Secure 2.0 Act can improve retirement savings for 100M workers, but will it pass?

Retirement savings plans could see a significant upgrade at the end of this year as a series of bipartisan measures have gained support in the House and Senate, most notably the Secure 2.0 Act.

The Secure 2.0 Act has a range of reforms to retirement savings products, expanding incentives for consumers to save and giving small businesses more ability to offer retirement plans to employees. Although the bill is one of many that legislators are trying to rush through with little time during a lame duck session, industry insiders point to strong bipartisan support for the measure as a sign that lawmakers will find a way to pass the bill this year.

Two major ways of expanding savings

According to the American Retirement Association (ARA), the SECURE 2.0 Act is most notable for two provisions: the Saver’s Match program and the Starter K plan, the first of which is designed to encourage savings among lower-income Americans, and the second program would provide a simpler 401(k) plan that will allow more small companies to help their employees establish retirement savings plans.

Starter K plan: “The Starter K plan does not require employer contributions or complicated testing,” a recent ARA report said. “It only requires that workers be automatically enrolled in the plan at a minimum of 3% of pay and provides the ability for workers to opt-out. The Starter K plan with automatic enrollment becomes the perfect option for a small or start-up business that is not able to contribute to a retirement plan today but wants to give its valued workers and opportunity to save for their retirement.”

Brian Graff, CEO of the association, noted that this will help lower-income Americans, including communities of color that have historically had a lower rate of saving for retirement. The ARA estimates that Black and Hispanic American workers would see a 22% increase in access to workplace retirement plans with the help of these provisions, as indicated in the map below which shows the number of workers in each state who will gain access to retirement savings through the Starter K.

“A lot of people from communities of color tend to work at smaller businesses, where there is a larger coverage gap,” Graff noted. “The Starter K plan is intended to fill that void, and make it easier for small businesses, with effectively a 100% tax credit that will make the plan free for small employers.”

Graff added that the one reason so many Americans don’t have retirement savings is that they simply don’t get started in a program. With an automatic enrollment that includes an opt-out clause, many more Americans are likely to maintain retirement savings plans, including underserved communities.

“It’s a gateway to saving for a comfortable retirement,” Graff noted. “When people are covered in the workplace, there’s no racial disparity, all colors save at the same rate.

Saver’s Match program: Industry insiders point to the Saver’s Credit program as a major way to increase access to retirement savings plans for lower- or middle-income workers. The current matching system provides a tax credit for savers—but many Americans pay too little in taxes to participate in that framework. The Saver’s Credit establishes a Saver’s Match—federal matching funds that are deposited directly into retirement accounts.

According to ARA, this will expand opportunities for retirement savings to many more workers, including gig workers and government employees such as teachers, who did not qualify for matching contributions under the old system. according to ARA. “Under the new rules, eligible savers would get a 50% matching contribution on up to $2,000 in retirement savings annually,” the ARA report said. “This match rate would phase out between $41,000 and $71,000 in the case of taxpayers filing a joint return ($20,500 to $35,500 for single taxpayers and married filing separate; $30,750 to $53,250 for head of household filers).”

Graff noted that under the new system, as many as 108 million Americans could gain access to retirement savings plans because the programs expand income thresholds for employees as indicated in the map above that shows the number of workers in each state who will be eligible for the Saver’s Match. “The expanded and enhanced Saver’s Match would both encourage saving and help moderate income earners build wealth by providing an immediate, meaningful return on personal retirement contributions,” Graff said.

Helping younger workers get into the system

Another possible feature of the Secure 2.0 Act that could have a major impact is language that would allow employees to count their student loan payments toward a retirement plan match. “You’d be able to count the student loan payment as a matching contribution,” Graff said. “This is an exciting new benefit opportunity for employers who are competing for younger workers. For those workers who can’t afford to save money in the plan because they have student loans, they would still be able to get some retirement savings.”

That ability to get younger workers into the system will be a boon for retirement savings in general, noted Barrett Scruggs, VP of Workplace Financial Well-Being at SoFi at Work. “Many Americans have put retirement planning on hold to focus on repaying student debt. This feature will help borrowers stay on top of payments while still preparing for the future,” Scruggs. He added that the automatic enrollment features in the Secure 2.0 approach also will increase worker participation in retirement savings plans among younger workers. “Less than half of Americans between 24 and 39 years old had retirement accounts in 2020. Automatic enrollment will help more employees start saving for retirement earlier, setting them up for financial well-being down the road.”

Scruggs said better communication and education around the benefits of retirement savings should be a priority, regardless of whether the Secure 2.0 Act passes or not. “While [passage of the bill] gives small businesses more incentive to offer retirement plans, better education around the ROI of financial well-being benefits will ultimately move the needle towards adoption. Every cent counts for a small business, particularly as inflation drives up costs. Demonstrating how financial well-being positively impacts employees’ job satisfaction, engagement, productivity, and retention will be key to gaining participation from small businesses,” he said. “While these new initiatives are mostly advantageous, they’ll be a challenge to communicate to employees. With changes to SECURE, Section 127, and ongoing adjustments to student loan payments, forgiveness and interest rates, plan sponsors will be looking for a holistic partner who can help provide communication support.”