Given the dysfunction in Congress, we were both surprised and pleased to see that last week the House of Representative passed legislation that will help Americans retire. The bill, called Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, was approved 417-3, a rare demonstration of bipartisan cooperation.
The bill cobbles together several interesting provisions. It will allow Americans to delay required minimum distributions (RMDs) from their retirement accounts until 72 and it will allow those still working to continue to contribute to their retirement accounts beyond age 70 ½. Currently, owners of such accounts must begin taking distributions by age 70 ½. This has long been an oddity in the law and has caused confusion and errors for many retirees. For example, you are permitted to wait until April 1 of the year after you turn 70 ½ to take your first RMD, but if you do so, you must take two distributions in that year.
The reality is that most Americans cannot wait until age 70 to begin taking distributions from their retirement accounts. And they don’t. However, there are some Americans who have enough income and savings who can wait to take distributions, and there are some who will never need to take distributions from these accounts. So, this provision will help them.
The government taxes distributions from qualified retirement accounts. The longer a retiree waits to take distributions, the longer the federal government must wait to receive the taxes due on these distributions. So, moving the maximum age before deferrals must start from 70 ½ to 72 will be cost the government revenue. While this is really a timing issue, Congress will have to determine the budgetary impact to revenue and decide whether to offset it or not.
Another provision will make it easier for small employers to offer retirement plans to their employees. They will be able to group together to offer 401(k) plans with more choices, lower costs and fewer compliance requirements. The idea is that they will have better bargaining power with retirement plan administrators, allowing them to negotiate for better service, features and pricing than they could obtain on their own. They will also be given a tax credit to start a plan, and another credit if their plan includes auto-enrollment for their employees (unless they explicitly opt out). Small business owners face lots of challenges, and while making retirement plans more affordable is attractive, it’s not clear that cost is a significant barrier. Rather, small businesses face myriad other obstacles that discourage them from offering retirement plans.
The bill will also allow long-term, part-time workers to participate in their employers’ retirement plans. Currently, an employee must meet certain tenure requirements before they are allowed to participate, and these rules prevent part-timers from entering a plan. This is good news for workers who are not full-time. But one does wonder how many part time workers really have the ability to actually contribute to a retirement plan. Many of these people work several jobs just to get by. Also, employers would not be required to contribute to their retirement plans for part-time employees in the same ways they must for their full-time workers.
The SECURE Act will allow employers to more readily offer annuities within their 401(k) plans. It will provide some legal immunity to employers should the insurance company underwriting the annuity fail, leaving both the employer and workers with losses. This provision is not entirely clear, but it appears that the sponsoring employer will have some duty to assess the creditworthiness of the insurance company before offering its annuities in the company’s retirement plan.
As we have shared in the past, we believe annuities can be a valuable part of a person’s retirement plan. They provide guaranteed income that a retiree cannot outlive. However, most annuities are very expensive, with all-in costs that can total 3% or more. We would want employers to perform careful due diligence to make certain their employees are offered annuity products that are competitively priced.
All of these changes come with a cost. To pay for them, the House bill would change the way in which those who inherit retirement accounts are made to take distributions from them. Beneficiaries will be required to fully liquidate these retirement accounts over a period of no longer than 10 years. Exceptions to this provision will be for the deceased plan owner’s surviving spouse and minor children. Current law allows beneficiaries to take distributions over their life expectancy.
There is companion legislation to this House bill in the Senate, called the Retirement Enhancement and Savings Act, or RESA, and its provisions largely mirror those in the House bill. The bills are not identical and, should the Senate also pass its bill, the two pieces of legislation will need to be worked out in conference.
While we generally support this legislation, we know that much more needs to be done to help Americans achieve long-term financial security in retirement.
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