Why the Saver's Match Matters
Thanks to Secure 2.0, beginning in 2027 low and middle-income employees will be eligible to receive a federal government “Saver’s Match” by simply contributing to their qualifying retirement plans. Historically, employers frequently match employee contributions to 401(k) plans, which provides a strong incentive for employees to participate. These matching contributions are often referred to as “free money.”
In a recent report, Federal Saver’s Match Coming in 2027, Could Boost Automated Retirement Savings Programs (the “Pew Study”), The Pew Charitable Trust surveyed groups of workers who lack access to an employer-sponsored retirement plan to determine their interest in contributing to plans that would include the Saver’s Match. The Pew survey of 1,000 Saver’s-Match-eligible employees found that 87% of all respondents would more likely participate in a State-run retirement program (a “State Auto-IRA Plan” or “State Plans”) with a Saver’s Match. In fact, the addition of the Saver’s Match increased respondents’ interest in State Auto-IRA Plans even when they were initially uninterested in them.
Under the Saver’s Match, the federal government will provide a 50% match on the first $2,000 contributed to a qualifying account, whether it is an employer-sponsored defined contribution plan (e.g., 401(k), 403(b), or governmental 457(b)) or an employer-sponsored auto-IRA that funds a Traditional IRA. Single taxpayers who earn $20,500 or less qualify for the full match, with the match phasing out at $35,500. For joint filers, comparable income numbers are $41,000 for the full match, phasing out at $71,000. One important note about the Saver’s Match is that the government-funded amounts cannot be withdrawn other than for retirement purposes.
Challenges to Overcome
The challenge with the Saver’s Match is that it will not be available for contributions to Roth IRAs. Importantly, State Auto-IRA Plans almost exclusively use Roth IRAs as the default savings vehicle. And we believe that many of the employees who participate in the State Plans would qualify for the Saver’s Match; for the otherwise eligible employee, a State Plan without the Match is less attractive than a qualifying retirement vehicle would be.
No doubt Congress excluded Roth IRAs from the Saver’s Match for a variety of reasons, but this is a problem for the State-run Auto IRA Programs. The easiest fix going forward would be for Congress to exempt Roth IRAs in any State Program from the Roth exclusion. Short of that, State and Plan Administrators must figure out how to accommodate the Match in a cost-effective administrative fashion.
As we see it, Plan Administrators will need to revamp their systems to offer a Traditional IRA, perhaps in a shadow or mirror account, which is not entirely different from what 529 Plans do for certain scholarship accounts. Setting up the Traditional IRA, however, will require controls in comparison to a Roth IRA, as there are considerable constraints with respect to withdrawals and tax regulations, and additional reporting requirements. Not all the administrative details of the Saver’s Match have been released so it is possible that we will see even more regulations going forward.
Despite the added administrative costs, for many small business owners, a significant portion of their employees are part of the low and middle-income population that the Saver’s Match targets. Thus we believe it is critical for State Auto-IRA Plans to add a Traditional IRA to enable the Saver’s Match for these employees. Doing so should encourage participation in the State Plans, and provide a reason for employees not to opt out of participating.
Outreach Opportunities
A significant component of the Saver’s Match will be the outreach necessary to educate prospective participants. The Saver’s Match replaced the Saver’s Credit, which few individuals used. In fact, according to the Boston College Center for Retirement Research (“CRR”), less than 6% of taxpayers claimed the Credit in 2021. Both the Pew Study and CRR’s The Saver’s Match Could Really Help Low and Middle-Income Workers support the importance of employee education to maximize the full impact of the Saver’s Match. The federal legislation includes some Treasury funding to increase public awareness of the Match; States and Plan Administrators will need to step up their own efforts to reach this demographic so that they will be well informed by the 2027 rollout. Given that the State Auto-IRAs are funded through payroll deduction, there will be an even greater need for the inclusion of payroll providers in this effort. Importantly, we see a significant opportunity for existing outreach programs to target employees who may have already opted out of a State Plan.
AKF has been following the Saver’s Match and its potential impact on State Auto-IRA Plans. We welcome the opportunity to have a conversation about how State Plans can accommodate it to the benefit of all eligible participants.