The baby boom generation comprises 70 million-plus Americans who began turning the traditional retirement age of 65 in 2011. It’s estimated that the number of people reaching this age will peak in 2027.¹ 

Is this “silver tsunami” of forthcoming retirees prepared for the next leg of their retirement journey? Opinions vary: The retirement industry thinks they’re doing a great job getting participants ready for retirement, but participant surveys reveal a different picture. The Employee Benefit Research Institute reports that seven out of 10 Americans feels confident that they have enough money to live comfortably throughout retirement.² In contrast, according to a recent AARP survey³, one-in-five Americans 50 and over had no retirement savings and more than half of those surveyed worried that they will not have enough money for retirement.

Such divergent attitudes between those building retirement plans and those depending on them is troubling. Fortunately, the recent passage of the Securing a Strong Retirement Act of 2022, (aka SECURE 2.0 Act), opened the door to a host of tools that sponsors and advisors can leverage to upgrade plan designs and more effectively promote, not just retirement readiness, but holistic financial wellness for all plan participants.

The many provisions within Secure 2.0 were designed with three primary objectives in mind:

1. expanding coverage of employees via workplace retirement plans,
2. increasing retirement savings for US workers and
3. preserving income in retirement.

As we discuss below in the first of a two-part series on the topic, it is essential that plan sponsors and financial professional work together—in partnership with a range of trusted outside service providers—to fully harness the power of this new legislation on behalf of American workers.

Enrollment Rates and Contribution Levels Are Key

It’s been said that the first step is the hardest, and this logic seems to explain the mediocre participation rates experienced by many defined contribution (DC) plans. While the Pension Protection Act of 2006 provided “safe harbor” for employers offering an auto-enrollment feature, participation rates, (though markedly improved), remain suboptimal. About 73% of civilian workers have access to retirement benefits, but just 56% of these employees are enrolled in retirement plans.⁴

That said, even among enrolled participants, many have suboptimal contribution rates.⁵

It’s our non-controversial view that further improvements to enrollment rates will go a long way toward improving Americans’ retirement readiness. To that end, the features of SECURE Act 2.0 seek to address under-enrollment across the retirement chain.

• Immediate incentives. Financial professionals can help employers go beyond matching funds to offer more creative enticements to enrollment. Click here to read more.
• Better access for smaller companies. Smaller employers may apply all administrative expenses towards tax credits and pool resources with other small companies into multiple-employer plans. Click here to read more.
• Wider eligibility. Part-time employees will be eligible for plan enrollment after two years of service, rather than the previous requirement of three years.
• Mandated automatic enrollment and escalation. Starting in 2025, employers introducing new plans will be required to auto-enroll eligible employees, at a minimum default contribution of 3% that escalates 1% annually until it reaches at least 10%.
• Student loan help. Employers can treat participants’ student loan payments as elective deferrals eligible for employee matching contributions in plans.

SECURE Act 2.0 contains a number of features designed to encourage greater savings rates among participants at all stages of their retirement journey. For younger participants, the mandated automatic enrollment and escalation feature will assist with higher participation and contribution rates. Maximizing these investments early in a participant’s career will help harness the power of compounding. Additionally, the framework around catch-up contributions for pre-retirees has been improved. The limits on annual catch-up contributions. (voluntary deferrals in excess of the statutory limit available only to participants aged 50 or older to help them bolster their tax-advantaged savings as they approach retirement), will be raised starting in 2025 to $7,500 for participants 50–59 and $10,000 for those 60–63. The catch-up maximum will be indexed to inflation thereafter. For high-income participants, (employees that earn more than $145,000), catch-up contributions will be made on an after-tax basis. Beginning in 2027, lower-earnings employees will be eligible for a federal matching contribution of up to $2,000 per year.

Come Together, Right Now

While higher participation levels and contribution rates will certainly help, the onus for building plans that best leverage these new tools remains on sponsors and financial professionals. We believe the introduction of the SECURE 2.0 Act provides an excellent opportunity to re-orient their mindset toward the overall financial wellness of their participants.

Future retirement success—especially for younger participants—depends on innovation and adaptation across the entire retirement ecosystem. Financial professionals, sponsors, recordkeepers and investment managers must all work together. Perhaps as important are efforts to support participants’ overall financial wellness by employing a holistic program that enables them to concurrently pursue both short-term goals, (such as paying down student-loan debt), and longer-term goals, (saving for college), within the context of retirement planning.

In our view, such an approach entails providing participants with both guidance across their retirement journey as well as a diversified menu of investment choices suited to their ever-changing needs. First Eagle believes that thoughtful and consistent risk exposure over the long-run is one of the best approaches to achieving retirement income goals. We do not believe that taking on more portfolio risk will guarantee bigger returns. In fact, excessive risk may lead to the permanent impairment of capital, which undercuts the benefits of compounding. Financial professionals and plan sponsors can help participants make better decisions by helping to build thoughtful investment lineups that provide vehicles with complementary styles, philosophies and goals that have experienced a variety of market conditions. These plan lineups may also include selections that optimize the
potential benefits of SECURE Act 2.0.'

First Eagle can provide resources to complement existing financial wellness programs that help plan sponsors and retirement professionals build
thoughtful, well-rounded programs. We have developed several participant-oriented value-add tools that financial professionals can leverage to deliver a high-caliber, differentiated experience for their plan sponsor clients and promote financial wellness among their plan participants.

This may also include access to professionally managed account services that provide customized investment planning according to factors like age, salary, risk tolerance and other factors. While technology has made managed account services cheaper and more accessible, a managed account’s investment options generally are limited to the same strategies offered to plan participants. To leverage this dynamic, plan sponsors should provide a menu of investment choices that employs a dynamic investment approach, thoughtfully adjusting portfolio risk exposures in response to shifting market conditions in a way that helps position participants to navigate the short-term waxing and waning of portfolio values. This helps participant adherence to carefully constructed investment plans that pursue long-term absolute returns while attempting to mitigate downside capture.

By working together to take an innovative approach to improve enrollment, engagement and financial education, financial professionals and sponsors can help participants achieve lifelong financial goals. First Eagle stands ready to help. Please contact your First Eagle representative to learn more.