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SECURE 2.0 Enhancements: What Employers Are Adopting for Retirement Plans

Recent findings suggest that saving for retirement might become more accessible as a growing number of employers begin to implement changes dictated by SECURE 2.0, a federal law designed to enhance retirement savings opportunities, which was enacted in 2022.

A survey conducted by Alight Solutions provides insight into how employers are altering their 401(k) plans in response to this legislation. Many organizations have already modified their policies, while others plan to do so in the near future.

The implemented changes include raising the balance threshold that allows former employees to remain in their 401(k) plans, simplifying the process for taking hardship withdrawals, and introducing an option for after-tax matching contributions.

Simplified Hardship Withdrawals

Historically, employees wishing to access their 401(k) funds prior to retirement had to prove they faced a significant financial hardship. Documenting this financial need often required various forms of proof, such as unpaid medical bills, which could complicate access to funds in urgent situations. Michael Espinosa, president of retirement services at TrueNorth Wealth, notes that the new self-certification option streamlines this process, allowing individuals to declare their need without extensive documentation.

The Alight survey highlighted that self-certification for hardship withdrawals is one of the most embraced rules under SECURE 2.0, with 42% of employers reporting its adoption. An additional 28% expressed they will likely implement it, with nearly 60% planning to do so by 2025.

Experts like Joe Petry, a certified financial planner, emphasize that while self-certification offers easier access to funds, individuals should carefully consider the implications of making early withdrawals. “There’s a reason you can’t take money out [of a 401(k)] before age 59 ½ without penalties,” Petry cautioned, reminding individuals to maintain financial prudence for their future.

After-Tax Matching Contributions

In terms of employer matching contributions, SECURE 2.0 introduces the concept of Roth matching. Traditionally, matching contributions were made on a pretax basis, deferring tax payments until retirement. This new option allows employees to agree to pay taxes on contributions upfront, leading to potential tax-free growth on earnings later.

Choosing between these options can depend on an individual’s current and anticipated future income. Those currently earning at a higher rate may benefit from the pretax matching to lower their tax burden now, while those expecting a higher income in retirement might prefer the Roth option to avoid higher taxes later. Nevertheless, only 13% of surveyed employers have adopted this Roth matching provision, with more than 40% of those considering it expressing a desire for greater legal clarity before proceeding.

Increased Balance Thresholds

The new SECURE 2.0 regulations also state that starting in 2024, employees will not be automatically forced to move their 401(k) balances if they leave a job and their account has more than $7,000. This change elevates the previous threshold of $5,000, which allowed employers to mandate that lower balances be rolled into an individual retirement account (IRA).

The Alight survey indicates that nearly 40% of employers have opted to implement the increased threshold, with more than a quarter confirming they plan to do so. This adjustment aids in reducing administrative challenges, but it’s essential for employees to keep track of their old 401(k) accounts to avoid losing track of potential retirement savings.

Overall, as provisions from SECURE 2.0 are increasingly adopted, workers may find that their ability to navigate retirement planning becomes significantly easier. Understanding these changes and how they affect one’s financial situation can create better long-term outcomes for retirement savings.

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