Secure Act 2.0 Could Change How You Save For Retirement
The pros and cons of Secure Act 2.0 – Forbes Advisor

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Anyone who says Washington, DC can’t agree on politics is obviously not paying much attention to retirement legislation.

On March 29, the House of Representatives passed a pension reform package called Secure Act 2.0 by a vote of 414 to 5 – it is now heading to the Senate. The bill follows in the footsteps of the Secure Act of 2019, which also enjoyed bipartisan support and was signed into law by former President Donald Trump.

The new package builds on its predecessor in an effort to further improve the US retirement system. Companies creating new retirement plans would be required to automatically enroll employees, student borrowers could get a little help, and older Americans would have the opportunity to save more in catch-up contributions. There are dozens of other positive boosts in the bill that will benefit the retirement plans of all Americans.

However, Secure Act 2.0 does not accomplish what it did not set out to accomplish: a systemic change in the rules that would improve overall retirement security. That said, its rapid and popular adoption gives hope that bolder pension reforms are now possible.

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What Secure Act 2.0 would accomplish

Secure Act 2.0 attempts to achieve three goals: getting people to save more, improving retirement rules and reducing the costs for employers to set up retirement plans.

Perhaps one of the most popular provisions of the bill is to allow employers to offer matching pension contributions to employees repaying student loans. Under the proposed rule, employees can earn employer matching contributions by making eligible student loan payments instead of making their own contributions to the company’s retirement plan.

Many Americans, especially young workers, cannot afford to save because they have to pay off their student loans every month. The average monthly student loan payment is around $400— and while the Biden administration will likely extend its student loan payment freeze through the end of August, that could be the end of pandemic pauses.

The move could help the 26% of people who aren’t saving for retirement but want to, according to a TIAA-MIT AgeLab Study 2019. Now these borrowers can service their loans and earn the matching contribution – typically 3% – that their employer contributes to their plans.

“Young Americans would no longer have to choose between saving for retirement and paying off their loans,” said Kelly LaVigne, vice president of consumer insights at Allianz Life. “They can do both and start building the future in a number of ways.”

The bill also loosens some restrictions on older Americans. For example, it is increasing limits on 401(k) catch-up contributions for people ages 62 to 64 to $10,000 from the current $6,500, and those savings are considered Roth contributions. This means that savers would pay taxes now, but benefit from tax-free capital gains later.

There are many other provisions in the bill, including a searchable national lost-and-found registry at the Labor Department that Americans can use to find missing retirement dollars. This might come in handy if you’re one of the millions of Americans who changed jobs but forgot to bring your 401(k). One estimate is that there are 24 million abandoned 401(k)s with $1.35 trillion in assets. Another provision would increase the age at which retirees must begin required minimum distributions (RMDs).

What Secure Act 2.0 would not do

There is no doubt that the measures set out in Secure Act 2.0 would improve the US retirement system. But that barely touches on two of the biggest flaws in the current system: fixing Social Security and requiring employers to automatically enroll all workers in a retirement savings plan.

Despite countless arguments to the contrary, Social Security is not bankrupt. Social Security trust funds are expected to run out of money in just over a decade. If this happened, the result would be an immediate reduction in benefits of approximately 25%. Congress needs to pass reforms that raise payroll taxes or cut benefits, or do a little of both.

Meanwhile, only half of U.S. households are currently enrolled in a retirement plan of any kind, according to the Federal Reserve. It’s about the same pace as in 1998.

Over the past two decades, more and more companies have begun to automatically enroll their employees in defined contribution pension plans, even as defined benefit plans, aka retirement plans, have disappeared. For example, 62% of employers automatically signed up in 2020, according to the Plan Sponsor Council of America, up from 46% the previous decade.

Here is the problem with Secure Act 2.0. The bill will not require existing pension plans to automatically enroll employees, and companies with fewer than 10 employees are exempt from the rules. Don’t count on the new auto-enrollment provisions to change the status quo anytime soon.

The best thing about the Secure Act 2.0

Like its namesake, Secure Act 2.0 tinkers with the retirement system, but does not guarantee Social Security, the most important source of retirement income for most Americans.

But the best thing about the bill is that it shows that almost all of Congress, whose members can’t agree on much, believes that Americans need more help when it comes to retirement.

“Getting older is not a partisan issue,” says Catherine Collinson, executive director of the Transamerica Center for Retirement Studies.

While Congress is now focused on marginal improvements, the popularity of the effort shows it’s focused on the details and eager to make progress. This bodes well for the hard work ahead as real social security reform is tackled.

This should give all Americans hope that Congress has worked hard to build the muscle memory to meet this pressing challenge.

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