2023 is no 2022 when it comes to the key focus areas on which retirement industry experts should be guiding savers, according to J.P. Morgan analysts.
Plan advisers and sponsors should be guiding retirement savers to start leveraging provisions of the Secure 2.0 Act of 2022, particularly the benefits available to employees of small companies and those paying off student loans. Savers should also build up an emergency reserve, to prevent dipping into their 401(k)s when faced with income or spending shocks.
At a Monday launch event for J.P. Morgan’s 2023 Guide to Retirement, experts walked through the guide’s analysis of the most significant issues impacting retirement, advisers, their clients and DC plan participants in the years ahead.
Opportunities in Secure 2.0
The New York-based investment firm’s guide to retirement recommended people take advantage of opportunities in Secure 2.0 legislation, such as looking out for, or even requesting, retirement savings plans if they work at small companies which may not have been offering a workplace plan. For companies with less than 50 employees, less than 50% of private-industry workers have access to retirement benefits. Secure 2.0 aims to remedy the lack of access by encouraging small businesses to create retirement plans through increased tax credits, which can be an important benefit to workers, said Mike Conrath, chief retirement strategist and head of the retirement insights strategy team at J.P. Morgan Asset Management.
Through the Secure 2.0 Act, if an employer offers it, employees will also gain access next year to contribute to emergency savings accounts in defined contribution plans, up to a maximum account value of $2,500, something savers should start considering and advocating for, according to J.P. Morgan. Contributions that exceed $2,500 will spill over to the long-term retirement savings portion of the plan. Employers may automatically enroll participants at a rate of up to 3% of pay.
Also effective in 2024, another Secure 2.0 initiative intends to help families manage their student loan debt burden, Conrath pointed out. Employers will be allowed to make matching contributions to retirement plans for participants’ student loan payments.
“In essence, what this allows for is employers to make matching contributions on behalf of those employees who are making student loan payments, jumpstarting retirement savings that they otherwise would not have in place due to the burden of student loan costs,” Conrath said at the launch event. “There’s $1.6 trillion in outstanding student loans, so that’s a big provision there.”
J.P. Morgan’s experts stressed the importance of building an emergency reserve. When people do not have liquidity, they often turn to their 401(k) and use it as a “piggy bank” to generate the cash needed to weather income or spending shocks, said Kelly Hahn, a defined contribution strategist at J.P. Morgan.
“The key implications when it comes to building an emergency reserve for the sponsors and advisers is, No. 1, to think really long and hard about leveraging the provision in Secure 2.0 to offer the emergency reserve within the DC for their participants,” Hahn said. “I think, more importantly, [No. 2] is to help educate the participants on the importance of having an emergency reserve and to help them think about how to leverage it so that they can keep the retirement savings intact for the intended use.”
If taking a loan from a 401(k) plan is unavoidable, the guide recommends lessening the impact by continuing contributions while repaying the loan. Employees should ensure that they continue to receive an employer match, if available.
Hahn said workers typically encounter spending shocks more frequently, about once every three months, compared to income shocks, which occur about once per year. Savers are recommended to set aside two to three months’ salary. Retirees come across more spending shocks in larger amounts than workers, likely due to unpredictable expenses such as health care. Retired savers are advised to set aside three to six months’ income.
“I don’t think there’s anything specific to this year to watch out for; I think the pitfalls are, I hate to say, somewhat evergreen,” Conrath said. “We see people kind of repeating the same type of behaviors, overreacting to markets. A big thing is folks don’t take full advantage of a company match on their DC plan. The evergreen concepts are still there, and Secure. 2.0 just shines the light that much more on the importance of what’s offered now, so you ought to take advantage of it to the extent we can.”