New legislation seeks to extend 401(k)s to even younger Americans

Working Americans could get an opportunity to start their retirement savings journey earlier than ever thanks to a newly proposed piece of legislation in the House of Representatives.

The draft legislation, filed jointly by Democratic Congresswoman Brittany Pettersen of Colorado and Republican Congressman Tim Walberg of Michigan, is aimed at expanding access to employer-sponsored retirement plans for young workers.

The proposed bill introduced on August 2, titled the Helping Young Americans Save for Retirement Act, seeks to make it easier for Americans aged 18 to 20 to participate in 401(k) plans.

It follows companion legislation filed in the Senate last November by Republican Senator Bill Cassidy from Louisiana and Democratic Senator Tim Kaine from Virginia.

"We have to make sure our financial regulations keep up with reality and give all employees an opportunity to build a stronger financial foundation from the start," Pettersen said in a statement.

Under current regulations established by ERISA, employers are only required to offer 401(k) plans to employees who are 21 years old or older.

While business owners have the option to extend these benefits to even younger employees, many are held back by the costs and regulatory complexities associated with administering workplace retirement plans.

The bipartisan draft legislation seeks to address that challenge by proposing key amendments to the Employee Retirement Income Security Act of 1974 as well as the Internal Revenue Code of 1986.

In her statement, Pettersen cited 2021 data from the Plan Sponsor Council of America, which found that 40 percent of workplaces with retirement plans have a minimum age of 21 for participation, potentially disenfranchising younger employees.

The opportunity cost for employees between 18 and 21 years old can be very steep, Pettersen noted, as they miss out on additional savings and three years’ worth of compound interest.

Given the chance, younger workers might dive headfirst into the 401(k) pool. In a comparison of defined contribution plan data in 2022 and 1989, the Investment Company Institute recently found Gen Z households are kickstarting their retirement savings earlier than previous generations as their participation in DC plans were three times’ the participation of Gen Xers at the same age.

In a similarly encouraging report, Corebridge Financial found nearly three-quarters of Generation Z members are engaging in serious financial planning before the age of 25.

"Empowering young Americans to start saving early not only fosters financial independence but also strengthens retirement security," Walberg said.