New Benefits for Retirement Savings and Financial Priorities

The Secure 2.0 Act, passed at the end of 2022, has introduced new benefits to assist workers in managing their retirement savings and other financial priorities. However, there has been a slow uptake by employers in implementing these benefits into their 401(k) plans.

The law encompasses various provisions that will impact retirement plans in the coming years. Two key provisions aim to reduce barriers to saving. Firstly, employers now have the option to consider an employee's student loan payment as eligible for the company 401(k) match. Secondly, emergency savings accounts are now allowed within retirement plans. Both of these options are voluntary for employers and are set to commence in 2024.

Unfortunately, the majority of workers will not immediately enjoy the benefits of these provisions.

According to Craig Copeland, Director of Wealth Benefits Research at the Employee Benefit Research Institute, "Employers are proceeding with caution when it comes to implementing the voluntary options from Secure 2.0."

As of midyear, only 25% of large companies had planned to offer the student loan match, as reported by the institute. Comparable data regarding employers' adoption of Pension-Linked Emergency Savings Accounts (PLESAs) is not available, but plan administrators indicate that this option is less popular among employers compared to the student loan benefit.

One potential reason for the low uptake is capacity-related issues. Secure 2.0 includes certain provisions that employers are obligated to comply with, and companies are primarily focused on meeting those requirements. For instance, a mandate requiring higher-income workers aged 50-plus to make their catch-up contributions post-tax was delayed from 2024 to 2026 in order to provide employers and employees with additional time for adjustment. Another requirement set to take effect in 2025 stipulates that all new plans must auto-enroll their participants.

Benefit Design and the Importance of Emergency Savings

Many plan administrators acknowledge that low outside savings can hinder the funding and maintenance of a retirement account. While the availability of an in-plan option for emergency cash may seem convenient, there are concerns about the time and privacy involved in going through an employer or plan administrator for access. Additionally, the portability of the account when an employee leaves the job, as well as the limited access for workers who don't qualify for the company retirement plan, are further considerations.

Dave Gray, head of workplace retirement offerings and platforms at Fidelity Investments, acknowledges that Congress has recognized the significance of emergency savings and included an optional provision in SECURE 2.0 to address this need. However, he believes that more can be done to support employee needs, suggesting the provision of an option through the workplace that offers greater flexibility, portability, and simplicity than an in-the-plan approach.

Fidelity Investments itself offers Fidelity Goal Booster as an independent offering, separate from a retirement plan but available in partnership with employers.

Statistics show that workers without adequate emergency savings, defined as having at least three to six months' worth of expenses set aside, are 13 times more likely to resort to a hardship withdrawal from their retirement plan when faced with financial difficulties. Tom Armstrong, Vice President of Customer Analytics & Insight at Voya Financial, emphasizes that other established vehicles can help employees meet emergency expenses. For example, health savings accounts provide employees with a tax-advantaged method of saving for medical expenses, which are a common cause for hardship withdrawals.

Despite their slow start, experts believe that the benefit provisions introduced in Secure 2.0 may gain traction over time and serve as a competitive advantage for employers who offer them.