Saving for retirement is becoming a loftier goal by the day, and many Americans are entering that new stage of life with insufficient savings to cover expenses and relying solely on Social Security.
This is why Congress has made some significant changes to the country’s retirement system, including several updates to 401(k) plans. These changes are intended to help future retirees transition more smoothly from their working lives to retirement.
The changes come in the form of the “Secure 2.0” Act, which is an update to the original piece, with the majority of the changes taking effect in 2025.
Why is this update so important? According to a CNBC survey of approximately 6,700 adults conducted in early August, roughly four in ten American workers say they are behind on retirement planning and savings, primarily due to debt, insufficient income, or a late start.
This is a discouraging figure, especially given that, according to Dave Stinnett, Vanguard’s head of strategic retirement consulting, 401(k) plans are “the primary way most Americans prepare for retirement”. He also stated that the accounts can work “very, very well” when designed properly, which appears to be the main issue: they are not properly utilized.
Changes to 401(k)s
The first significant change to be implemented is an increase in catch-up contributions. Employees can defer $23,500 into 401(k) plans in 2025, up from $23,000, and those over the age of 50 can make up to $7,500 in catch-up contributions in addition to the $23,500 limit.
Employees aged 60 to 63 will see an additional increase in catch-up contributions. As certified financial planner Jamie Bosse, senior advisor at CGN Advisors in Manhattan, Kansas, explains, this collective will contribute an additional $11,250, representing a 14% increase.
According to Vanguard’s 2024 How America Saves report, which is based on data from 1,500 qualified plans and nearly 5 million participants, only 14% of employees maxed out 401(k) plans in 2023, and only an estimated 15% of workers made catch-up contributions in plans that allowed it during that time.
Unfortunately, this means that the increases, while nice in theory, may not be as utilized as experts would like for the general public
Other changes by the Secure 2.0 Act
Another piece of good news for part-time workers is that they will now have better access to 401(k) and 403(b) plans. The change went into effect in 2024, when employers were required to provide plan access to part-time employees who worked at least 500 hours per year for three consecutive years. In 2025, the threshold is reduced to two consecutive years.
Stinnett applauds the measure, calling it “a very good thing for long-term part-time workers who may have struggled to qualify for 401(k) eligibility.”
According to the US Bureau of Labor Statistics, only 56% of civilian workers who had access to workplace retirement benefits participated in these plans, which is a very low number given that they are the primary source of income in retirement. This measure should hopefully increase those numbers.
Another significant change is that the new 401(k) plans will include mandatory auto-enrollment. This will affect all new plans established after December 28, 2022. They must also include at least a 3% employee deferral rate.
Alicia Munnell, director of the Center for Retirement Research at Boston College, emphasizes that “coverage is my thing.” It is critical that people have coverage wherever they go (including when they transition from full-time to part-time employment). It is clearly a positive step to take. More people will join, which will result in more savings.”