New SECURE 2.0 and state 401(k) programs that can boost participation rates
Younger workers are benefiting from auto enrollment by participating at higher rates than prior generations, while the Saver’s Match program allows low-income workers to receive a match of up to $2,000 into their 401(k)s.
There is almost $40 trillion in total retirement assets in the US. This is an enormous amount of capital and represents over $200k for every US worker on average. Unfortunately, the distribution is quite skewed with some workers able to build a tremendous amount of savings and others not having access through an employer or struggling to save a meaningful amount.
We have seen steady growth in the number of employer-sponsored plans over the last decade (see chart below). And with the passing of the Pension Protection Act in 2006, auto enrollment has become more of an industry standard, improving the inclusivity of the system—drawing in more younger workers, women, and people of color.
Newer entrants like my company Guideline are also making an impact. We recently published our 2023 year-in-review highlighting our progress. Today we serve almost 50,000 businesses and manage over $12 billion in retirement assets. Since we launched in 2016, we have helped more than 40,000 small and mid-sized businesses launch new 401(k) plans.
Unfortunately, the majority of US employers, predominantly small firms, still don’t offer retirement plans to their workers. This translates to tens of millions of workers lacking coverage. Many workers who are fortunate enough to have access to a workplace plan still don’t participate because they never opted in or they opted out during auto-enrollment.
With Social Security on a path where more tax revenue will be required or benefits will need to be cut, this leaves a lot of workers in a vulnerable position despite retirement being the largest annual tax giveaway.
The best framework I’ve seen for evaluating the U.S. retirement system looks at it in three dimensions, according to the Participation Rate of March, 2024:
- Access – How many workers have access to a retirement plan through their employer/?
- Participation – For those with access, what percentage are participating in their plan?
- Sufficiency – For those participating, are they contributing sufficiently to meet their goals?
1st dimension: Access
The tax credits for starting new plans from the SECURE Act (2019) and SECURE 2.0 (2022) coupled with the various state programs and associated mandates have increased pressure on small and mid-sized businesses to offer 401(k) plans or use the state auto-IRAs.
And from SECURE 2.0, the Starter 401(k) created a simpler product for employers that want to offer a retirement plan but can’t afford an employer match. So far, we are seeing about 15% of our new signups in Starter since we launched last October. Most or all of the Starter employer costs can be offset by the new plan tax credits from the SECURE Acts while also meeting the various state mandates.
While the new plan tax credits are valuable, in our opinion, it would be even more impactful if they could be available at the point of sale like the new EV tax credits from the Inflation Reduction Act. This way they could be taken off the upfront costs for the small business with the provider redeeming them with the IRS. This would enable small business owners to access the tax credits immediately and avoid having to file for them when they do their taxes.
There is also some potential for a Federal minimum coverage standard to create even broader expectations for employers to offer a retirement plan. While the idea of a Federal standard may seem controversial, small businesses and providers having to navigate a patchwork in the near future of 30+ different state mandates is crazy. There is a proposal circulating that would require businesses with 10 or more employees to establish an auto-IRA (with a state or a private company provider) or a 401(k) plan for their employees. To ease the burden, it may be coupled with some additional tax credits.
2nd dimension: Participation
Fortunately, we are seeing mounting evidence that younger workers are benefiting from auto enrollment by participating (and saving) at higher rates than prior generations. At Guideline, all of our plans feature automatic enrollment, and as result we see average participation rates around 83%, according to the Participation Rate of March, 2024. Although auto enrollment has been becoming much more common, it is still lagging for smaller businesses outside of our platform.
From the SECURE Act, there are dedicated tax credits for new plans with auto-enrollment. And from SECURE 2.0, beginning in 2025 all new plans started in 2023 or later will be required to feature auto-enrollment with some minor exceptions, in effort to accelerate participation and create earlier savings behaviors.
This will be a big step forward toward a more inclusive retirement system. It will also create the downstream opportunity to phase in an auto enrollment requirement for businesses that started their 401(k) plans before 2023 along with the potential to backsweep employees annually that had not previously enrolled.
3rd dimension: Sufficiency
One increasingly common approach to boosting savings rates is auto-escalation which makes small automatic increases to employee contribution rates. Like auto-enrollment, auto-escalation is featured in the state auto-IRA programs like California’s (typically 1% increase annually) and from SECURE 2.0 will also be required in 401(k) plans starting in 2025 (for all new plans created in 2023 or later). So not only will employees start saving automatically, but the amount they save will increase over time, helping to grow their assets with minimal management.
Related: Saver’s Match: New employer 401(k) option that expands access for low-income workers
On the employer contribution side, SECURE 2.0 also provides an additional tax credit for employer matching, up to $1,000 per employee dependent on plan size. And then from the federal government side, the Saver’s Credit will become a Saver’s Match starting in 2027. This will do away with the tax credit and replace it with a retirement plan contribution from the US government. Workers who contribute to 401(k) or IRA can receive a match of 50% up to $2,000 to be deposited into their retirement account. This program is intended for lower income workers and has requirements attached to it.
There is also a policy workstream on keeping workers retirement savings properly invested. There is a draft bipartisan bill in Congress to enable Roth IRA to Roth 401(k) rollovers. With the state auto-IRA programs creating 800k Roth IRA accounts with $1 billion in assets and Robinhood opening 500,000 IRAs for almost $2 billion with a focus on gig workers we are seeing accelerated Roth IRA creation and lots of small accounts. As a system, we need to help workers keep their retirement savings together and combine like accounts, including Roth accounts, so savers that might start with a Roth IRA could roll that into a Roth 401(k) when their employer establishes a 401(k) or they join a new employer that already offers one. Account consolidation may increase participant awareness, improve asset allocation over time, reduce fees, and increase overall savings.
For investors who are already saving effectively, SECURE 2.0 included a provision that allows investors fortunate enough to have excess educational savings in their 529s to roll that into their Roth IRA starting in 2025. The 529 would have to be open for at least 15 years and there is a one-time $35,000 conversion limit, but this could be increased over time. This helps investors plan for a specific goal, higher education, and when they meet that goal either with sufficient savings or earning a college scholarship, they can easily flow that over to their next goal which is longer term retirement savings.
Jeff Rosenberger, COO of Guideline, has 15+ years in financial services and tech.