Okay, SECURE 2.0 hasn't passed yet, but … employers, get ready!
The sweeping new retirement savings legislation will likely become law any day now, however, it’s not a catch-all solution and employers still need to make some adjustments to further differentiate themselves.
Employers can act now – even making small, annual adjustments of 1-3% — to further differentiate themselves as a top employer.
SECURE 2.0 is dominating the headlines and is likely heading to a vote any day now. For good reason, employers are excited about the bipartisan support to strengthen 401(k) plans and help more American workers save. However, it’s not a catch-all solution, so whether it’s this retirement legislation or the next, employers should always be thinking of ways to produce meaningful outcomes for their employees when it comes to retirement savings.
If SECURE 2.0 passes it will have a significant impact on participants and the retirement system. Lawmakers are proposing a provision that will require newly established 401(k) plans to automatically enroll new hires into their plans with a pre-tax rate of at least 3% of the employee’s pay. In addition, existing workers who have not yet taken advantage of their employer’s retirement plan will also be automatically enrolled following the same guidelines. These provisions will help more Americans save for a financially secure retirement – particularly among younger and minority workers. Here are some things that employers will want to keep in mind while adapting to changes and ensuring participants make the most of their retirement benefits.
Understand the impact on talent
We have seen that strong retirement benefits, like auto enrollment, annual savings rate increases, and matching contributions, are differentiating tools when it comes to recruiting and retaining top talent. If passed, more employees will benefit from plan features designed to promote an individual’s financial wellbeing. This is undoubtedly good news in addressing the savings needs of American workers. But it also means that employers will want to boost their retirement benefits to further differentiate themselves as a top employer. For example, employers have a number of tools at their disposal to further enhance employees’ savings rates. According to our Vanguard research, adopting even small, annual adjustments of 1-3% would enable an additional 20% of participants to reach a 75% replacement ratio in retirement. Matching contributions vary greatly among employers so benefits decision makers should apply competitive match formulas which may be more attractive for those seeking new job opportunities.
Evaluate your communications
If SECURE 2.0 passes, more participants enrolled in company retirement plan means more communications. Employers should think about their communication styles differently to serve a larger audience and develop that communication strategy now. Employees who may be unfamiliar with retirement plan benefits and tools may need some educating, and those already familiar, may need more administrative help when it comes to navigating their plan. This is where your recordkeeper can come in and counsel on designing communications to reach employees on a more personal level.
Related: Fidelity, Vanguard team up to ease 401(k) portability when workers switch jobs
In addition to identifying client communication preferences, plan sponsors can use this opportunity to educate employees on financial wellness tools and services, which aim to support all aspects of an employee’s financial health.
Short term impact to the bottom line
The cost to employers who roll out new retirement plans may grow in the short term, based on expanded retirement plan access for more employees, including long-time, part-time workers. However, this investment in a workforce is game-changing. It’s been our experience working with plan sponsors that they are focused on ensuring that a plan leads to strong retirement readiness for their employees. This is also great news because more workers will be able to ramp up contributions, with the help of the auto enrollment provision, and focus on their retirement savings. Based on our 2022 How America Saves data, employees who work for a company that has an auto enrollment design save on average 50% more than employees who work for a company that does not offer one. Plan sponsors can also explore doing a budget analysis of what that financial impact will be in advance. Our research shows that the uptick comes from lower compensated employees and therefore the impact to a match budget in most cases is smaller than expected.
As a recordkeeper, we know that implementing some of these provisions may require changes to your plan design, but now is the time for plan sponsors to embrace this legislation and get excited about the provisions that can help plug retirement savings gaps and get employees on track. Policy can be a powerful promoter of change and employers should always be mindful of prioritizing the retirement saving needs of their employees both now and in the future. So lean on your recordkeeper for support in navigating the changes – we’re all in this together.
John James is Vanguard Managing Director and Head of Institutional Investor Group