By Bruce Corcoran, AIF
Before Congress wrapped up last year, it passed the SECURE 2.0 Act, which will have sweeping impacts that ensure more people have a healthy retirement nest egg. The specific protocols outlined in the bill are complex (there are 92 provisions overall), but the big takeaway is that it will increase the number of employees who are eligible for employer-sponsored plans and bring more flexibility in the plans companies offer.
One of the biggest barriers to retirement savings is getting started. Whether because of preference or necessity, many people need to focus on immediate expenses and may not prioritize setting aside savings for decades into the future. However, ample research shows that automatic enrollment dramatically boosts retirement plan participation rates for employees. And the reasoning makes sense: it begins the process of retirement savings with no effort required.
Very few people opt out of automatic retirement savings, especially once they see their savings grow. How auto enrollment affects individual plans is a nuanced topic and depends on multiple factors, but the results are generally positive.
The Auto-Enrollment Process
Your employer will initiate the process, but it’s where you end up that matters. As a starting point, understand how much you’ll realistically need to save for retirement and the required savings rate to meet that milestone.
With this bill in place, new employees will be automatically enrolled in a savings plan when they start an eligible job. The next step is to evaluate how that auto-enrollment matches up with your savings goals. For example, you can change the deferral (how much you’re saving as a percentage of your salary or as a dollar amount) and/or the investments. You can even opt out, if you wish (although studies show that in most situations, it’s beneficial to be enrolled in a retirement savings plan).
When you are first enrolled, take a look at your investment portfolio and amounts to understand how this will contribute to your savings goals. You can make any changes through your retirement plan provider (these are companies like TIAA, Vanguard, or Empower).
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Automatic Escalation of Contributions
There’s another automatic feature designed to help you save, and that goes hand-in-hand with auto-enrollment. The SECURE 2.0 Act includes an auto-escalate provision to ensure workers don’t stay at the initial deferral/savings rate—which, for many savers, will end up being too low if it never increases. Auto-escalate means your savings rate will automatically increase each year up to a set maximum (e.g., 10%). For example, it may increase by one percentage point per year from an initial rate of 4% in year one to 5% in year two and so on until it levels off at 10% (unless or until you change jobs or change your savings rate).
What’s the Right Investment?
Auto-enrollment puts you in what is deemed an appropriate initial investment (such as a fund based on your expected retirement date, according to your age) and at a reasonable initial savings rate (usually a relatively low level to ease you into the habit). Deferral and investment decisions will vary depending on your personal approach towards savings, but it’s important to understand what your employer is offering and how that aligns with your own goals. Don’t think of these initial decisions as permanent or perfect. You’ll want to review both the investments and savings rates after the first year, if not sooner. You are able to adjust your deferral rates at any time through your plan provider.
The optimal savings portfolio is going to vary. Every situation is unique, and each person is facing different circumstances that will impact how to approach retirement savings. But, don’t feel you have to do this alone—find out what resources are available. I recommend that you ask your employer about what they may offer, such as free certified financial planning or retirement education professionals who can help you better understand and explore your options.
The SECURE 2.0 Act also adds flexibility and incentives to improve savings. It allows new features to be tied to additional benefits, such as increased contribution limits, additional tax benefits, and other types of support provided to employees in the workplace. If you are someone with student loans, for example, starting in 2024, employers will be able to match loan repayments with a contribution to a retirement account.
With the SECURE 2.0 Act, Congress is cementing employer-sponsored retirement plans as the new must-have benefit. As employees remain in a role or transition to a new company, they should consider retirement savings incentives as part of a broader benefits package. In addition to salary, bonuses, and healthcare coverage, employees should better understand what incentives their company is offering around retirement savings, such as a match.
The provisions in this bill build on years of experience and research which shows that auto-enrollment and auto-escalation can have massive, positive benefits for employees in getting started with retirement savings. For those who have new savings plans thanks to the SECURE 2.0 Act, welcome. For those with additional questions, I encourage you to start with your company’s benefits teams as they can walk you through the defaults and options available to you.
About the author: Bruce Corcoran
Bruce Corcoran, AIF®, CFS®, is the head of Life and Retirement at Coherent, a global SaaS software company redefining how business and IT teams build software on Excel. He has over 20 years of industry experience, including working for TIAA and Horace Mann.