Decoding the US' new pension legislation

Every HR leader and professional knows the critical role retirement plans play in securing the future for their employees. Now, the landscape of preparing for those golden years is undergoing a transformation with the introduction of the Automatic IRA Act of 2024.

This new legislation is not just another policy but a significant stride forward for small businesses and employees alike, promising to make retirement benefits more attainable for many.

The Automatic IRA Act of 2024 is a legislative mandate that requires employers, who do not offer a retirement plan and have a workforce exceeding 10 employees, to facilitate automatic Individual Retirement Accounts (IRAs) for their employees. The Act is designed to ensure that employees have a straightforward, automatic mechanism to contribute a portion of their paycheck towards their retirement savings.

Under the Act’s provisions, employers are required to contribute a default percentage of an employee’s paycheck to the employee’s automatic IRA account. While employees have the autonomy to adjust their contribution percentage or opt-out entirely, the Act provides for an automatic escalation of contributions.

This begins at a modest 6% and gradually increases to a more substantial 10% over subsequent years, fostering a culture of increased savings over time.

The Act also introduces a lifetime income requirement for 401(k)-type plans with over 100 participants. This requirement mandates that such plans must permit participants to elect to receive at least 50% of their vested account balance in the form of lifetime income.

However, this requirement is waived for participants with balances of up to $200,000, providing some flexibility for those with smaller savings.

Implications for US businesses

The Automatic IRA Act of 2024 carries significant implications for US businesses, particularly those of smaller scale. It imposes a new administrative responsibility on businesses to facilitate automatic IRAs for their employees. This includes setting up the IRAs, managing contributions, and ensuring compliance with the Act’s provisions.

There will also likely be greater financial implications. While employers are not required to match employee contributions, they may choose to do so as a means of attracting and retaining employees. Additionally, businesses may incur costs associated with setting up and administering the IRAs.

There is also the employer/employee relationship to consider. By facilitating access to retirement savings, businesses can contribute to their employees’ financial security and wellbeing. Nevertheless, businesses will need to communicate effectively with their employees about the Act and its implications to ensure understanding and buy-in.

Comparison with current retirement options

One of the key shifts introduced by the Automatic IRA Act, also familiar as SECURE 2.0, lies in its mandate for automatic enrolment. This is a notable divergence from traditional plans where enrolment was largely manual, often leading to lower participation rates primarily due to inertia or a lack of understanding. With the new scheme, employees are proactively included with the ability to adjust their contribution rates or opt-out if they choose.

Delving further into the details, the Act specifies a hard-wired escalation of contribution rates for automatic IRAs – commencing at 6% and incrementally intensifying each year up to 10% in the fifth year. This gradual increase contrasts sharply with the fixed contribution rates often seen in conventional retirement plans, driving a proactive savings culture tantamount to a powerful fiscal impetus.

Moreover, emerging from SECURE 2.0 are provisions that align with the dynamic needs of today’s workforce. There’s the introduction of target date and balanced funds, which extend diversified investment options to employees. Coupled with this is the pioneering concept of emergency savings accounts linked to the retirement plan, available from 2023 onwards – providing a dual benefit of retirement and short-term financial security.

The new legislation also sets forth a supportive framework for small businesses, which often experience financial constraints that preclude them from offering retirement benefits. A generative tax credit of $500 per year for three years incentivizes the setup of automatic IRAs, balancing fiscal responsibility with societal benefits. By bolstering small businesses in their effort to assist employees plan for retirement, the Act empowers companies to attract and retain talent while fostering long-term financial wellness for their teams.

Navigating the New Landscape

To navigate this new landscape, businesses will need to take several steps. Firstly, they will need to understand the Act’s requirements and ensure they are in compliance. This may involve seeking legal or financial advice.

Businesses will need to set up processes for facilitating automatic IRAs, including setting up the IRAs themselves, managing contributions, and ensuring compliance with the Act’s provisions. This may involve working with a financial institution or retirement plan provider.

Thirdly, businesses will need to communicate effectively with their employees about the Act and its implications. This may involve providing information about the Act, explaining how automatic IRAs work, and addressing any questions or concerns employees may have.

Finally, businesses may need to consider how the Act fits into their broader benefits strategy. For example, they may choose to match employee contributions as a means of attracting and retaining employees. This decision, while not mandated by the Act, could serve as a powerful incentive for employee retention and satisfaction.

HRD Connect Curators of the New Business Landscape. HRD Connect produces industry-recognized content for senior HR leaders. Through articles, case studies, Q&As, podcasts, events, and more, we offer truly progressive and cutting-edge insights designed to help people leaders address core HR challenges and add greater value to their business.

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