The first major retirement legislation since the Pension Protection Act of 2006 stands a good chance of becoming law before the end of the year – good news for retirees and certain workers alike. It’s likely to start getting more attention when Congress returns from August recess next month.
The legislation, already passed recently by the House of Representatives by a whopping bipartisan vote of 417-3, is called the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE). Now in the Senate’s hands, it would, among other things, delay required minimum distributions (RMDs) from IRAs and similar accounts to age 72 instead of 70 ½, eliminate any age cap for traditional IRA contributions (now 70 ½), and open the door to encourage 401 (k) plans to offer annuities.
It is no cure-all for Americans’ financial retirement problems, but at least it’s a step in the right direction. On another front, for example, the legislation would permit small businesses to band together to create retirement plans for their workers at lower cost. It would also enable more part-time workers to participate in 401(k) plans by trimming the number of hours they have to work a year to qualify.
The Senate has a similar bill in the works – the Retirement Enhancement and Savings Act, known as RESA. As a result, Congress will have to reconcile the two bills before any legislation can be sent to President Trump.
Annuities are Probably Coming to 401(k) Plans
Of particular interest to annuity fans, the House legislation would eliminate some of the liability for employers who add annuities to the menu of options for their 401(k) plans. Employers have been reluctant to include annuities because of fear of being sued if an insurer could not make their guaranteed payments. Theoretically, this could happen – and long after participating employees leave the company.
The legislation would ease these concerns by adding a provision that protects employers from liability in such cases. If the insurance company became insolvent, retirees would be able to seek redress from state insurance guaranty associations, which provide a backstop to their benefits up to certain limits.
To be sure, there is debate about the value of annuities in a tax-deferred umbrella. Since annuities defer interest outside of a tax-deferred umbrella prior to withdrawals, critics question the value of putting them inside this umbrella. Critics also note, correctly, that annuity fees are typically higher than fees for other investments – often markedly higher. They also say insurance companies might be more inclined to sell mostly variable annuities and fixed indexed annuities (FIAs), which charge among the highest sales commissions.
On the other hand, many annuities offer the option of guaranteed lifetime income, an attractive feature available nowhere else.
FIAs May Make the most Sense for Retirement Accounts
And FIAs, one of the most popular annuities, offer conservative investors the opportunity to invest in the stock market without losing principal in a down market (in exchange for taking smaller gains in an up market.) Critics question whether investors can get ahead this way in the long run. But the fact remains that millions of conservative investors fear losing money in the stock market, and an FIA offers a way around this without banning people from the stock market altogether.
Here are additional details on some of the other key features of the SECURE Act:
- As mentioned, the House bill increases the starting age for RMDs to age 72. This provides an additional 18 months of tax-deferred growth for older workers and retirees who don’t need to tap their retirement accounts to cover expenses. Because the change wouldn’t be effective until next year, those turning 70 ½ in 2020 would be the first to benefit. (IRA workers already taking RMDs would be unaffected.)
- Also mentioned, the House bill would eliminate the age cap for traditional IRA contributions, already the case for Roth IRAs. For those 50 and older in 2019, the maximum contribution is $7,000.
- The SECURE Act would allow penalty-free withdrawals from retirement plans to pay for the costs related to the birth or adoption of a child.
- The Act would also permit small businesses to band together to create retirement plans for their workers, many of whom have no such plans today. Supporters say it would give access to investments and administrative services at less expense.
- One ostensible negative in the SECURE Act is the way it would treat non-spouse heirs of retirement accounts. The legislation would erase their ability to stretch out RMDs over the span of their own life expectancies, allowing more of the money to grow tax-deferred. Instead, the legislation would mandate that the inherited assets be withdrawn within 10 years. Larger IRA withdrawals lead to larger tax liabilities – and that’s the whole point. The House wrote this into its legislation to help cover the costs of everything else.
There is an argument that all these changes, while mostly positive, won’t move the retirement security needle much. In fact, the case can be made that many of the changes benefit only relatively wealthy IRA owners – those that don’t yet need their RMDS, for example – and are essentially a favor for financial product manufacturing lobbyists.
The Less Well-Heeled Could Be Missing Out
On one hand, this view may seem overly negative. On the other hand, the major issues facing retirement security for most Americans still revolve around the funding of Social Security long-term, skyrocketing drug costs, and strains on Medicare and Medicaid. Studies shows that a quarter of working Americans have no retirement savings at all, including 13% of workers age 60 and older. Most provisions of the SECURE Act do little for them.
For those it would help, however, the timing is propitious.
In general, Americans can expect to live 20 more years in retirement – and some much more. A white paper by the Teachers Insurance and Annuity Association of America (TIAA), a Fortune 100 financial services organization, says that among two-thirds of married couples who are 65 today, at least one spouse will live to age 90. Longer life expectancy, TIAA says, increases the “longetivity risk” – i.e., the chance that retirees will outlive their savings.
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