New changes to SECURE 2.0: strategic 401(k) strategies for 2024 and beyond 

Financial wellness is firmly established as a key benefit that employees value. With the fourth quarter and open enrollment period fast approaching, employers must shift their focus toward elevating their workforce’s financial literacy to help them maximize the benefit, especially when it comes to 401(k)s.

Recently, several federal acts and updates have simplified long-term savings initiatives and retirement programs for Americans. These changes aim to make 401(k) plans more accessible, flexible and effective in helping Americans save for retirement. That said, employers have an important role to play in helping their employees maximize the benefit of financial wellness, which impacts individual employee performance and the business’s bottom line. 

Employers and plan sponsors should set their sights on transforming their 401(k) benefits offerings from a burdensome requirement for HR to oversee into a key workplace differentiator that attracts and retains top talent. Like long-term investments, success doesn’t happen overnight, but an immediate shift in perspective to providing more education, transparency, and accountability on plan offerings, from the top down, will set this transformation in motion. 

As the final quarter of 2024 approaches, employers who utilize the mid-year period to strategically rethink and maximize their benefits offerings will reap the most rewards for themselves and their employees, ensuring long-term growth, cost savings, and stability while avoiding a chaotic planning crunch during the end of the year. 

The freshly updated SECURE 2.0 Act elevates employer and employee savings

The Federal Government introduced the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019. Three years later, the Department of Labor enacted the SECURE 2.0 Act, building off of the original act and giving millions of Americans an invaluable opportunity and resource to secure a more prosperous financial future. SECURE 2.0 was further bolstered in 2024 with updates designed to increase access to retirement plans, enhance savings, and simplify plan management for employers and employees alike. By taking full advantage of these changes through active participation, individuals can significantly grow their retirement assets while businesses can capitalize on numerous direct and adjacent benefits as well. 

New changes to SECURE 2.0 + employer action items

This transformation in education, accountability, and transparency requires sponsors and advisors to have a thorough understanding of the diverse perspectives and demographics that make up most businesses. With this in mind, employers should consider the following 2024 updates to SECURE 2.0. The benefits to the company and their individual employees will serve as a clear differentiator within an increasingly competitive and uncertain economy. 

1. Higher catch-up contribution limits

From 2025, individuals aged 60-63 can make catch-up contributions to 401(k) plans up to $10,000 or 50% more than the regular catch-up amount for that year (indexed for inflation). This significantly increases the catch-up limits for older workers to boost their retirement savings in the final years before retirement. Employers and any plan advisors they choose to leverage should be sure to have one-on-one meetings with each employee and clearly explain how this catch-up contribution adjustment affects or could affect them. 

2. Roth 401(k) rule changes

Effective 2024, the requirement to take required minimum distributions (RMDs) from Roth 401(k) accounts at a certain age is eliminated, aligning the rules with Roth IRAs. Participants can let their Roth 401(k) funds continue growing tax-free indefinitely and should evaluate the potential benefits relative to their personal situation with a fiduciary plan advisor. 

3. Matching contributions for student loan payments

Employers can now amend their 401(k) plans to treat qualified student loan payments as elective deferrals for the purpose of receiving an employer-matching contribution, allowing employees to receive matching contributions without reducing their take-home pay. As Gen Z continues to become a more prominent part of the workforce, offering matching contributions for student loan repayments can be another key differentiator. 

4. Automatic enrollment for new plans

New 401(k) plans established after the effective date must automatically enroll participants upon eligibility, with an initial deferral rate of at least 3% but not more than 10%, increasing annually by 1% until reaching 10% to 15%. This change can help younger employees and employees struggling to understand offerings/administrative processes get started saving for their retirement.

5. Emergency savings accounts and withdrawals

Employers can offer emergency savings accounts linked to workplace retirement plans, allowing employees to contribute up to $2,500 in after-tax dollars for emergency expenses. Additionally, participants can take one penalty-free withdrawal of up to $1,000 per year from their 401(k) for emergencies without the 10% early withdrawal penalty.

6. Automatic portability of small balances

The law facilitates the automatic transfer of small 401(k) balances (under $7,000) when an employee changes jobs, reducing the risk of lost accounts. Similarly to automatic enrollment programs, automatic portability can help new plan enrollees get up to speed with their plan details without losing their initial savings due to external, administrative, or financial literacy factors. 

SECURE 2.0 also offers numerous tax benefits for employers and their employees to leverage, including tax credits for plan administration costs. The act increases tax credits for small businesses that establish new retirement plans, which aims to encourage more employers to offer retirement benefits to their employees. Lastly, SECURE 2.0 allows sponsors to offer more flexible plan features that appeal to multiple employee demographics, such as student loan repayment benefits and emergency savings accounts. 

Turning financial leakage into benefits

401(k) outcomes are better if companies are not overpaying for them. Businesses of all sizes are burdened by 401(k) administration fees. As a result of these increased costs, employees’ retirement savings are diminished while often reducing corporate profitability since many companies cover these costs. This trend is particularly harmful for small and medium-sized businesses as research shows that smaller plans often pay significantly higher fees compared to larger plans, with discrepancies ranging from 1.5% to over 2% for smaller plans and less than 1% for larger ones.

401(k)-related fees can generally be broken down into main categories:

1. Investment fees: Includes expense ratios, sales loads, and other investment-related costs, typically make up the largest portion of 401(k) fees and are charged as a percentage of assets invested in each fund.
2. Plan administration fees: Cover the costs of recordkeeping, accounting, legal services, and other administrative tasks associated with managing the 401(k) plan. They may be charged as a flat fee or a percentage of assets.
3. Individual service fees: Charged for optional services, such as taking out a loan or rolling over assets to an IRA.

Employers and plan sponsors can utilize several strategies to address overpayments. These include regularly benchmarking fees against industry standards, leveraging plan size for better negotiation, optimizing the investment menu by choosing lower-cost funds, enhancing fee transparency for participants, and seeking professional guidance from independent fiduciaries. By adopting these practices, businesses can reduce 401(k) administrative overpayments, boost employee retirement savings, and improve their bottom line.

As employers navigate the complexities of financial wellness in today’s uncertain economic landscape, the opportunity to transform 401(k) benefits from a standard offering into a powerful tool for attracting and retaining top talent has never been more critical. By understanding and utilizing the recent updates to SECURE 2.0, businesses can not only improve their bottom line but also empower their employees to achieve long-term financial security, setting the stage for a more prosperous and stable future for all.

About the Authors

Steven Abernathy is the Principal and Chairman of the Board at The Abernathy Group II Family Office.  Matt Daley is the President of Abernathy Daley 401k Consultants.