Saving for retirement is challenging. But a new law may help people overcome hurdles that keep them from putting money aside. The Secure Act passed in late 2022, has many changes to retirement rules that will benefit savers. Learn how these changes might impact your employees and how to prepare for them.
Automatic Enrollment
The Secure 2.0 Act brought a host of changes to retirement planning. While some were not as dramatic as others, they still can significantly impact employees and employers.
One of the most significant new features is automatic enrollment for 403(b) custodial account participants. This feature is designed to help employees save for retirement by making saving the default option. This feature can help address the inertia that can keep many individuals from participating in their employer’s plans. A recent Principal study found that auto-enrollment helped more than half of the participants in the study achieve their largest share of retirement income.
Another major change is expanding Roth options for 401(k) and 403(b) plans to include non-elective contributions and employer matching. This change allows business owners to offer a Roth version of their 401(k) or 403(b) plans to qualified workers. This can allow employees to take advantage of the benefits of a Roth account without the risk associated with early withdrawal penalties.
Finally, the Secure 2.0 Act changes the rules for catch-up contributions for high-income 401(k) and 403(b) plan participants. This change allows plan sponsors to elect to allow higher-income workers to choose to have their employer matching and non-elective contributions treated as Roth contributions rather than pretax contributions. This change will be effective for plan years starting in 2024.
Generational Diversity
Generational diversity is a powerful company asset, offering fresh perspectives and unique strengths. However, it’s also a challenge requiring the right tools. In addition to helping your team find new solutions to everyday problems, multigenerational teams can help you better understand different target audiences.
As the youngest generations continue to enter the workforce, businesses must embrace and nurture this trend. Gen Z is characterized by their high motivation, creativity, individuality, and deep technological connection. These individuals will need a workplace that reflects their lifestyle and values and allows them to show up as themselves.
Baby boomers and traditionalists will need to learn to adjust to the demands of a younger workforce while at the same time learning from the skills, insights, and perspectives that older employees have to offer. Generational differences can lead to conflict in the workplace, but this is not inevitable and can be reduced with the right culture and training.
For example, a common myth is that millennials are job-hoppers. The truth is that these individuals may leave a company if it doesn’t meet their needs or fit their values, but they will likely stay loyal to a company that respects and understands them as people. In addition, a company that offers cross-generational mentorship programs can reduce ageism and create a positive work environment for everyone.
Convenience
Generally, retirement account holders must wait until they’re at least 59 1/2 to withdraw funds without hefty penalties. However, the Secure Act allows for early withdrawals if individuals self-certify that they experienced domestic abuse. This change makes it easier for victims to access their money.
Also included in the legislation is a provision that allows employer plans to offer annuities as investment options. This is important for employees in an account balance plan who want to use their savings to provide lifetime income, similar to a defined benefit pension. Previously, these plans were only available to large employers, but the new law makes them more accessible to smaller businesses. Lastly, the bill includes an option for small businesses to establish Roth versions of their existing retirement accounts (SEP and SIMPLE IRAs). This will enable more people to save, especially those who work for a small business and do not have a 401(k) at their current job. These changes will majorly impact how employees save for the future, and hiring managers should be aware of them.
Tax Credits
Traditionally, many small businesses have been unable to offer retirement plans due to high costs. The Secure 2.0 Act provides tax credits to help make it more financially feasible for small employers to offer a plan. Secure2.0 also includes a provision that allows long-term part-time employees to join employer-sponsored retirement plans. This enables millions of part-time workers who have worked 500 or more hours annually for three or more consecutive years to save for their future.
In addition, the act reduces the excise tax that individuals pay if they fail to take required minimum distributions (RMDs) from their retirement accounts promptly. The bill lowers the penalty to 25 percent from 50 percent. Finally, Secure 2.0 allows participants to elect to have their employer matching and non-elective contributions converted to Roth after-tax contributions through one-off elections. This optional feature applies to contributions made after December 29, 2022. Plans with a graded vesting schedule must consider modifying their existing rules to allow this election.
