Saver's match 'free money' could pad millennial, Gen Z retirements

Tens of millions of lower-income retirement savers could soon get up to $1,000 in matching contributions toward their nest eggs each year — but they'll need financial advisors' help.

That's the key takeaway from a report last month by The Morningstar Center for Retirement & Policy Studies and interviews with four experts about the "saver's match" program, which is a provision of the sweeping 2022 Secure 2.0 retirement law that's slated to take effect in 2027. As the replacement for the current "saver's credit," the match provides up to 50% in annual matching contributions from the federal government on the first $2,000 flowing into a saver's retirement account for those with modified adjusted gross income of $35,500 or less for individuals or a maximum of $71,000 for couples.

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Financial advisors often focus on high net worth clients whose wealth stretches far beyond that eligibility. However, they also frequently work with clients whose businesses sponsor employer retirement plans that must adjust their systems and raise workers' awareness to enable them to fully tap into their benefits. Many firms and advisors also regularly participate in pro bono planning that aids people of any means with volunteer services. Amid persistent racial disparities in retirement savings and the continuing flow of Secure 2.0 provisions taking effect across the retail wealth management industry, professionals will play a pivotal role in ensuring that the saver's match reaches its potential to boost millennial and Generation Z nest eggs by a mean of 12%, the report said.

"The impact is intuitively the biggest when people are changing their behavior, taking full advantage," said Spencer Look, an associate director of retirement studies with Morningstar's retirement center and co-author of the report. "There could be a big impact if we do that well as an industry and we implement this well."

Advisors, employers and other parts of the 401(k) and retirement-savings ecosystem require some time to "not only to get the infrastructure, the plumbing in place," but try to "target the potentially eligible participants in their plans and make sure they understand this is free money to them," said Jack VanDerhei, the director of retirement studies with Morningstar's retirement center and the other co-author of the study. For example, some of the eligible workers who aren't currently 401(k) plan participants may need to set up their first individual retirement account in order to receive the government matching contributions. At the very least, advisors should know that the saver's match and other parts of Secure 2.0 are "certainly going to influence the entire landscape going forward," VanDerhei said.  

"It's a given that, if the 2017 tax modifications are going to be salvaged in 2025, a number of retirement situations will come into play as far as taking looks at things like mandatory Rothification," he said. "This is something that's already been put in place and is going to be perceived by many as being a big help in terms of some of the retirement gaps going forward."

What the study found

The current saver's credit has reached fewer than 6% of filers due to design shortcomings like the requirement that they have an income-tax liability and a lack of knowledge among eligible savers, Morningstar's report said. The researchers found "reasons to believe that the saver's match will be more effective than the saver's credit," including the facts that savers will no longer be obligated to have federal income tax liability, that the money "will be directly deposited into their retirement accounts — a more tangible benefit that could encourage greater participation," and that the law instructs agencies such as the Treasury Department to promote it, they wrote. 

"That said, the success of the saver's match will largely depend on how effectively it is implemented," Look and VanDerhei wrote. "To maximize impact, the government and retirement industry should reduce barriers and minimize savings friction wherever possible, within limits. Clear and accessible communication and education — including an awareness campaign — are also critical to ensure qualified individuals understand and use the program effectively."

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The maximum match of $1,000 on top of the first $2,000 in retirement savings each year will go to taxpayers with modified adjusted gross income of $20,500 or less as individuals, $30,750 or lower for heads of households and as much as $41,000 among couples. For those with higher modified adjusted gross income, the matching contributions phase out at respective levels of $35,500, $53,250 and $71,000. Among millennials and Gen Z savers, roughly 49% of Hispanic households, 44% of Black Americans, 29% of white taxpayers and 26% of other racial and ethnic groups will qualify for some level of matching contributions. 

Using census data on those generations in terms of gender, marriage status and race and a simulation model called the "Morningstar Model of U.S. Retirement Outcomes," Look and VanDerhei predicted that single women's wealth at retirement could jump 13%, that of Black savers could grow 15% and Hispanic households could surge by 12%. Those figures assume that they get the highest matching contribution in 2027 and retire when they're 65 years old, and that the program spurs more people to open retirement accounts and save more in order to take advantage. But even without behavioral changes, the saver's match could boost the generations' retirement nest eggs by 8%.

"When looking at the results from different demographic perspectives, we found that single women, non-Hispanic Black Americans and Hispanic Americans see greater benefits compared with other groups," Look and VanDerhei wrote. "Moreover, our results show that workers in industries with a higher risk of running short of money in retirement are projected to experience a more significant increase in their retirement wealth under the new program."

Help needed

The match necessitates "buy-in from everyone" across employees, employers, advisors, recordkeepers and governments, plus ample financial wellness education, according to Pam Hess, the executive director of the Defined Contribution Institutional Investment Association's Retirement Research Center, which has worked on prior research about the potential impact of the saver's match as part of a joint effort with the Morningstar center and the Aspen Institute Financial Security Program called the Collaborative for Equitable Retirement Savings. In addition, the findings of the latest study explain why more employers are considering how they could provide emergency savings, paycheck advances or low-interest loans, she said.

"Peoiple need help meeting their short-term financial struggles," Hess said. "Employers are coming up with other solutions to help their workforce. You put those together with the saver's match, and it could be really meaningful."

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Until the policy starts in 2027, advisors could get a head start by trying to increase the number of households using the existing credit, according to Catherine Collinson, CEO and president of the nonprofit Transamerica Institute and its division Transamerica Center for Retirement Studies, which found in a survey earlier this month that only 51% of workers are aware of the saver's credit. The match "essentially reimagines and replaces and takes the saver's credit to the next level, and the saver's credit is available right now," she said.

"Most people don't wake up in the morning thinking about taxes everyday, unless it's April 14 — the day before everything is due," Collinson said, noting that many people also push back on the idea that they are among the "low-to-moderate income retirement savers" eligible for the credit. "The general public does not relate to that messaging, so this is where it's so critical for financial advisors who can help to get the word out."

More ways to get involved

On the other side of the equation, the sponsors and recordkeepers could use a nudge from the advisors to ensure they're giving the employees the means to get the biggest match "systematically, in a way that is doable and viable," Hess said. Right now, many employers simply don't "have all the information they need to know who's eligible and who's not," based on their modified adjusted gross income, she noted. 

"We know that engaging employees is really hard — getting that connection is increasingly hard in a noisy world," Hess said. "First you have to figure out who qualifies, and then you have to get the dollars from the government into that account, which is not a connection that's in place today."

Advisors' expertise could overcome some further barriers to participation based on the continuing problems that "there's still a major trust issue going on any time the government gets involved" and some people may not understand how to open an IRA, VanDerhei said. They'll also be able to point out that the match would benefit "a lot of people" to a certain extent, so it's not just for those of the lowest means, Look said.

"Pro bono work, volunteering to help educate and talk through with people in the community who may be eligible is very, very important," he said.