America has a retirement crisis. Here's how Congress wants to fix it.
Americans could be in store for a major retirement overhaul with the Securing a Strong Retirement Act of 2022, otherwise known as the Secure 2.0 bill. The proposal, which on March 29 passed the House with broad bipartisan support, comes as almost half of older workers have no retirement savings.
To be sure, Secure 2.0 has yet to pass the Senate, but the plan so far has garnered support from both Democrats and Republicans as well as retirement experts and advocacy groups like the American Society of Pension Professionals & Actuaries.
The bill has the potential to solve some of retirement problems facing American workers — including their lack of retirement readiness. And workers are clearly worried about their ability to financially handle retirement, with a new Allianz Life study finding that more than 6 in 10 non-retirees fear running out of money more than death.
"This bill is built for both people who are preparing for retirement and people in retirement," said Kelly LaVigne, vice president of consumer insights at Allianz Life. "It's not like Washington is singing kumbaya, but there is a lot of support for revising retirement savings."
Here are 5 of the the most significant ways the bill would impact retirement savings, according to experts.
Automatic enrollment in retirement plans
One of the pitfalls of the current retirement system is that workers often don't participate in employer-sponsored retirement programs, even if they have access to them. The bill seeks to address this issue by making automatic enrollment mandatory for businesses with more than 11 employees.
Under the proposal, workers would initially automatically contribute at least 3% of their wages into their employer retirement plans. Each year after that, the contribution amount would increase by 1 percentage point, capping at 10%. Employees could opt out of contributions, and current retirement plans are grandfathered in, according to a House Ways and Means Committee summary of the bill.
Currently, about 6 in 10 employers offer automatic enrollment, and it's proved to be a powerful tool for getting people to save. More than 90% of new hires participate in retirement plans in companies where enrollment is automatic, compared with 28% at firms where contributions are voluntary, Vanguard found in a 2021 study.
"Automatic enrollment is important," LaVigne noted. "It can get you used to saving. You never missed the money because you never spent it."
Allowing pre-retirees to sock away more money
"Pre-retirees," or older workers who are just a few years away from retirement, could super-charge their retirement savings under Secure 2.0.
The bill would allow people who are 62, 63 and 64 to increase their catch-up contributions to $10,000 a year, compared with $6,500 now. That could be an acknowledgment that many workers in their 50s are financially strapped by other financial obligations, LaVigne said.
"When you are 50, you may still be putting kids into college, and that takes away our ability to invest into future retirement," he noted.
Delay mandatory withdrawals until age 75
One of the biggest changes would be to the law regarding required minimum distributions, or RMDs, which is the amount of money that retirees are mandated to withdraw each year.
The Secure 2.0 bill would delay RMDs to when retirees turn 75, instead of the law's current age of 72. This could give retirees more flexibility in deciding when they want to draw down their retirement assets, experts say.
Granted, this is likely more of an issue for wealthier retirees who have significant assets set aside in IRAs, 401(k)s or other plans. But it still could give retirees of all types more control over when they withdraw their assets.
Employers could match student loan repayments
This one is a bit trickier, but could help workers who are struggling to save for retirement due to their student loan repayments.
Under the plan, employers could treat their workers' student loan repayments as elective deferrals to their retirement accounts. That's important because employers could then provide a matching contribution to their 401(k).
The new provision "is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions for retirement plans," noted the House Ways and Means Committee.
Employers could contribute to Roth IRAs
The Roth IRA was designed to help middle-class workers save for retirement by allowing them to save after-tax money, in contrast to 401(k)s and traditional IRAs that rely on pre-tax contributions. The benefit of a Roth IRA is that retirees can then withdraw the money tax-free, given that they paid tax on the money years earlier.
One major change would be to allow employers to put matching contributions into an employee's Roth IRA. Younger workers can sock away after-tax money into a Roth while their tax bracket is lower, giving them an edge by the time they reach retirement and may be in a higher tax bracket. But many older workers can enjoy the tax benefits too, especially if they expect to switch tax brackets or filing status.
"That is a huge benefit to just about anybody," LaVigne noted.