A new survey by Commonwealth analyzes the impacts of SECURE 2.0 legislation on low to moderate income (LMI) employees.
Commonwealth worked with five focus groups, for a total of 20 participants, to assess interest and requests for emergency expense provisions under SECURE 2.0. According to report data, 25% of respondents earned less than $30,000, while 5% made between $30,000 to $39,000, 60% earned $40,000 to $59,000, and 10% made a salary of $60,000 to $79,000.
Under SECURE 2.0, employers can implement a PLESA feature that would allow employees to make post-tax contributions towards a rainy-day fund, which can be used during financial hardships. The legislation also includes a withdrawal option that permits employees to take out up to $1,000 a year from their retirement plan, without any withdrawal penalties, as long as the participant pays back to amount within three years.
“In the months since this legislation passed, there has been much discussion of these provisions, mainly focused on two areas: the practical feasibility and cost for retirement plan administrators and recordkeepers to implement the provisions, and the demand from plan sponsors to include them in their retirement offerings,” Commonwealth writes in its research. “One area to further explore is how employees participating in the retirement plans, particularly those earning low and moderate incomes (LMI), perceive the provisions and how they would be impacted by the decision to offer these options.”
The analysis found that respondents were less likely to withdraw from their retirement, as most preferred accounts in which they can store contributions for future use.
While groups reacted positively to the legislation’s $1,000 withdrawal option and the $2,500 pension-linked emergency savings account (PLESA), Commonwealth found that participants expressed a preference for the $2,500 option when asked to choose. When asked for reasonings behind their preference, most respondents had an “ingrained belief that retirement funds should not be withdrawn early,” and said that $1,000 would not be enough to cover an emergency expense.
Additionally, respondents liked the “ease of setup and access to the PLESA for employees,” according to Commonwealth.
Given the preferences, Commonwealth determined that employers and retirement plan providers with participants earning LMI should consider adding the $2,500 PLESA benefit to their plans. Furthermore, plan sponsors who implement the feature should set a default contribution rate of 3% of their paycheck, as the report says this would be a “likely reasonable amount for employees earning LMI.”
Additional insights on Commonwealth’s research can be found here.
SEE ALSO:
- The Long-Term Impacts of SECURE 2.0
- 5 Big Ways SECURE 2.0 Would Impact 401ks
- How SECURE 2.0 Validates Emergency Savings Initiatives