead to significant changes in the participation of young and low-paid employees in the program.

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

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