The federal government has passed new legislation that impacts how Americans approach retirement savings, and it’s up to the financial industry to clearly explain the implications to consumers.

The SECURE 2.0 act, signed into law on December 29, brings a variety of changes to retirement planning. Passed with broad bipartisan support, the law promises improvements to help people save more for retirement while lowering the costs for small business owners to offer employees retirement benefits.

Addressing the savings shortfall in the U.S.

The median household retirement savings is currently only $134,000, even among Americans nearing retirement (age 55 to 64), according to the Federal Reserve’s Survey of Consumer Finances. This is far less than what most retirees need to sustain a good retirement.

Consumers know they need a retirement plan, but too often fall short when trying to make it happen. An AARP study of American adults of all ages shows that 87% think retirement planning is important, but as their own retirement approaches, only 45% feel prepared. The goal of the new law is to address this gap.

Let’s take a look at some key provisions, along with messages we’re focused on that can help explain and simplify it for consumers.

Short-term changes in the SECURE 2.0 Act

1. The age for taking the first Required Minimum Distribution (RMD) from a retirement account rises to 73 this year, and continues to increase over the next decade. For years the mandatory RMD age for IRAs, 401(k)s, and 403(b)s had been age 70.5, before it was increased to 72 – and now, 73. By 2033, the RMD starting age will be 75.

Communicate this: The law gives retirees more time before they are forced to dip into their retirement savings — which means more time to grow their accounts.

2. RMDs are eliminated from all Roth 401(k) accounts after this year. This matches Roth IRA accounts, which don’t have any RMD throughout the life of the account owner.

Communicate this: This means consumers will have more control over their retirement decisions. For Roth accounts, the federal government is leaving it up to retirees to decide when to take a distribution, and how much to take.

3. Starting this year, for savers aged 50 or older there is an increase in the additional “catch up” contributions they can make to the retirement accounts. While this is not directly part of the law, this related change will impact consumers. Specifically, the additional limit has been raised to $7,500 from $6,500 (see “New rules can help savers make up for lost time” below). The standard contribution limit for all ages is also increasing, from $20,500 to $22,500. By combining the standard contribution and the catch-up contribution, pre-retirees 50 and over can now contribute a total of $30,000 a year (see chart).

Communicate this: More than ever before, late-starters can bolster their retirement savings by investing extra pre-tax funds in the last 15 years before retirement.

4. Starting immediately, new incentives help small businesses provide retirement plans at lower costs. Before this law, qualified small businesses establishing a new retirement plan for employees received a 50% tax credit to cover administrative costs for the first three years of the plan. Now it’s been increased to 100% of administrative costs, with a limit of $5,000 a year, which is enough to cover almost all small business plans.

Communicate this: With these changes, setting up a retirement plan for employees is now effectively free for qualified small businesses for the first three years.

Longer-term changes in the SECURE 2.0 Act

1. Starting in 2025, limits will be raised for catch-up payments for those aged 60-63 who want to add extra money to their retirement account. For 401(k), 403(b), and 457(b) plans, the new limits will allow an extra contribution of either $10,000 or 50% more than the regular catch-up contribution (whichever is higher).

Communicate this: It’s never too late to contribute to retirement savings, even after age 60.

2. Starting in 2025, new 401(k)s and 403(b)s will automatically enroll employees with a default elective deferral rate of at least 3%, and will begin automatically escalating annual contributions by 1% per year until reaching between 10-15%. Studies show that participation rates rise dramatically when employees are automatically enrolled.

Communicate this: Beginning in 2025, 401k plans will start saving for you. You could find yourself saving 10% annually in 10 years without lifting a finger.

3. Starting in 2027, a “saver’s match” will make it more attractive for low-income savers, as well as freelancers and other gig-economy workers, to participate in IRAs. Under the plan, the government will make a matching contribution of up to $2,000 for qualified savers. While this provision is getting a lot of attention, it’s still four years from implementation. And income limits and phase-outs will apply. Until 2027, the existing “saver’s credit,” which provides a tax credit instead of a direct contribution, will still apply.

Communicate this: Without a steady employer to help, gig workers are in dire need of retirement planning. More than a quarter of full-time gig workers report having zero retirement savings.

It’s important that financial professionals, marketers and consumers all understand the impacts and opportunities of this wide-ranging legislation. The financial services industry has an opportunity to provide clear, solid communication to deter any confusion or misconceptions that may arise — and help consumers create the retirement they always wanted.

We’re here to help make sure that messaging is on-point and engaging. If you work in financial services and are looking to communicate about complex topics in a compelling, consumer-friendly way – and on particular retirement topics — please contact us here. We’d love to talk it over!