Second Quarter Focus: Retirement Industry Buzz - What you should know now
The retirement industry continues to evolve. What many investors don’t realize is that 401(k) type plans are a fairly new evolution in saving for retirement, with plans beginning to emerge in the 1980s and expanding throughout the 90s and into the early 2000s. When I started my first 401k related job in the 90s, many companies still had traditional employer funded pension plans and 401k plans looked nothing like the plans of today that have an endless number of features and options.
Perhaps as a result of the industry maturing, over the past five years, the focus has shifted to filling in the gaps created by the demise of employer-provided pensions with the burden of saving for retirement falling squarely on the shoulders of American workers. The bottom line is that many Americans are not well prepared for retirement for a variety of reasons, some due to lack of access to an employer-sponsored plan, some due to the inability to save enough, and some due to a lack of understanding of how to handle a lump sum of money once they retire.
A number of interesting plan features are beginning to come online that were made possible by Secure 2.0. As a reminder, the Secure 2.0 legislation that passed at the end of 2022 with strong bi-partisan support in Congress was intended to expand retirement plan coverage and encourage Americans to save. It seems like we’ve been talking about it for years now but the rubber is finally hitting the road and some of the newly allowed plan features are starting to become available at a record keeper near you.
Here are a few I’m excited about!
Student Loan Payments as 401(k) Matching:
Effective 1/1/24, employers now have the option to modify their retirement plans to allow an employer match to be funded towards an employee’s student loans. Recordkeepers are now coming to market with this feature, one of our largest partners is rolling it out in the 4th quarter this year.
I’ve seen first hand in my meetings with employees how difficult student loan debt can make it for young professionals to get a good start financially and am a big supporter of this provision.
For clients that want to help with student loans but not through the retirement plan, there are some great options out there today and we’d be happy to help you explore it.Emergency Savings Accounts and Withdrawals:
The new emergency savings accounts can be linked to the 401k plan (allowing for payroll deduction) and permit non-highly compensated employees (earning under $155k in 2024) to make Roth (after-tax) contributions to a savings account linked to their 401k. Withdrawals are penalty-free and do not have to be documented to show a qualifying emergency.
Even if you do not add the emergency savings account feature to your plan, Secure 2.0 also provides an exception to the 10% penalty for emergency withdrawals on one distribution per year of up to $1,000, that can be repaid within 3 years.Lifetime Income Products
A HUGE topic of interest and debate in retirement today is Lifetime Income. Most of us agree that one of the challenges facing Americans today is making the money they have saved in their retirement accounts last for the rest of their lives. Most people have NO idea how much they can safely withdraw from their accounts and many savers simply do not have enough saved to last for an extended life expectancy.
Enter insurance products. While insurance and annuities have at times seemed like bad words in the financial and retirement industry (whether earned or not), we all know there is a time and place for insurance. The questions are:
Is it currently the right time and place for it in your retirement plan?
Are the options currently (or soon becoming) available appropriate for your plan and participants?
How do you evaluate these options and what is your fiduciary liability?
The good news is that Secure 2.0 did create a safe harbor for employers to follow in selecting and monitoring in-plan retirement income and addressed some of the portability issues that can occur if a plan changes recordkeepers and has a lifetime income product that is not portable.
Some highly anticipated new lifetime income options are coming to market now. We look forward to discussing these options with you, and whether they make sense for your company’s plan. While we welcome the increased focus on the withdrawal phase of retirement as it is critically important, these features (as with most plan features) are not one-size fits all and should be evaluated carefully for your plan.
We look forward to having rich discussions with our clients on these topics this year. If you have questions about our processes or feel they could benefit your plan, please reach out and I am happy to discuss in more detail.
