Congress passes SECURE 2.0: How retirement plans will change in 2023 and beyond

Christmas came early for consumers and retirement advisors late last week when Congress passed – and President Joe Biden signed into law – a $1.7 trillion omnibus spending bill that includes SECURE 2.0 Act retirement savings legislation.

“With the passage of SECURE 2.0, millions more Americans now have a better chance at retirement success,” said John James, managing director of the Vanguard Institutional Investor Group. “This landmark legislation makes it easier for participants to save for their future by broadening Americans’ access to the retirement savings system through expanded automatic enrollment and escalation; novel portability efforts; and greater transparency around target-date fund performance.”

As the year winds down, financial experts are unwrapping that gift to determine the implications for investors in 2023 and beyond.

“The passage of this legislation means Congress has done three vital things:  [1] validated that emergency savings matters, belong in the retirement system, should include an option for automatic enrollment and be eligible for employer matches; [2] provided legislative clarity on concrete ways for plan sponsors and vendors to create practical emergency savings options in retirement plans; and [3] beginning in 2027, provided more-accessible tax incentives to contribute to retirement plans,” said Timothy Flacke, cofounder and executive director of Commonwealth.

The Washington Post summarized the key provisions of the legislation:

• Automatic enrollment. Starting in 2025, most businesses will be required to automatically enroll employees in 401(k) plans. Employees will contribute between 3% and 10% of their wages. Each year, the contribution will increase by 1% until it reaches at least 10% (although not more than 15%).
• Saver’s match. For workers earning less than $71,000 per year, the federal government will provide a 50% match up to $2,000 in employee cash contributions, which means the government will provide a maximum of $1,000. This cash will be deposited directly into retirement accounts.
• Emergency withdrawals. One penalty-free withdrawal for unexpected or immediate expenses arising from family or personal needs is allowed. One withdrawal of up to $1,000 will be allowed per year if the amount is repaid. If it is not, another withdrawal cannot be made for three years.
• Emergency savings. Employers have the option of offering their lower-paid employees a savings account linked to their long-term retirement plans. Employers also can automatically opt workers into the savings accounts, contributing no more than 3% of the employee’s salary. The account will be capped at $2,500, and additional money will be routed into the retirement account. “This is especially important for the tens of millions of Americans who live paycheck to paycheck with little savings cushion, who are more likely to be women and more likely to be Black or Latinx,” Flacke said.
• Part-time worker enrollment. Under current law, part-time employees can have a 401(k) plan if they work with their employer for one year with 1,000 hours of service or three consecutive years with at least 500 hours of service annually. The new law will reduce that three-year eligibility period to two years.
• Mandatory distributions. Under current law, people with 401(k) plans must take out money from their accounts starting at age 72 to ensure they use the money rather than pass it down through their estates. The new proposal increases that mandatory age to 73 starting in 2023 and then 75 starting in 2033.
• Student loan matching. Workers strapped with student debt may not be able to afford to put money in retirement accounts, causing them to miss out on employers’ matching contributions. Employers now can choose to make contributions to retirement accounts based on an employee’s student loan payments.

Related: SECURE 2.0: What it means for employers, benefits brokers and plan advisors

The bottom line is that SECURE 2.0 will help Americans better prepare for retirement, said Greg Wilson, partner and head of institutional client business for Goldman Sachs Ayco Personal Financial Management.

“Our research shows that a growing number of retirement savers face a vortex of unique and significant financial challenges throughout their working years that can derail their retirement savings,” he said. “Provisions in the SECURE 2.0 Act are key changes that can help working Americans overcome expected and unexpected obstacles to saving.”

The full text of the legislation is available at www.appropriations.senate.gov/imo/media/doc/JRQ121922.PDF.