With some Americans finding it tough to set aside money for retirement, upcoming changes to 401(k) plans might make it a bit easier for certain workers to prepare, according to experts in the field. These modifications, part of the “Secure 2.0” initiative passed by Congress in 2022, aim to overhaul the U.S. retirement system. Notably, several updates for 401(k) plans will start taking effect in 2025.
Currently, nearly 40% of American workers admit they’re lagging in their retirement savings efforts. The main reasons? Debts, insufficient income, or simply starting too late, according to a CNBC survey conducted with around 6,700 participants in early August.
Dave Stinnett, who leads strategic retirement consulting at Vanguard, points out that 401(k) plans are “the primary vehicle for most Americans planning their retirement.” He emphasizes that these accounts can be incredibly effective when set up correctly.
So, what’s on the horizon for 2025, and what should employees keep an eye on? Let’s dive into some key changes.
### ‘Exciting change’ for catch-up contributions
In 2025, employees will be able to defer up to $23,500 in their 401(k) plans, slightly up from $23,000 in 2024. Those aged 50 and above will still have the option to add $7,500 in catch-up contributions on top of that basic limit.
But there’s a noteworthy tweak to catch-up contributions for certain older workers come 2025, thanks to Secure 2.0. Jamie Bosse, a certified financial planner and senior advisor at CGN Advisors in Kansas, expresses excitement about this change. The catch-up contribution ceiling will climb to $11,250, a roughly 14% increase, for employees between 60 and 63. This adjustment allows them to save a total of $34,750 in 2025, including the new basic limit.
Interestingly, only about 14% of employees maxed out their 401(k) contributions in 2023, based on Vanguard’s 2024 How America Saves report, which examined information from 1,500 qualifying plans and nearly 5 million participants. Additionally, roughly 15% of workers made catch-up contributions in the same year, as per the same report.
### Shorter wait for part-time workers
Secure 2.0 has also broadened access to 401(k) and 403(b) plans for certain part-time employees. From 2024, employers have been required to provide plan access to part-timers who clock at least 500 hours annually for three consecutive years. Come 2025, this threshold decreases to just two consecutive years.
Stinnett remarks, “That’s a real boon for long-term part-time workers” who’ve found it tough to qualify for 401(k) eligibility.
As of March 2023, the U.S. Bureau of Labor Statistics reported that about 73% of civilian workers had access to workplace retirement benefits, and 56% were actively participating in these plans. Alicia Munnell, director of the Center for Retirement Research at Boston College, opines that “coverage is crucial.” She stresses that consistent coverage is vital, regardless of whether someone transitions from full-time to part-time within the same job.
### Mandatory auto-enrollment for new 401(k) plans
Secure 2.0 also introduces auto-enrollment requirements for certain 401(k) plans. Starting in 2025, most new 401(k) and 403(b) plans created post-December 28, 2022, will need to automatically enroll eligible employees with a minimum deferral rate of 3%.
“It’s unequivocally a positive step,” Munnell remarks, anticipating that this will lead to increased participation and savings. Stinnett previously mentioned to CNBC that features like automatic enrollment and gradual escalation – where contribution rates increase annually – are crucial for boosting savings.
However, these elements alone might not always ensure sufficient savings. Although experts recommend a 15% savings rate, many plans cap automatic escalation. In 2022, a significant 63% limited these increases to 10% or less of annual pay, according to the Plan Sponsor Council of America.
