Secure 2.0 heads to Biden. Here's what it means for retirees

December 27, 2022 9:28 AM

As Congress finally pushed through its $1.7 trillion spending bill at the last minute, it also concluded another saga: the months-long quest to pass Secure 2.0.

The sweeping retirement legislation, pieced together from several different Senate and House bills, had been percolating in Congress for the better part of a year. The package is full of popular reforms, supported by the industry and backed by a rare bipartisan consensus — but for months, it never got a vote.

On Friday, that long wait came to an end without drama or fanfare. Instead of giving Secure 2.0 its own vote, lawmakers folded it into the omnibus bill, which had to pass in order to avoid a government shutdown. Meanwhile, most of Washington's attention was on the upcoming holidays, an ominous snowstorm and a speech to Congress by Ukrainian President Volodymyr Zelensky.

But even if it was denied the spotlight, the new law is significant. Like its predecessor, the Secure Act of 2019, Secure 2.0 is a patchwork of small fixes that many say will make saving for retirement easier. Among other measures, it bolsters auto-enrollment in 401(k)s, raises the limits for catch-up contributions and offers help paying off student loans and emergency expenses. It won't solve every problem, but many experts say it's a substantial step in the right direction.

"This is a good bill for the American people, and it's a good bill for the retirement services industry," says Paul Richman, chief government and political affairs officer at the Insured Retirement Institute. "I think it's a win-win all around. It'll mean more retirement savings to help bring us closer to addressing the looming retirement crisis that we know is out there."

Here are five of the many ways Secure 2.0 will change retirement in America:

Auto-enrollment

Many U.S. employers offer 401(k)s or other retirement plans, but not all employees take advantage of them. In 2021, only 75% of private industry workers with access to an employee-provided plan actually participated in it, according to the Bureau of Labor Statistics. Automatic enrollment offers a solution: Instead of hoping workers sign up, employers can make plan participation the default, unless employees opt out.

While the approach is already legal in the U.S., Secure 2.0 goes a step further by making it not only allowed, but required. Starting in 2025, employers that provide newly created 401(k) and 403(b) plans will have to auto-enroll their workers in them, with an initial contribution rate between 3% and 10%. There are many exceptions, including all currently existing plans, as well as plans provided by churches and some small businesses. But experts say the policy sends a powerful message.

"It really is the best and most effective way to get people starting to save and saving enough," says Dave Stinnett, head of strategic retirement consulting at Vanguard. "So I think it's a good signal, even to existing 401(k) plan sponsors, that if they haven't adopted automatic enrollment, they really should."

Catch-up contributions

The new law also makes it easier for workers who have fallen behind on their retirement savings to catch up later in life. Under current law, employees 50 and older are allowed to add large sums, called "catch-up" contributions, to their retirement plans that go beyond the usual limits. In 2021, the cap for such contributions was $6,500. In 2025, under Secure 2.0, it will be raised to $10,000 for savers aged 60 to 63.

The Insured Retirement Institute estimates that this will allow an additional $9 billion in savings for older workers over the next 10 years.

"It will allow greater savings for those who may still be behind but are quickly approaching retirement," Richman says.

Required minimum distributions

In general, the American retirement system usually encourages leaving the workforce as late as possible. One rare exception is required minimum distributions (RMDs), which force savers to begin withdrawing money from their retirement plans at a certain age.

Under current law, that age is 72. Secure 2.0 would raise it to 73 in 2023 and then to 75 in 2033. For those who can either keep working into their 70s or rely on other resources for their retirement, this could lead to substantial savings.

"I suspect many financial advisers would view that as a very positive thing," Stinnett says. "If you don't need to tap into your retirement account, if you're fortunate enough not to have to tap into it, you can wait even longer to do it."

Student loans

Student debt can be a major barrier to retirement savings. According to the Center for Retirement Research, college graduates with loans save only half as much by age 30 as those without them.

For some of those indebted workers, Secure 2.0 offers a way out. Beginning in 2024, employers will be allowed to make a special kind of matching contribution: Whatever amount the worker is spending on their loans, the employer will match a percentage of that amount for their retirement plan. The law applies to 401(k), 403(b), SIMPLE IRA and 457(b) plans, and experts hope it will put workers on track to both pay off their loans and save for their golden years.

"You can pay your student loans while your employer helps you begin to save for retirement," Richman says. "The hope is that when you've finished paying off your student loan, you would then take the money you were paying for your loan and put it into your retirement account, but you'll already have a nest egg built up with just the employer match alone."

Emergency savings

Even apart from retirement, many Americans don't have enough savings to cover emergencies. According to one study by the Federal Reserve, 32% of U.S. adults would struggle to pay for a surprise $400 expense.

Secure 2.0 attempts to help solve this problem by creating emergency savings accounts. In addition to retirement plans, employers will have the option to auto-enroll their "non-highly compensated employees" in these new accounts, which would absorb up to 3% of their salaries. Once an employee reaches the maximum contribution — which can be set anywhere up to $2,500 — any additional amount would overflow into his or her retirement account.

"That's something that financial advisers would want to make sure they educate their clients on," Stinnett says. "It's a good educational prompt for financial advisers to talk to their clients about the need to have emergency savings in addition to their long-term retirement savings."

Of course, higher-income workers are less likely to need help saving for emergencies. But Richman sees this as an example of the many different groups Secure 2.0 is likely to serve.

"There's benefits all over the board," he says. "For people of all levels of income, all types of workers, older, younger — they all benefit from this bill."