Never too young? Lawmakers back new 401(k) plan bill for teen retirement savers

Save early and often is the advice often given to those seeking to save for retirement, and yet America’s youngest workers are frequently excluded from participating in workplace retirement plans that would help them follow that advice. Legislation introduced in the Senate this week could change that, however, allowing young workers to benefit from up to three years of additional retirement savings contributions and maximize the power of compounding.

On Wednesday, Sens. Bill Cassidy (R-LA) and Tim Kaine (D-VA) introduced the Helping Young Americans Save for Retirement Act aimed at removing barriers that discourage companies from offering employer-sponsored retirement plans to Americans under the age of 21. Although companies may allow employees under age 21 to participate in a 401(k) plan, they are not obligated to do so under the Employee Retirement Income Security Act of 1974, and many employers choose not to extend 401(k) eligibility to younger workers.

The bill would lower the participation age of ERISA-covered defined contribution plans to 18 years old and remove provisions that make it expensive to include younger workers in DC plans. Specifically, the bill delays ERISA provisions that require businesses to undergo mandatory audits if they allow employees younger than 21 to start contributing to their plan and exempts 18 to 20-year-old employees from testing related to retirement funds that would increase the cost of administering retirement plans for these employees. Covered plans would still be able to set a minimum age threshold up to 18 years old.

“Americans who decide to enter the workforce instead of going to college should have every opportunity available to save for retirement,” said Dr. Cassidy. “The legislation increases those opportunities and empowers working Americans to plan for a secure retirement.”

Sen. Kaine added, “Young people who are starting out in their careers should be able to access employer-sponsored retirement plans like everyone else.”

According to the Plan Sponsor Council of America, about 40% of 401(k) plans have a minimum age requirement of 21. When the organization asked employers whether they would support mandatory plan eligibility at age 18, a large number of respondents were in favor of helping employees save as early as possible. Some employers, however, were worried about younger employers changing jobs more frequently, which could increase administrative costs or unfavorably skew average deferral percentage/actual contribution percentage (ADP/ACP) testing.

Related: More than 1 in 5 Americans don’t actually know what a 401(k) is

“This bill takes a very important step forward in recognizing that beginning retirement savings at an early age can make a significant difference,” the American Benefits Council said in a statement supporting the legislation. “First, saving early means that the money has more years to grow before retirement, so that even a small amount set aside at age 18 can grow into a very important part of a retirement nest egg. Second, helping younger employees get into the habit of saving can help establish a culture of saving that will serve those employees well throughout their lifetimes.”

The amendments would apply to plan years beginning in 2026.