Saving for retirement and ensuring those funds last throughout your lifetime might get easier, if a bill that’s circulating Congress is passed into law.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which passed last Thursday in the House of Representatives by a 417-3 vote, aims to improve the nation’s retirement system. It includes 29 provisions, many of which provide new opportunities to save, whether you’re three or 30 years away from exiting the workforce.
The bill should soon make its way to the Senate, where lawmakers are floating similar legislation with bipartisan support. With both chambers and political parties appearing to be aligned on the issue, retirement experts say the SECURE Act – or another bill closely resembling it – could soon be signed into law.
“There is general agreement on both sides of the aisle that people need to be saving for retirement, and we want to create the incentives and vehicles for them to do so,” says Elizabeth Kelly, senior vice president at United Income who served as a special assistant to the president at the White House National Economic Council under the Obama administration. “More changes are needed to help make sure that all Americans are prepared to live a secure and dignified retirement, but the vast majority of the provisions are a step in the right direction.”
If passed, the bill would be the biggest legislative change to the retirement system in more than a decade, when the Pension Protection Act was passed in 2006. Here’s a breakdown of the SECURE Act and how you can expect it to impact your retirement savings.
What is the SECURE Act, and why does it matter?
The reality surrounding retirement is bleak: A lot of Americans aren’t prepared.
More than one in five working Americans aren’t saving for financial milestones such as retirement, according to a March 2019 Bankrate survey. A separate Bankrate survey conducted in May found that not saving for retirement was Americans’ top financial regret.
Meanwhile, a quarter of non-retired adults have no savings or pension whatsoever, the Federal Reserve found in its 2019 survey of households.
But contributing to that bleak picture is an issue of accessibility, Kelly says. Forty-two percent of private sector workers don’t have access to a retirement savings plan, as of March 2018, according to the Bureau of Labor and Statistics.
Those numbers are even more grim for part-time workers and employees at small firms. Nearly 35 percent of individuals who work less than 35 hours each week have access to a 401(k) or pension plan at work, while 46 percent of workers at businesses with fewer than 100 employees had access to only a 401(k), according to BLS.
That’s a major part of what the bill seeks to address, Kelly says. She breaks the 29 provisions down into two buckets, with the first category designed to increase the availability of workplace retirement savings plans.
“We know that the best way to get people to save is to offer them a workplace retirement plan, and ideally, to automatically enroll them in that plan,” she says. “The goal is to give people the tools to be better prepared by increasing the availability of retirement savings plans.”
But another development serves as a backdrop to the SECURE Act. People are living longer and working much later in their lives. More than 20 percent of Americans aged 65 and older are working or looking for work as of February, according to a United Income analysis. That’s double the amount of people at 65 or older who were still in the labor force in 1985.
The remaining provisions are “basically intended to update the rules to increase longevity” of individuals’ funds, Kelly says.
How the bill could change retirement plans
Though there are 29 updates to the retirement system, here’s where you’ll see the most impact, according to retirement experts.
1. Includes part-time employees
Current laws allow employers to exclude their part-time employees from eligibility for a 401(k) plan. That won’t be the case, if the SECURE Act is passed.
Under this legislation, your employer must allow you to participate in its defined contribution plan if you work at least 500 hours a year and have been at the firm for at least three consecutive years.
This will help the growing number of baby boomers who seek part-time work instead of fully retiring, says Rhian Horgan, founder and CEO of Kindur, a retirement planning platform.
“The old world where you retire at 62 or 65 and go from working full-time to retirement isn’t what modern retirement looks like,” Horgan says. “We see more and more retirees sliding into retirement.”
2. Raises age requirement for required minimum distributions
Current law requires that participants start withdrawing from their retirement savings accounts at 70.5. The new bill raises that minimum age to 72. That’s intended to “ensure that individuals spend their retirement savings during their lifetime,” according to the bill.
“It’s basically saying that you don’t have to take your minimum distributions until age 72 instead of age 70.5,” says Gene Steuerle, institute fellow and Richard B. Fisher Chair at the Urban Institute. “People are living longer.”
The law would also repeal the maximum age for contributing to a traditional IRA, also currently set at 70.5.
“As Americans live longer, an increasing number continue employment beyond traditional retirement age,” according to the bill.
3. New 10-year deadline on inherited 401(k)s or IRAs
The SECURE Act would change how long you can hold on to a 401(k), a traditional IRA or a Roth IRA that you’ve inherited from someone who’s died. Today’s guidelines say you can stretch the balance out over your lifetime, but under the new bill, those balances must be withdrawn within 10 years.
But there are some exceptions. If you’re the surviving spouse or minor child of the account owner, for example, you would not be subject to these new regulations.
“It’s both to raise money to pay for the provisions of the bill that may cost some money by virtue of increased savings being tax deferred, but also to make sure that the 401(k) plans and IRAs, are not being used indefinitely as a tax-deferred vehicle by the inheritors,” Kelly says.
4. Allows annuities to be offered in 401(k) plans
Annuities are an investment that provides regular disbursements throughout a period of time in exchange for an upfront, lump-sum payment. Essentially, they act as a fixed and steady stream of income during your retirement and can help prevent outliving your savings. Most 401(k) plans, however, don’t offer the option to purchase annuities – but that could change.
The bill creates a safe harbor for employers, making them more likely to offer these plans.
“It’s a recognition that we are living longer. Consumers today have to manage the drawdown of their assets,” Horgan says. “This move from pensions to 401(k)s is creating a tremendous amount of liability and responsibility for consumers.”
