48% of U.S. households led by someone 55 or older have no money saved for their retirement, according to a report released by the Government Accountability Office.
To make matters worse, 29% of those households don’t have access to a pension or other defined benefit plan that would help provide some source of income during retirement, leaving these families to live solely off of Social Security benefits.
It’s a very complex problem, driven in part by a shift away from traditional pensions toward a do-it-yourself savings system.
So what can be done to change people’s savings behavior and prevent them from facing their own retirement crisis?
Research has shown one of the most effective ways to get people to save is through a workplace retirement plan such as 401(k)s, 403(b)s, etc. — also known as defined-contribution plans.
However, millions of people do not have access to these plans either, especially at small businesses where the cost and complexity preclude the employers from establishing one.
There is currently a bill that aims to help workers save more for retirement by incentivizing small businesses to offer defined-contribution plans and making it easier for workers to save within those plans (along with some other stuff).
So, What is the bill?
The Setting Every Community Up for Retirement Enhancement Act, known as the SECURE Act, includes 30 provisions that seeks to reform the retirement savings landscape.
I’ll run through a few of the current provisions of the SECURE Act that I find particularly interesting and provide my opinions on if it really helps accomplish what they’re setting out to do — which is to help the average American save more for retirement.
It is important to note that the SECURE Act is not yet law, but it was attached to the year-end spending bill that it is likely to be signed by the President and go into effect January 1, 2020.
Section 102 & 105
Section 102 and 105 of the bill almost go hand-in-hand. Section 102 would allow an employer to automatically deduct money from an employee’s wages toward retirement — up to 15% of their salary — unless the employee opts out or to contribute a different amount. Basically, your employer determines how much you save to your Plan unless you tell them otherwise.
I actually really like this provision for defined-contribution plans and think it could go along way in helping individuals build wealth. Unfortunately, automatic enrollment already exists (with the current cap at 10% of an employee’s salary) and most employers don’t use it.
To help incentive businesses to include auto-enrollment in their Plan, Section 105 would create a $500 per year tax credit that would be available for three years to help offset the cost of including the provision in the Plan.
I really don’t think this credit will make a difference in the adoption rate of the auto-enrollment provision. Instead, I think employers should be given more tools to ensure that their participants are saving at sufficiently high levels to enjoy a secure retirement.
Section 107
Current IRS rules say that if you are older than 70 1/2, you can’t contribute to a traditional IRA (but you can still contribute to a Roth IRA). This piece of legislation would repeal that and doesn’t put an age limit on contributions.
The reasoning behind the change is that Americans are living longer, and an increasing number of people continue to work beyond traditional retirement age.
The current age cap for IRA contributions doesn’t make much sense so I am in favor of repealing it. But aside from some tax planning opportunities, this doesn’t do much to help those struggling to build substantial retirement assets do so.
This provision also includes language that coordinates deductible contributions to IRAs after age 70 1/2 with qualified charitable distributions (QCDs).
Here is what the provision says,
“The amount of distributions not includible in gross income by reason of the preceding sentence for a taxable year (determined without regard to this sentence) shall be reduced (but not below zero) by an amount equal to the excess of – (1) the aggregate amount of deductions allowed to the taxpayer under section 219 for all taxable years ending on or after the date the taxpayer attains age 70 1/2, over (2) the aggregate amount of reductions under this sentence for all taxable years preceding the current taxable year.”
Talk about confusing! What this is essentially saying is that QCDs must be reduced by the cumulative amount of deductible IRA contributions you made after age 70 1/2, that have not already reduced an earlier QCD amount.
Here is an example:
You made deductible IRA contributions at age 71, 72, and 73 for a total of $21,000 ($7,000 per year). At age 74, you make a qualified charitable distribution of $30,000 from your IRA. Only $9,000 of this amount will be treated as a QCD. The first $21,000 doesn’t count because you already took a deduction for it.
This makes sense otherwise you’d be getting a tax break on the money going in and an equivalent amount going out.
section 112
Under current law, employers generally may exclude part-time employees (employees who work less than 1,000 hours per year) when providing a defined contribution plan to their employees.
These rules can be especially detrimental to women since they are more likely to work part-time than men.
Section 112 would make it harder for employers to exclude part-time employees from Plans by expanding the eligibility requirements to include anyone who has worked three consecutive years of service with at least 500 hours of service.
I like this provision a lot and think it goes a long way to help the average working American save for retirement.
section 114
Current law requires individuals to begin required minimum distributions (RMDs) from their retirement accounts once they reach age 70 1/2. The SECURE Act would delay this to age 72.
Something to keep in mind is this only applies to those who are not age 70 1/2 by the end of 2019. If you’re already age 70 1/2, you’ll have to continue taking your RMDs as you would have. There is no grandfather clause.
Honestly, this does nothing but add a few more years for tax planning opportunities (like Roth conversions) for those who already have substantial traditional retirement assets.
section 204
Section 204 is my least favorite provision of this bill. It essentially makes it easier for employers to offer annuities in their 401(k) lineup.
While I’m not against using annuities for lifetime income planning, I am against wrapping them into retirement accounts so insurance companies can charge egregious fees. If you want proof, look at the current 403(b) market!
I recommend reading Tony Isola’s article on why he is against this provision as he’s an expert in the 403(b) space and has researched this thoroughly.
section 302
The Section would allow 529s to be used for student loan payments.
I wrote an article about how this change opens the door for some unique tax planning opportunities, but this doesn’t help the average person prepare for retirement.
section 401
This Section would make substantial changes to inherited retirement plans like 401(k)s and IRAs.
Currently, non-spouse beneficiaries must begin distributions from an inherited retirement account one of two ways:
- spreading distributions over their lifetime, or
- distribute the balance of the account within 5 years of the original account holder passing away
The bill would take away the first option completely and instead requires most beneficiaries to distribute the account over a 10-year period.
Inherited accounts aren’t meant to be retirement accounts so I can why the government would want to implement this provision — it accelerates the taxes the government is owed.
From a planning perspective, it makes proper estate planning and tax planning far more important for families with significant wealth. Does it help the average person with accumulating retirement assets? I think not.
Final thoughts
While the SECURE Act makes a few positive changes, it doesn’t do anything to help accelerate the retirement security of those who most need it.
Not surprisingly, many of the changes appear to be a clear result of the insurance companies having great lobbyists.
Needless to say, it will take further work by financial planners to help change the way people save for retirement, one family at a time. We can only hope that, in time, this also influences the way the government makes rules surrounding this topic for the better.
