As a requirement of the new Secure Act 2.0 legislation, all new retirement savings plans will automatically enroll workers beginning in 2025, unless they opt out, and gradually increasing their savings rates as the years roll on. That’s a great start, and will boost the savings of many millions of Americans, but there’s still a long way to go, contends an article in The Wall Street Journal.
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The new legislation recommends a default savings rate of a minimum 3%, which Shlomo Benartzi, the author of the article, believes is too low. According to research conducted with Harvard and Carnegie Mellon Universities, the minimum rate should be 7% in order to maximize the savings in workers’ accounts. And the speed at which savings rates go up should also be increased, in order to fill the gap of workers who switch jobs and have to enroll in their new plan at the lower initial rate. The speed recommended by the Secure Act 2.0 is 1%, while Benartzi writes that it should be set at annual increments of 2%.
And while savings autopilots are ideal, different people have different needs; an employee with a two-income household and one child will have very different needs from a single parent with three children and a mountain of credit card debt. Paying off that debt is more important than saving for retirement, and employees should be given the option to tailor their savings defaults to their individual financial situation. Automatic enrollment at varying rates could be a solution, where some employees might be better off enrolling at 0% with a swifter escalation while others may do better enrolling at a 10% savings rate. After all, investments are customized to the individual, and retirement plans should be personalized as well, Benartzi posits.
The Secure Act 2.0 does recognize the need for flexibility, with employees able to prioritize paying off student debt as well as other allocations. However, most employees will need advice on which allocations are the best for them. Financial guidance that considers a person’s whole picture is extremely valuable, boosting income by 2.51%—and thereby adding 6.93% into their 401(k) account—every year by eliminating the expensive mistakes that an employee might make if left to their own financial devices. Given that tremendous boost, holistic financial guidance is something that every employer should offer to their employees, Benartzi stresses, writing that while “[r]egulators have long been concerned about the cost of financial advice…the absence of advice can be far more expensive.” So while the Secure Act has given employees a much-needed leg-up, there is still a ways to climb.