But don’t expect that to happen all at once, says Shai Akabas, director of economic policy at the Bipartisan Policy Center. Employers will most likely roll out those plans gradually.
“I don’t think that people are waiting to hit the go button and will start offering them tomorrow,” Akabas says. “Over time, you’ll see additional employers considering this option. I would guess that it would be over several years.”
5. Permits multi-employer 401(k) plans for small businesses
Opening up a work-based retirement savings plan such as a 401(k) can be costly for small businesses. As a result, many firms choose not to offer them, forcing employees to find savings plans on their own. A provision in the SECURE Act, however, seeks to change that.
The bill expands employers’ abilities to offer multi-employer plans, as long as they have the same trustee, fiduciary, administrator, plan year and investment options, “making it easier for small employers to sponsor a retirement plan and thus improving retirement savings,” according to the Ways and Means Committee.
The bill would also offer tax credits of $500 intended to “defray startup costs” for new 401(k) and simple IRA plans that include automatic enrollment.
“Basically, the idea is that you enable small businesses to band together and create one large retirement plan with the goal of lowering the administrative burden on each plan’s sponsor and costs,” Kelly says.
6. Requires 401(k) statements to include lifetime income stream disclosure
For those between the ages of 30 and 39, the average 401(k) balance is $42,400, according to recent data from Fidelity Investments. That may seem like a lot, but if you’re trying to stretch it out over your lifetime into a monthly or even weekly stream of income income, it may seem like a different story.
The new retirement bill would require that benefit statements include a disclosure that would illustrate “monthly payments the participant would receive if the total account balance were used to provide lifetime income streams,” according to the bill. This could help you learn what still needs to be done regarding your retirement savings – and whether you should be contributing even more.
How the bill could change the way you save
Outside of the retirement space, the bill provides extra opportunities to save elsewhere, by increasing your flexibility in covering costs associated with education and adoption.
“People are increasingly viewing retirement security as a more holistic problem and a comprehensive financial security challenge,” Akabas says. “People are recognizing the fact that student loans and health care issues play into the picture of the retirement broader narrative. It’s fair to look at these provisions as going hand-in-hand with some of the more direct retirement provisions.”
1. Expands 529 account flexibility
The SECURE Act would also expand the uses for 529 accounts, an investment vehicle that helps individuals save for higher education costs. If passed, the bill would allow individuals to use funds within these accounts for apprenticeships and qualified student loan repayments loans of up to $10,000, according to the bill.
“Creating more flexibility on 529s overall incentivizes savings and increases flexibility,” Horgan says. “Flexibility means that you’re more likely to try to save. When things are inflexible, you’re less likely.”
2. Allows adoption or child birth cost withdrawals
The bill would allow new parents to withdraw up to $5,000 from their retirement accounts to cover qualified costs associated with a new birth or adoption, as long as that distribution is made within a year.
What needs to happen before it becomes law
Though the bill is gaining a lot of traction, it still has a few hurdles before it’s made a law. The Senate will now get a chance to vote on SECURE, and lawmakers could either vote for it or against it – or strike down some of its provisions.
The Senate has its own version of SECURE circulating the finance committee: The Retirement Enhancement and Savings Act (RESA). The two pieces of legislation don’t differ too much; RESA, however, would increase the minimum distribution age to 75 instead of 72.
The fact that both chambers of Congress seem to have the same objective on their mind makes it seem much more likely that SECURE or a combined version with RESA will one day become a law, Horgan says.
“It’s rare to see legislation coming to the forefront that is so aligned from both the House and the Senate from day one,” she says.
Where the bill may fall short
The nature of accounts such as 401(k)s and IRAs is that they’re self-directed; the account owner must be the one who chooses the investment strategy. But statistics don’t paint an overall rosy picture for that readiness: A June 2018 Bankrate survey found that 61 percent of Americans don’t know how much they will need to have saved to fund their retirement.
Meanwhile, six in 10 non-retirees who hold these self-directed retirement savings accounts have little to no comfort in managing their investments, according to the Fed’s household well-being survey.
“People need more choices, but it always then raises an extra challenge,” says Jeff Yastine, senior equities analyst at Banyan Hill who helps people invest for retirement. “People already feel overwhelmed by their choices when it comes to 401(k)s. (The bill) makes it more complicated for all of us to know and make the right choice.”
The bill also doesn’t address other issues surrounding retirement, such as rising health care costs and Social Security insolvency, though it could protect people from those problems indirectly, Kelly says.
“There are certainly bigger issues in retirement that need to be tackled outside” of the bill, she says. “To the extent the bill encourages more people to save, so that they have more money to cover future health care costs, more is better.”
In the interim, it’s a good time to review your current plan and find a strategy to increase your contributions, Horgan says.
“If you’re under the age of 70.5 and working part time and haven’t participated in a plan, that’s encouraged for people in their 50s and 60s,” Horgan says. “It’s an opportunity to review your plan to create an income in the transition period.”
And because the legislation would create so many new options for retirement savings, it increases the importance of educating yourself on all of the options at your disposal, so you can choose the plan that’s right for you, Yastine says.
“That’s the curse of having a choice,” Yastine says. “If you don’t have a choice, it’s taken completely out of your hands. If you have three or five different choices, now the potential for confusion and misunderstandings grows exponentially. On the other hand, if you make better choices and you can get educated, you will have a better retirement than you might have had otherwise.”
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