Congress to the Rescue (Maybe)
Two important bills are moving through Congress
How will this impact your retirement? Americans face a retirement crisis. One in three Americans has less than $5,000 in retirement savings, and one in three baby boomers has less than $25,000 saved for retirement. At Vanguard, the median 401(k) account value for an investor age 65 and older is $58,035. The median private pension is only $9,376 per year, and the average social security check in 2018 was $17,064.
Add it all up, and the average American aged 65 and older has approximately $29,000 to live on per year in retirement. After looking at the data, the St. Louis Fed concluded that “for many American households, the total balances of their retirement accounts may not be sufficient to ensure a solid life in retirement.”
Could Congress come to the rescue? With The SECURE Act in the House of Representatives and RESA in the Senate, there may be a chance.
The Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act, was introduced in the House of Representatives by Richard Neal on March 29th. The Retirement Enhancement and Savings Act of 2019 (RESA) was introduced in the Senate on April 1st . The bill has passed the Ways and Means committee in the House, and is waiting in committee in the Senate. Both bills have bipartisan support in their respective chambers.
What primary tasks do SECURE and RESA set out to accomplish?
- change IRA rules, including those related to required minimum distributions (RMDs)
- increase small business offerings of retirement savings plans
Regarding IRAs, the bills propose to repeal the maximum age for traditional IRA contributions, which is currently set at 70 ½ years.
What is the SECURE Act?
The SECURE Act change age when someone is required to begin mandatory distributions, increasing it from 70 ½ years old to 72. The Senate bill is currently silent on this matter.
The bills make modifications to the “Stretch” RMD Rules upon the death of the IRA owner. In RESA, the account balance must be fully distributed by the fifth year following the account owner’s death; the SECURE Act requires full distribution by the tenth year following the account owner’s death. The bills allow for exceptions, such as distributions to the spouse, disabled or chronically ill individuals, or the account owner’s child, if the child is under 18 years old.
The House bill also helps home healthcare workers save for retirement through a defined contribution plan or IRA by classifying their “difficulty of care” payments as compensation for purposes of calculating contribution limits to retirement savings plans.
To spur small business to offer retirement plans, both the SECURE Act and RESA make it easier for business to form “Multiple Employer Plans”, or MEPs which help spread out the costs over multiple employers making the plans more affordable.
The SECURE Act permits penalty-free withdrawals of up to $5,000 from qualified retirement savings plans to help pay for childbirth or adoption expenses (with repayment permitted).
The SECURE ACT and 401(k) Plans
The SECURE Act also offers employers a tax credit of $500 per year to cover the cost of setting up new 401(k) plans and SIMPLE IRA plans that include automatic enrollment.
Additionally, the proposed SECURE Act increases the number of people who will be able to enroll in 401k plans. Under current law, employers may exclude part-time employees who work less than 1,000 hours per year from defined contribution plans. Except in the case of collectively-bargained plans, the proposed law will require employers to offer dual eligibility enrollment for their 401k plans; under the proposed law, an employee must either satisfy the current eligibility criteria or an employee must work at least 500 hours, but not more than 1,000 hours, in three consecutive years.
For small employers, the SECURE act increases the credit limit for small employer pension plan startup costs, as well as creates a new tax credit to help defray the costs of starting a 401(k) or SIMPLE IRA plan that includes automatic enrollment.
SECURE ACT Policies
One word of caution: the laws change the policies around “lifetime income options” aka annuities. One good change in the SECURE Act is that Lifetime Income Options are made more portable, allowing people to avoid most surrender charges and fees.
An unfortunate feature of the proposed laws is a concession that loosens the fiduciary standard around the selection of annuity products. The bills would allow a provider to meet its fiduciary obligation by obtaining written representation from an insurer that they are licensed to offer guaranteed annuity contracts and that they’ve been operating in good standing for the past seven years.
At HCM Wealth Advisors, we believe that, in most situations, a dividend growth solution is superior to annuities, and we would be hesitant to include annuities, in a meaningful way, in most retirement income plans. Of course, there are exceptions to every rule, and you should talk to your Wealth Advisor about the specifics of your unique situation.
To pay for these changes, the bills include revenue enhancements. The penalty for failing to file a tax return is increased to the lesser of $400 or 100% of the amount of the tax due. There is also an increased penalty for failing to file retirement plan returns.
Hopefully these bills will enable more Americans to save for retirement, helping to stave off the looming retirement crisis.