Inside the $1.7 trillion government spending bill, which has passed Congress and is heading to President Biden’s desk for his signature, is a set of important reforms to the private pension system.
The upcoming changes will prompt companies to enroll more of their employees in savings plans and also give existing retirees a break. The bill also contains provisions that help people burdened with student loans, military spouses, and part-time workers who are eager to save for retirement.
Many of the changes — totaling $53 billion — start next year with proponents hoping they will help avert what many call a burgeoning retirement savings crisis in the United States, especially among poorer Americans who are often left out of the system altogether.
“This is historic,” Rep. Richard Neal (D-C) said Thursday, adding that the new rules will help Americans have “great independence in the future.”
Neal was one of many lawmakers behind the bill along with figures like Rep. Kevin Brady (R-Texas), Sen. Ron Wyden (D-Oregon), Sen. Mike Crapo (R-AZ) and others. The bill was finalized over two years of debate across multiple congressional committees in what all parties hail as a bipartisan model.
“As the economy deals with the effects of the worst inflation in nearly 40 years, working families need all the help they can get when it comes to saving for the next chapter of their lives, and we are now one step closer to achieving that,” added Sen Rob Portman. (R-OH) this week.
Here are some of the key provisions of the bill.
Breaks for existing savers
The bill is a follow-up to the SECURE Act of 2019, which marks the first major retirement legislation since 2006.
One closely watched provision would change the age at which people must begin taking mandatory distributions from their retirement plans. The SECURE Act increased so-called RMDs from the age of 70 to its current level of 72. Now, the requirement will rise again to 73 starting January 1, 2023 and then to 75 in 2033.
The new rules reflect the fact that Americans are living longer and increasing lifespan allows them to keep their money tax-free for longer and continue to earn returns.
Some want Congress to go further in the coming years. “My goal is to get rid of it completely,” Rep. Brady said in 2020, during a simultaneous event on Yahoo Finance.
The bill also increases the so-called “catch-up” contributions allowed to older savers who are behind in savings and want to save extra money in their later working years. These provisions will begin in 2024.
Provisions to get more people to save
Another huge swath of the bill includes a variety of attempts to get companies to enroll more people in retirement plans.
The main condition, according to many lawmakers, is the new rule on auto-enrolment.
This is the first section of the bill and would require companies to automatically enroll new employees into an employer-sponsored retirement plan (if one is introduced) as part of the onboarding process. The rule will take effect in 2025 and will apply to companies that offer a 401(k) or 403(b) plan.
New employees can opt out, but the default will be the savings. Studies have shown that employers with self-enrollment retirement plans have much higher participation rates.
“We’ve decided to start with automatic enrollment and make it difficult to opt out,” Rep. Neal said. “I think automatic enrollment is a huge problem for eligible participants.”
There are also a handful of sections in the bill that focus on small businesses, which have difficulty offering retirement plans because of their size. These employers will have access to startup tax credits and new inducements to pool their resources in multi-employer plans in the coming years.
The bill also aims to help part-time employees at companies of all sizes. These employees often have to wait three years before they can enroll in a retirement plan. The new rules reduce the wait to two years, starting in 2025.
Finally, Chris Littlefield, Principal’s president of Retirement and Income Solutions, estimates that “Secure 2.0 will help generate nearly $40 billion in retirement savings for new entrants over the next 10 years.”
Fresh ideas about student loans and emergency savings
The bill also states that student loans should be treated as deferrals for the purpose of retirement savings. What that means in practical terms is that student loans and retirement savings will now be effectively linked if the employer chooses to offer the benefit.
Starting in 2024, the employee can pay off their student loan, but in the process earn a “match” from their employer with that money going into a 401(k), 403(b), or SIMPLE IRA account.
There’s also a similar idea in the bill about tying retirement and emergency savings. Employers can offer their employees the option to put money into an emergency fund along with their retirement account. Employees will be able to put up to $2,500 in an emergency fund — which they can tap into at any time — with additional savings and potential matches on the road to retirement.
Another part of the bill would make it easier for people to access existing emergency retirement plans without paying onerous tax penalties that often come with early withdrawal. The bill provides for “an exception for certain distributions used for emergency expenses,” according to the summary of the legislation.
“I’ve heard from many people who have had to cut into savings meant for the future, not to mention countless others who have never had access to an employer-sponsored retirement plan,” said Sen. Patty Murray (D-WA), co-chair of the committee. Senate Aid, he said this week: “That’s why these reforms are so important.”
As for the big picture, “there are some people who are left on the sidelines in the retirement savings game,” Kathleen Coulomby, vice president of the American Council of Life Insurance Companies, recently told Yahoo Finance Live. It represents one of the many outside groups that have helped push the bill to the finish line.
“It really strives to help so many of these vulnerable populations,” she said.
Other notable parts of the soon-to-be law
Other changes coming soon include updates to the SAVERS balance to make it more generous and raise awareness of the benefit. The credit allows some low-income workers to get additional tax breaks when saving for retirement.
Another provision aims to make it easier for military spouses who sometimes don’t work long enough to be eligible for savings to quickly join a workplace savings plan when they enter or re-enter the workforce. The ruling also provides a tax credit of up to $500 to help these couples spur their savings.
Another top-level provision would create a national “lost and found” database of retirement accounts operated by the Department of Labor. Sen. Elizabeth Warren (D-Massachusetts) pushed the requirement along with Sen. Steve Daines (R-Montana), and this week said the provision “will make it easier for Americans to keep track of their retirement savings and for employers to connect their former employees with accounts that They left it behind.”
What the bill won’t address is the challenge of Social Security, which could run low on the funds as early as 2034. But lawmakers have long been wary of any changes to Social Security itself, which is often referred to as the “third barrier.” of American politics.”
Ben Werschkull is Yahoo Finance’s Washington correspondent.
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