What the new SECURE 2.0 Act means for your retirement savings

Chances are you have been socking away money for retirement all these years — perhaps not as early or aggressively as you would have liked, but water under the bridge.

The odds are pretty high as well that you know a recent graduate who has yet to set up a 401(k) plan with their employer, perhaps because the starter-job pay is only enough to tread water when it comes to covering rent, student loans and, of course, nights out.

Under the new SECURE 2.0 Act, under the purview of the U.S. Department of Labor and the IRS, many of those career starters will be automatically enrolled in a 401(k) when they are hired. Zachary Keep, a compliance risk manager with Paychex which has offices in Rocky Hill, explains a few nuances of the new law and how it will shape retirement savings for those starting out — and those well down that road.

What big changes are in store with Secure 2.0?

SECURE 2.0 enriches the incentives for an employer to establish a retirement plan — substantially, and particularly for some of the smallest employers. SECURE 2.0 provides tax credits up to 100 percent of plan-startup costs, subject to some dollar limits, obviously. You could almost say that for some employers it’s going to be free to set up a plan — it comes down to the number of employees.

Particularly for employers in a state like Connecticut where there is a [retirement plan] mandate, they are going to look and say, “Well, I could do this IRA or I could offer a 401(k).” A 401(k) is arguably a more robust option for an employer.

There is also a tax credit for employer contributions. As we all know, for 401(k)s there’s typically an employer match — well, now employers can claim a tax credit on that match. It’s not permanent — it phases down over a period of years, but for that initial period starting up the plan, it makes it that much easier for employers.

An employer has the option to match student deferrals as if they were elective contributions to a 401(k). So, practically, what does that look like? If I’m just out of college and I’m struggling to pay down my student loans, I might choose not to contribute to my 401(k) — I might choose to focus on those loans. Well, Secure 2.0 is going to allow employers to say, “OK, you paid $100 on your student loan? We’re going to match that as if you had paid that $100 into the 401(k).” It is huge, and I think people are really going to take advantage of it, but there’s a lot of unanswered questions. We are really awaiting regulatory guidance.

Any changes for existing retirement plan account holders?

I think probably the big one is the change in RMD, or required minimum distributions. One of the long-standing features in retirement plans is once an employee hits a certain retirement age, they need to begin drawing the plan down. SECURE 2.0 increases that age [to 73]. This happens from time to time — to someone who has $500,000 in their account and is maybe looking at this as a way to possibly build some generational wealth, it might have an impact.

In the longer term, there is almost a little bit of a pendulum that I’ve noticed in my time in the industry, and the pendulum swings on the question of, “What is the 401(k)? What is it meant to do?” If we go back in time, it was initially conceived as a supplement to a pension, in a much different world. Now it’s the primary vehicle for many Americans to save for retirement — usually it’s the second-biggest asset you have after the home. … Who should be in charge of it? Should it all be on the participant, should it be more highly regulated? That’s the conversation that’s been had since the beginning, and I think it will continue.