While the SECURE 2.0 Act is making some key changes to the rules for retirement savings, one of its biggest is to employer-sponsored retirement plans. A new provision will require employers to automatically enroll eligible employees in new plans with a participation amount of at least 3%. Why was the change made? And is it a good money move? Let's break it down.
How Does SECURE 2.0 Act's Automatic Enrollment Work?
Starting in 2025, the SECURE 2.0 Act will require companies with new 401(k) plans to automatically enroll their employees into those plans at a minimum contribution rate of 3%, but no more than 10%. This rate will increase by 1 percentage point each year up to 15%. As an employee, you are not forced to enroll. You still have the option to opt-out of the plan completely or change your contribution rate.
This change applies to most companies, but there are some that are exempt from these new rules. This does not cover small companies with 10 or fewer employees, new companies in business for less than three years or church and government agencies. While small businesses are not required to enroll, there is an incentive for them to do so: They could receive a 100% tax credit of up to $5,000 for any administrative costs as well as up to a $1,000 per employee match for the employer’s contributions to any 401(k) plans.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What Are the Benefits?
The bottom line is that Americans simply aren’t saving enough for retirement. According to a Bankrate survey, 55% of Americans say they haven’t saved enough. Since 401(k)s are an essential part of retirement planning, doing all you can to ensure you’re getting the most out of them is important.
The SECURE 2.0 Act is designed to make it easier for anyone struggling to save and put more money away for their retirement. With automatic enrollment, this can also be a benefit for anyone who might procrastinate about enrolling in their employer’s retirement plan.
Not only will automatic enrollment help full-time employees, but the legislation also expands 401 (k) options significantly to include long-term part-time employees. Beginning in December 2024, part-time employees who work at least 500 hours per year in three consecutive years, are eligible to begin making elective deferrals to their employer’s 401(k) plan. Meaning, if part-time employees work at least 500 hours, but less than 1,000, in 2021, 2022 and 2023 they can begin their deferrals as early as Jan. 1, 2024.
What Are the Drawbacks?
While there are many positives about these new provisions, they could present problems for some people. Even with automatic enrollment, many still won’t be saving enough for retirement. Employees have to make sure they are saving more outside of their 401(k) plans.
If you are a low-income earner, automatic contributions might hurt you because you need that money to cover your monthly expenses. While planning for your future shouldn't take a back seat, don't compromise your present if you need that money to pay your bills and everyday expenses.
What Can You Do Now?
Many rely solely on their retirement accounts, whether it's a 401(k) or an IRA, as their primary source of income in retirement. But that might not be enough. The SECURE 2.0 Act aims to help more Americans reach their retirement goals by presenting more options to investors and allowing companies to help their employees improve their retirement plans.
While it has done a lot of good when it comes to options for employees, the question now is the extent investors will integrate these provisions into their own financial plans and how effective employers will be to help them make any necessary adjustments.
Many of the legislation’s provisions won’t be effective immediately, but now is the time to sit down with a financial adviser to determine how the new rules may impact your financial future.
-
US-China Trade Hopes Send Stocks to New Highs: Stock Market TodayApple and Microsoft are on track to join Nvidia in the $4 trillion market cap club.
-
A Lesson From the School of Rock About the MarketsIt's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
A Lesson From the School of Rock (and a Financial Adviser) as the Markets Go Around and Around
It's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
