Despite promising legislation, the retirement savings gap isn't going anywhere

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On March 29, the House of Representatives passed the Securing a Strong Retirement Act of 2022 in an overwhelmingly bipartisan manner, clearing the chamber by a vote of 414-5 and signaling movement in a space that has been dormant for too long. 

If passed, this legislation — referred to as SECURE Act 2.0 — would make critical headway towards improving retirement security for the many Americans facing under-funded retirements. It includes key provisions that would make it easier for employers to support their employees’ unique savings goals, such as matching employee student loan payments with employer 401(k) contributions, increased catch-up contributions for those nearing retirement, and making it easier for part-time workers to qualify for their workplace retirement plan. The legislation also increases tax credits to small businesses setting up plans for their employees – a critical boost for companies that, historically, have been unable to afford such plans.

Crucially, the proposal needs Senate approval, and it may not land on the docket until the lame duck session of Congress after the midterm elections, though sentiment is that these efforts are long overdue. The planned proposal in the Senate may potentially exceed the House’s 2.0 by including an (employer-sponsored) “emergency savings” provision, as a cushion for those who may have had to withdraw funds early.

SECURE Act 2.0 would be wholly beneficial for retirement savers, but does it go far enough? While 2.0 would require companies to auto-enroll employees in their workplace plans at a 3% contribution rate and auto-escalate contributions annually (1% per year until totaling 10% of pay), this requirement only applies to new 401(k) plans, not existing ones. With the Bureau of Labor Statistics reporting in 2020 that only 72% of eligible employees participated in their workplace 401(k), it’s clear that one of the biggest hurdles towards retirement security is simply getting people enrolled — and if the legislation applied more broadly, it would put countless employees in a better position.

For those nearing retirement age, 2.0 would build off its predecessor, the SECURE Act of 2019, which increased the required minimum distribution (RMD) age from 70 years old to 72. This next iteration would move that to 75 (by 2033), allowing people to save for a longer period while averting any potential IRS penalties. 

Additionally, aging employees – those 62-64 years old – looking to set aside larger sums to account for hardship withdrawals or underfunding, are currently limited by federal law to an extra $6,500 annually. Under 2.0, that new amount would be capped at $10,000 annually. While the increase is progress, the current retirement savings gap for many Americans is significantly more than $10,000 — a U.S. Census Bureau report found that 49% of adults ages 55 to 66 had no personal retirement savings in 2017 — so increasing this threshold further would be worthwhile. 

The bill also could have been more generous by allowing for catch-up contributions to be made either in the form of pre- or post-tax (Roth) contributions. It would require that these contributions be made only to Roth accounts, a move which will boost federal revenue upfront, but has associated income limitations that will restrict its usage for participants.

More broadly, 401(k) access remains a problem. According to the Congressional Research Service, the public policy research institute for the U.S. Congress, some 32% of private-sector workers still do not have access to a workplace retirement plan. Meanwhile, a growing number of states have taken matters into their own hands and begun offering state-sponsored auto-IRA programs to provide retirement savings options for employees without a workplace plan.

There is room for Congress to take a harder stance on the need for all US employees to have retirement security. This legislation could have considered a mandate that all businesses offer a retirement plan – whether that be via a private provider or a federal or state plan option – and offered even greater tax incentives to make it more affordable for businesses to offer plans.

While the House’s version of 2.0 does not include any incentives for businesses to offer employer-sponsored emergency funds, the Senate is reportedly considering a related item that would allow employees to withdraw up to $1,000 per year to cover short-term emergency costs, without incurring steep penalties. For background, this type of savings provision is favored by nine out of 10 financial professionals, according to the Nationwide Retirement Institute.

Given the number of employees that were forced to withdraw from their 401(k)s to sustain basic living expenses during the pandemic, this would be a unique offering that could help drive greater financial stability and ensure that retirement funds remain untouched during times of strife.

Ultimately, retirement legislation has not truly caught up with the needs of employers and employees in 2022: SECURE Act 2.0 will be meaningful to bridge this gap but there’s a longer road to curb the mounting savings gap. Employers need to take a proactive role in helping their employees with retirement by ensuring, at a minimum, that employees get enrolled in their workplace plans and are educated about what their retirement savings journey should look like, such as how much to contribute and how often to increase their contribution rates.

What’s more: a 401(k) should be a table-stakes offering at this point, as businesses consider the needs of both current and prospective employees. New offerings such as student loan management solutions, FSAs and HSAs, and wellness stipends are all benefits employees are clamoring for and will help employers stand out from the pack.

True, it is not easy to advance these measures on Capitol Hill. What ultimately should give consumers hope is how uniformly positive members of Congress are about making improvements to the American retirement system. With some enhancements, this legislation represents an important step to closing the retirement savings gap in the United States. In the meantime, the retirement industry should do what it can to galvanize employers around the benefits of 401(k) offerings and put more employees on the path towards retirement security.

Kristen Carlisle is general manager of Betterment at Work, where she and her team work to bring retirement planning and financial wellness benefits to small and mid-sized businesses across the U.S. She has over 15 years of experience within the B2B technology industry, and most recently served as the company’s director of B2B operations.