We’ve heard it straight from employers: The top reasons businesses offer retirement plans don’t involve concerns such as recruitment, retention, or competitiveness in their chosen industry. They want to help employees do a better job with retirement savings.
The 2021 Principal® Retirement Security Survey (PDF) found that “to encourage our employees to save” (74 percent) and “to help provide financial security to employees in retirement” (70 percent) are the top two motivators for businesses to establish retirement plans.
Proposed retirement legislation in Congress may help businesses owners do just that.
The Securing a Strong Retirement Act (PDF) of 2021 is sometimes called “SECURE 2.0” because it builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act that became law at the end of 2019. Implications for this legislation--if, when, and in whatever form it emerges--are huge. Business owners may be better able to afford and customize retirement plans to promote their employees’ financial security. Employees in turn could be given more effective and transparent financial tools to manage their longer lifespans and customize their individual retirements.
And more employees could be covered: Only 30 percent of the lowest-paid workers have access to an employer-sponsored retirement plan, but SECURE 2.0 is poised to help even the smallest businesses expand coverage.
Here are 10 key points to help your business prepare for the fresh possibilities of SECURE 2.0. (Remember that all this remains theoretical until Congress acts.)
1. More affordable to start a 401(k) or 403(b)
All administrative costs (up to $5,000) of starting a retirement plan could be covered through a tax credit for businesses with 50 or fewer employees--essentially a free startup for some businesses for the first three years of operation. A separate tax credit also would cover employer contributions to the plan--up to $1,000 per employee, with its 100 percent coverage gradually phased out over the first five years. (We already specialize in affordable plans for small business through Simply Retirement by Principal.)
2. Pooled or multiple employer plans (PEPs or MEPs) also more affordable
Any business that joins a PEP--we have our own, Principal® EASE-;could benefit from the startup tax credit for its first three years, no matter how old the PEP. And PEPs for the first time could include 403(b) plans covering nonprofits and government organizations.
3. More encouragement for employees to save for retirement
Automatic enrollment (with a contribution rate of at least 3 percent) and automatic escalation (1 percent annually, up to 10 percent) would be required for most 401(k) and 403(b) retirement plans (established after the law). We generally recommend employees start at a 6 percent contribution rate--a building block for financial security that’s supported by data: When employees auto enroll in a retirement plan, 90 percent of them stay, according to 2019 data from Principal. And they stay willingly: 83 percent of employees agree with auto enrollment and a 6 percent deferral. Existing plans would be unaffected by this proposed mandate. The smallest businesses (10 and fewer employees), businesses less than three years old, and church and government retirement plans also would be exempt.
4. Small incentives to enroll and save
The employer match tends to be the main lure for employees to join a retirement plan, but SECURE 2.0 would allow businesses to offer minor incentives such as gift cards to encourage even more people to start down the path to a secure retirement.
5. Time to correct mistakes
Employers adding auto enrollment and auto escalation get nine-and-a-half months after the end of a given plan year as a “safe harbor” to fix any innocent administrative missteps--crucial reassurance when such sweeping legislation could prompt so many new plans and adjustments.
6. More part-time employees eligible
SECURE already made more part-time workers eligible to join retirement plans if they log 1,000 hours in a year or at least 500 hours for three consecutive years. This new proposed legislation would reduce the threshold to 500 hours for two consecutive years.
7. Employer option to match student loan payments
This could help businesses attract fresh waves of recent graduates: Workers who feel they must tackle student loan debt before saving more aggressively for retirement can sort of do both. Their loan payments would qualify them to receive the employer match in their retirement plan. (We offer a student loan repayment program (PDF); ask your Principal representative.)
8. A higher required minimum distribution (RMD) age
Retirees could wait longer to withdraw savings to manage taxes or other factors. The RMD age would raise from 72 to 73 on January 1, 2022, and then to 74 in 2029 and 75 in 2032. (Balances of $100,000 and less would be exempt from RMD.)
9. More flexibility for guaranteed retirement income
Retirement law traditionally protects employees from a plan that would excessively load guaranteed income payouts late in life when they’re less likely to enjoy their savings. SECURE 2.0 would help balance that protection with sensible updates so retirement annuities keep pace with inflation through modest increases, provide payouts to survivors, allow “period certain guarantees” (lifetime annuities with a minimum payout period that transfers to beneficiaries after death), and relax limits on QLACs (qualified longevity annuity contracts) designed to begin payment much later in life and hedge the risk of longer lifespans).
10. A new retirement “lost and found”
A national online database would help reunite “lost” retirement accounts, whether a business is having trouble locating a former employee, or vice versa.
What’s next?
- Contact your business financial professional or Principal representative if you have questions about starting a 401(k), joining a pooled employer plan, or providing guaranteed income options to employees.
- Try our Principal Business Needs Assessment to help protect your business, your employees, and your lifestyle.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Co. Plan administrative services offered by Principal Life. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., 888-774-6267, member SIPC and/or independent broker/-dealers. Referenced companies are members of the Principal Financial Group®, Des Moines, IA 50392.
