Data and Research May 25, 2023

Millennials Retirement Readiness Fell the Most From 2020

Average retirement account balances increased by 5% from last quarter, in positive movements.  

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Declining retirement readiness scores show that Millennials may have to work longer to ensure they are prepared to retire, according to Fidelity Investments data measuring plan participant’s retirement readiness.

Following the cascade of economic effects from the COVID-19 pandemic and amidst continuing market volatility, retirement readiness for Millennials’ —individuals age 27 to 42—declined to 72 in 2023 from 82 in 2020, the greatest decline for a generational cohort, according to Fidelity’s retirement analysis.  

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Baby Boomers’, ages 59 to 77, retirement readiness scores stayed flat at 87 in 2023; and Gen X workers’, ages 43 to 58, readiness scores dropped to 79 in 2023 from 80 in 2023, data shows.

“Americans have experienced some tumultuous years, but through Congress’ investment in retirement savings through the Secure Act of 2019, as well as individuals’ continued commitment to save, we are optimistic for the future of retirement security,” Kevin Barry, president of workplace investing at Fidelity Investments, said in a press release with Q1 2023 Retirement Analysis.

The multinational financial services corporations’ research shows retirement readiness scores for the typical American household—on a scale from one to 150—expressed as a percent, to show if savers are on track to meet estimated retirement income needs.   

Overall, retirement readiness declined by five points last year to 78 from 83—after reaching an apex in 2020—signifying savers have accumulated 78% of the income needed to cover retirement costs in a down market, according to Fidelity Investments research published in March.

On a positive note, the average 401(k) balances increased to $108,200, up 4% from Q4 2022 and 5% from five years ago, the analysis finds.

Plan sponsors should help participants prepare for retirement by reinforcing positive steps plan participants can take, Fidelity said. The assessment includes recommendations for plan sponsors to help each generation to increase their retirement readiness.

“As Boomers get closer to retirement, being clear on your goals and having a plan in place can make a big difference in ensuring your savings last,” said Fidelity.

  • Fidelity’s assessment included advice for participants according to their generation. The recordkeeper advised Baby Boomers to ask key questions, including whether they should delay Social Security, where their income sources will come from, and what their strategy will be for taking income from retirement accounts.

Fidelity encouraged Generation X workers to continue saving.

“Gen X-ers are in their prime earning years and may still have a long time before retirement to save and invest, so there’s plenty of time for your money to potentially grow,” the assessment says. “Individuals 50 and above can even leverage catchup contributions to boost savings.”

Fidelity recommended Gen Xers ask themselves how much they will need in income when they retire and how they can maximize disposable income into savings.

Millennials workers need to ensure they invest appropriately, says Fidelity.

“Millennials have the benefit of time on their side, so staying invested and making steady contributions–even through market volatility and recession fears–can help your retirement savings grow long-term and recover from any downturns,” according to Fidelity.

Millennials are encouraged to ask themselves how they can improve their asset allocation and what tax advantaged accounts they should be investing in.

Fidelity’s research was collected through a national online survey of 3,569 working households earning at least $25,000 annually with respondents [and spouses, if married] age 25 to 75, from August 22 through September 26, 2022. All respondents expect to retire at some point and have already started saving for retirement. Data collection was completed by Versta Research using NORC’s probability-based nationally representative online panel.

The responses were benchmarked and weighted against data from the American Community Survey and Current Population Survey conducted by the U.S. Census Bureau and the U.S. Bureau of Labor Statistics. Versta Research and NORC are independent research firms not affiliated with Fidelity Investments. Fidelity Investments was not identified as the survey sponsor.

Compliance May 24, 2023

Congressional Leaders Tell Treasury to Expect SECURE 2.0 Technical Corrections

The letter did not outline a timeline but identified four technical errors and ambiguities to be fixed.

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Congressional leaders wrote an open letter to Secretary of the Treasury Janet Yellen and IRS Commissioner Daniel Werfel clarifying what Congress intended with certain provisions of the SECURE 2.0 Act of 2022. In the letter, a bipartisan group of Senate and House members said they intend to correct those technical errors, but they did not spell out a timetable.

Senators Mike Crapo, R-Idaho, and Ron Wyden, D-Oregon, the chairman and ranking member of the Senate Committee on Finance, respectively, and Jason Smith, R-Missouri and Richard Neal, D-Massachusetts, the chairman and ranking member of the House Committee on Ways and Means, respectively, identified Sections 102, 107, 601 and 603 as containing various technical errors or ambiguities.

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One of those requiring a correction, Section 603, includes an error pointed out in January by the American Retirement Association that inadvertently would eliminate both future and existing retirement plan catch-up contributions. Section 102 addresses startup tax credits for small employers, Section 107 focuses on the required minimum distribution age and Section 601 clarifies rules regarding SIMPLE IRA and SEP plans.

Startup Tax Credit

Section 102 increases the startup tax credit for small employers from 50% of the costs of starting a retirement plan to 100%, up to a maximum of $5,000. The section also provides a tax credit for matching contributions made for the first five years of a new plan sponsored by an employer with 100 or fewer employees, up to a per-employee maximum of $1,000.

According to the letter, the $5,000 limit on the startup credit could be read as applying to the matching contribution credit as well, or a $1,000-per-employee limit up to $5,000 total. However, Congress did not intend for the $5,000 to apply to the credit for employer contributions. The letter explains: “Congress intended the new credit for employer contributions to be in addition to the startup credit otherwise available to the employer.”

Required Minimum Distribution Age

Section 107 changes the required minimum distribution age. The letter confirms that Congress intended to increase the RMD age to 73 for those who turn 73 after December 31, 2022, and to 75 for those who turn 73 after December 31, 2032. The letter states that the language in this section could be read to apply to those who turn 74 in 2033 instead of 73, but this interpretation would contradict Congressional intent.

SIMPLE IRA and SEP Plans

The letter says that “Section 601 of SECURE 2.0 permits SIMPLE IRA plans and SEP plans to include a Roth IRA.” This section could be read to require SIMPLE IRA and SEP contributions to be included toward the Roth IRA annual contribution limit. Congress intended these limits to be separate items, not mandatory within plans that are designed to encourage employers to offer workplace retirement plans, according to the letter.

Catch-Up Contributions

Section 603 of SECURE 2.0 contains perhaps the most famous (or infamous) technical error in the legislation. This section requires catch-up contributions made by highly-compensated employees to be made to a Roth account, starting in 2024. This section accidentally removed catch-ups entirely for everyone, Roth or not.

As the letter explained, “Congress did not intend to disallow catch-up contributions … Congress’s intent was to require catch-up contributions for participants whose wages from the employer sponsoring the plan exceeded $145,000 for the preceding year to be made on a Roth basis and to permit other participants to make catch-up contributions on either a pre-tax or Roth basis.”

The letter did not direct the Department of the Treasury to make regulations in the interim to ensure Congressional intent is carried out, but instead communicated that Congress will correct the errors on their own. The letter also did not broach an extension of compliance dates, such as the one requested by NAGDCA for government plans, especially regarding the requirements of Section 603.

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