The 401(k) retirement savings plan is undergoing changes in 2025 aimed at enhancing retirement savings opportunities for many Americans, particularly older workers. The new rules include higher contribution limits, increased catch-up contribution limits for certain age groups and automatic enrollment.
Why It Matters
The changes to the 401(k) plan in 2025 are designed to address the growing need for better retirement savings options. According to Bankrate's latest Retirement Savings Survey, 57 percent of Americans believe they are falling behind on their retirement savings. This includes people working full-time, part-time or who are temporarily unemployed.
The average 401(k) balance across all age groups in 2023 was approximately $134,128, according to Vanguard's How America Saves 2024 report. But a few accounts with "very large" balances are outliers, which makes that number look more favorable.
As Vanguard notes, "The median balance represents the typical participant," which was $35,286 in 2023. This median figure underscores that many Americans have insufficient retirement savings.
With so many Americans feeling behind on their retirement planning, these updates could offer a chance to boost savings and improve financial security in retirement.
Alex Beene, financial literacy instructor for the University of Tennessee at Martin, told Newsweek the 401(k) changes in 2025 are "overwhelmingly positive," particularly for seniors aged 60 to 63 who are eligible for higher catch-up contributions. He also highlighted that many low-income earners have struggled with retirement savings due to limited access to employer-sponsored plans and believes the new changes will now help these employees save for retirement outside of Social Security for the first time.
What To Know
Beginning in 2025, several updates will influence retirement savings plans, offering new opportunities for savers. Here are some key highlights:
Annual contribution limit increase: For 2025, the maximum contribution limit for people under 50 is $23,500, up from $23,000 in 2024.
Higher catch-up contributions: Catch-up contributions allow individuals aged 50 and older to set aside additional funds in their 401(k) retirement accounts beyond the regular annual limits.
The catch-up contribution limit for most workers 50 and above is set at $7,500. However, individuals aged 60 to 63 can make catch-up contributions up to $11,250 starting in 2025. This provides an opportunity for older workers to boost their retirement savings before they retire.
Automatic enrollment: Starting in 2025, employers will be required to automatically enroll employees in new 401(k) or 403(b) plans with a participation rate of at least 3 percent, which will gradually increase to 10 percent. This means that if an employee doesn't actively opt out, they will be enrolled in the retirement plan with a default contribution rate.
Kevin Thompson, founder and CEO of 9i Capital Group, told Newsweek the auto-enrollment can be beneficial to some as it "may encourage or even force people to save into retirement plans who otherwise might not have." However, he pointed out that some individuals might need to opt out but may not realize this. He has encountered cases where people were unaware of the feature and surprised by their first paycheck at a new company. Therefore, he stressed the importance of employers clearly communicating auto-enrollment policies and the option to opt out to avoid confusion.
What Experts Are Saying
Alex Beene, financial literacy instructor for the University of Tennessee at Martin, told Newsweek: "The changes to more part-time employees being able to qualify for 401(k) accounts and mandatory enrollment for new accounts is great news, even if some low-income earners may not see it this way initially.
When you're already living paycheck-to-paycheck, the idea of being automatically enrolled in a retirement plan that's going to deduct so much from each paycheck can just feel like having less money to spend now on expenses. However, long-term, a 401(k) is going to offer the ability to retire for these same employees that financially speaking don't have that opportunity currently.
Social Security payments are never going to be enough to cover all living expenses during retirement, and an additional account is pivotal to giving these employees a chance to make retirement a reality."
Kevin Thompson, founder and CEO of 9i Capital Group, told Newsweek: "While the contribution limits have increased, inflation has hit lower-income earners the hardest. Whatever they are currently saving is unlikely to change, even with higher limits. Most save just enough to meet their employer's match, and if companies truly want to boost savings rates, they would need to increase their matching contributions—something that is unlikely."
What Happens Next
It's unlikely everyone will be able to take advantage of these new rule changes. Thompson explained that individuals living paycheck to paycheck often lack extra disposable income to save and "will likely reduce their savings to cover essential expenses such as healthcare and rent."
If you are able to save, Thompson advised allocating a portion of your paycheck to a 401(k) and an emergency fund, with the remainder going to essential and discretionary expenses. He suggested a savings rate of 10 percent to 15 percent to balance saving and enjoying your income without guilt.
Beene advised not to assume your employer is making the best decisions for your financial future and stressed taking control of your accounts and contribution rates. If Social Security is your primary retirement income, Beene suggested maximizing your 401(k) contributions and taking advantage of catch-up contribution limits. If you have other plans like a Roth IRA, "max those out first for their tax advantages before focusing on increased 401(k) contributions."
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