New Bill in Congress Can Bring Much-Needed Benefit to U.S. Retirement Landscape

For some time now, small business owners and their employees have had only a limited menu of effective workplace retirement-saving options.

High plan fees and other barriers have kept traditional retirement planning tools, such as 401(k)s, and income tools, such as annuities, beyond their reach.

A new bill, recently passed by the House of Representatives, aims to level the playing field for small businesses. It would also change some rules for required minimum distributions, or RMDs, which could help simplify retirement distribution planning.

The Setting Every Community Up for Retirement Enhancement Act (the “SECURE” Act) passed the House by a 417-3 vote in late May.

Now it’s on track to move forward to the Senate. With unprecedented bipartisan support in both houses, the bill is expected to have a good chance of sailing through.

If the president signed it into law – or if Congress overturned a presidential veto – the Act would represent the most substantial changes to the U.S. retirement landscape in a decade.

The Big Retirement Savings Gap

While statistics in this area vary, an estimated 63% of full-time American workers participate in an employer plan, according to the Investment Company Institute (ICI).

Institute analysis of tax data showed that, in 2014, two of every three workers aged 26-64 participated or had a spouse who participated in a plan.

Other studies show that participation from American workers could be as low as 40%. Taking the rosiest figure of 63% still leaves almost 30% of employees who either aren’t participating or don’t have access to such a plan.

Addressing the Retirement Shortfall

Assuming their current business or employment earnings meet their lifestyle standards, Americans will need to plan for at least 25-30 years of income for a comfortable retirement. But if statistics are any indicator, many Americans haven’t saved anywhere near that amount.

In a 2018 study, Northwestern Mutual found that 21% of Americans have no retirement savings and 10% have less than $5,000 in savings.

Another eye-opening statistic from that study: One-third of baby boomers approaching retirement have between zero dollars and $25,000 set aside.

New Options for American Workers

The SECURE Act is being heralded because it provides cost efficiency to small employers. With the legislation passing, they could band together to offer the same 401(k) plan to their workers.

It would essentially life the financial burden of creating and managing a company-specific 401(k) plan. This is what has kept a majority of small employers from providing this retirement savings solution.

By potentially easing the fiduciary liability for small business owners, proponents believe many more employers will be open to offering a retirement savings plan. In turn, workers would have a greater ability to build their nest eggs, reducing the likelihood that they would outlive their savings.

And the SECURE Act doesn’t just address the needs of full-time workers. It includes provisions that make it possible for the nation’s estimated 27 million part-time workers to access employer retirement plans.

The Act incentivizes participation from employers by enhancing tax credits for those offering plans with automatic enrollment and auto-escalation of contributions.

Employees will be encouraged to participate with automatic contributions and low-cost savings accounts.

Annuities Available Inside Employer Retirement Plans?

Sec. 204 of the bill proposes to ease employer liability for selecting in-plan annuity providers.

It would update the “safe harbor” provision for 401(k) plan sponsors under the Employee Retirement Income Security Act of 1974.

This revision is expected to increase employee access to annuities as lifetime income options. Right now, the vast majority of employer plans require you to purchase annuities outside of them.

Retirement experts say that this increased access to annuities can help investors better manage the risk of outliving their retirement money – and all the multiplied risks that come with it.

And not only that, retirement investors would have more options for principal protection and lower-risk tax-deferred accumulation.

Rethinking Required Minimum Distributions

IRS tax rules don’t let you keep retirement funds in your account indefinitely. To begin your withdrawals, the IRS created the annual Required Minimum Distribution.

This is the minimum amount you must withdraw from your retirement plan account, IRA, SIMPLE IRA, or SEP IRA, beginning when you reach age 70.5.  Roth IRAs don’t require withdrawals until after the death of the owner.

This withdrawal is included in your taxable income. And what is exempted? Any funds that were taxed before (your basis) or that are received tax-free, such as qualified distributions from designated Roth accounts, according to the IRS.

The SECURE Act would delay this requirement from age 70.5 to age 72. This could help the tax burden of those who wouldn’t need the taxable income from their retirement accounts, should they already have sufficient cash-flow from other sources.

Other proposed changes to RMDs include exempting owners of smaller accounts, for example those with less than $100,000, from withdrawal requirements.

Changes Expected for Inherited Retirement Accounts

There are also potentially significant changes to how retirement plans like 401(k)s, traditional IRAs, and Roth IRAs are inherited.

Plan owners’ beneficiaries generally spread distributions over their own life expectancy. The Act currently calls for beneficiaries to ‘distribute’ the inherited account over a shorter 10-year period.

Some experts point to this potential development as a tax-generating move that would drain large IRA inheritances more rapidly.

Smaller inherited accounts are absorbed by beneficiaries relatively quickly. The potential demise of the “Stretch” IRA or retirement account mirrors the Supreme Court ruling that inherited accounts don’t qualify as retirement accounts.

Therefore, extending tax benefits through a beneficiary’s retirement will likely be taken off the table.

Setting Up Your Own Retirement Success

We will all be watching the trajectory of the SECURE Act, as it could bring welcome changes to the American retirement system.

But for the good it can bring, this latest hurrah in Washington drives home an unavoidable truth. The best determinant of your retirement success are in the steps you take. Retirement is a personal responsibility now more than ever.

If you haven’t yet put your retirement financial strategy in place – or you want a second opinion of how your strategy might be stronger – financial professionals at SafeMoney.com can assist you.

Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your goals, concerns, and current financial progress. Should you need a personal referral, call us at 877.476.9723.