This year, there are some changes to 401(k) plans.

• This year, certain provisions from the 2019 Secure Act may become clearer.
• New retirement legislation in Congress has garnered bipartisan support, indicating that other changes to 401(k) plans may be on the horizon.
• Contribution limits also are higher for 2022.

Over the years, you may have observed modifications in your 401(k) plan, such as automatic increases in contributions and "catch-up" amounts for those over 50.

The Secure Act, a 2019 retirement bill, included a couple of tweaks that may become more apparent in the near future, addressing workers' desire for guaranteed income in retirement.

Bipartisan legislation in the House and Senate seeks to enhance the retirement system, potentially impacting 401(k) plans. One proposal suggests that employers can contribute to their employees' retirement plans even if they are paying off student loans.

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This year, you may notice some changes with your 401(k).

Contribution limit changes

The maximum amount you can contribute to your 401(k) changes annually. For 2022, you can contribute up to $20,500 in a traditional 401(k), an increase of $1,000 from 2021. Additionally, those aged 50 and over are eligible for a "catch-up" contribution of $6,500, bringing the total contribution limit to $27,000. Employer contributions do not factor into these limits.

The IRS imposes a limit on the total contributions made by employers and employees to retirement plans in 2022, which is $61,000 for all participants and $67,500 for those age 50 or older.

Small businesses may offer 401(k) plans with a contribution limit of $14,000 for 2022, and a catch-up amount of $3,000. Similarly, solo 401(k) plans, used by self-employed individuals with no employees except a spouse, have the same contribution limits as traditional 401(k) plans.

Estimate of guaranteed income

You may soon observe illustrations on your quarterly or annual statements indicating a potential estimate of guaranteed lifetime income if your account balance were annuitized, as per the Secure Act's mandate for 401(k) plans and similar workplace plans.

Jason Berkowitz, chief legal and regulatory affairs officer for the Insured Retirement Institute, stated that "the aim is to assist participants in assessing their progress towards achieving their retirement objectives."

Berkowitz stated, "To determine a protected stream of income in retirement, consider the balance and its translation."

The U.S. Department of Labor has issued an interim rule that requires two illustrations to be provided annually, showing estimated monthly income from a single life annuity and a joint annuity with benefits for a surviving spouse. A final rule is expected to be issued soon, which may differ.

The monthly payments would be calculated based on the worker's current account balance and would begin immediately, assuming the person is 67 years old or their actual age if older.

If a person is 35, they still have many years to make contributions that will increase their balance, which the illustration may not reflect. There is concern that for savers with lower balances, the numbers they see could be discouraging if based solely on their current accumulation.

In late 2020, House Ways and Means Chairman Richard Neal, D-Mass., wrote to the Labor Department requesting that additional assumptions, specifically investment returns, be included in the information provided to 401(k) participants in response to the interim rule.

It’s uncertain whether the final rule will include that recommendation.

According to Craig Copeland, a senior research associate with the Employee Benefit Research Institute, while most people agree that the information is useful, the way it is presented is the main issue of contention.

Annuities in your plan

The Secure Act aimed to alleviate companies' concerns about legal liability if an annuity provider failed to fulfill its obligations, even though annuities are allowed in 401(k) plans.

Through 401(k) plans and similar workplace plans, insurance companies, asset managers, and employers are increasingly making guaranteed lifetime income options more widely available.

The uptake of retirement plans by sponsors has been sluggish due to workers' lack of comprehension of annuities and their reluctance to surrender their retirement funds in a single payment.

"That makes it tough because people also say they are interested in a guaranteed source of income in retirement," Copeland said.

Typically, annuities entail entering into a contract with an insurance company, where you surrender your funds in exchange for guaranteed regular payments over an extended period. However, annuities can be complex and may be more expensive than other investment alternatives.

In general, annuities within a 401(k) plan may differ from those bought independently.

A guaranteed income option will be included in target-date funds, which gradually shift from stocks to safer investments like bonds as you approach retirement age.

When you turn 55, BlackRock's funds will start allocating approximately 10% to annuity contracts, which will increase to 30% by the time you reach 65.

You can roll over a portion of your funds between the ages of 59½ and 72 into a fixed annuity offered by BlackRock's insurance partners, which typically guarantees a minimum rate of return on your principal.

Although BlackRock's annuity offering eliminates the middleman and commissions, it does not mean that all annuity options in 401(k) plans will operate the same way. The Secure Act did not put limitations on the types of annuities that could be offered through a plan.

Research from the Insured Retirement Institute reveals that approximately 9 out of 10 workers desire retirement income sources, excluding Social Security, to sustain for their entire lifetime, as well as their spouse's, if applicable.

Berkowitz predicted that some companies may start incorporating annuities into their plans in 2022, despite the slow adoption rate.

He stated that it would be a continuous effort, with some adoption occurring this year and more in the future.