I’ve been helping people grow and protect their wealth for decades, and I know without a doubt that many factors make retirement planning a moving target. Sure, there will always be the ups and downs of the stock market. That’s a given. But the more impactful changes have to do with people’s changing goals or a disruption in their path toward financial freedom. A job transition, injury or long-term disability, divorce, death of a spouse, and more can turn the best financial plan on its head. At the moment, however, there’s something new in the works that could require a major shift in how you plan for retirement. The SECURE Act, a bill that would deliver the largest overhaul to retirement plans in over a decade, has already passed the House and is now with the Senate pending final approval. If it does pass, the changes will require everyone working toward a secure retirement to rethink their strategy.
The SECURE Act (which stands for ‘Setting Every Community Up for Retirement Enhancement’), passed the House on May 23 in a 417-3 vote. While it looked like the Senate was poised to pass the bill in short order this week, a hold was placed on the bill on Monday due to concerns about certain provisions of the bill. As someone who dedicates my life to helping families grow and protect their wealth, I’m glad to see that the Senate is taking a closer look. Hopefully, they will make some important amendments to be sure the SECURE Act gives Americans an easier path to a financially secure retirement.
What are my concerns with the SECURE Act as it stands today?
While the bill is designed to deliver much-needed reforms to America’s retirement savings laws, there are several provisions that do the opposite. For my clients, the most impactful concern is that SECURE would decimate the ‘stretch’ provisions of the current law that allow tax deferral of the IRA for heirs. (The beneficiary of this change would be the US Treasury—not families who hope to build secure futures for their families.) That’s pretty major, but it’s not my only worry. Of the bill’s 29 provisions, these items concern me most:
- Raising tax revenue by changing the rules regarding distributions from inherited IRAs. Current tax law allows the annual distribution amount to be spread out over the life expectancy of the heir. That means that the heir can ‘stretch’ the tax-deferral on inherited IRAs for decades. Under the new bill, however, most beneficiaries would be required to take their money out and pay the taxes over a 10-year, or even 5-year, period. Inheriting spouses and minor children are exempted from the provision, but any other heirs would be on the hook for the taxes due. This would impact the middle class more than the working poor or the wealthy.
- Creating a safe harbor for retirement plan sponsors to offer annuities within 401(k) plans.
This one is a doozy. In Q4 2018, indexed annuity sales set an all-time quarterly record at $19.5 billion, a 40% increase over sales in Q4 2017. The biggest problem? Lots of salespeople are selling lots of annuities to lots of people—regardless of whether the products are a wise fit. While income annuities are sometimes a wise choice for guaranteed income in retirement, these are entirely different products than deferred annuities (which I would never recommend). Not all annuities are right for all people, but under the SECURE Act, companies that decide to offer annuities would be shielded from liability, regardless of the annuity product they select. Any financial planner who has worked with teachers and seen the high-commissioned products in 403(b) plans knows well that there is great potential for harm with this aspect of the new bill.
- Requiring all defined contribution plans (including 401(k) plans) to estimate how much income would be generated by each plan participant’s current account value.
This provision tells me that the politicians who wrote the bill know little about the retirement planning process. There are too many unanswered questions. How would such a calculation be made? What return assumption would you make over the next 30 years? How many years would that income be expected to last? These are questions that we CFP®s take great care to answer correctly for each of our clients based on myriad aspects of their lives. Requiring a plan sponsor to make those estimates based on a generalized algorithm is not possible.
I’m not the only one with concerns around these aspects of the bill. Hopefully, our voices will be enough to convince the Senate to defeat the bill in its current state. That said, the bill is not all bad. Here are some changes that could potentially deliver real benefits:
- People who work past age 70 could continue making IRA contributions while they’re earning an income. With the average age of retirement increasing every day, this is a real benefit to older workers.
- Required minimum distributions from IRAs or 401(k) plans would be delayed from age 70 1/2 to age 72. (A Senate version of the bill would push out the start date to when the IRA owner turns age 75.) Again, this is a smart change to support an older workforce.
- Employers’ ability to create 401(k) plans in conjunction with other businesses would be expanded, allowing small businesses to share and reduce costs. Anything that makes 401(k) plans more accessible is a good thing!
- Smaller employers who encourage automatic enrollment in their retirement plan would receive a $500 tax credit. Studies show that employees save more under automatic enrollment than when they have to opt-in affirmatively, so this, too, is a good thing.
- The maximum workers can have automatically deducted from their paychecks to go into the retirement account would increase from 10% to 15%. The more dollars that workers can save pre-tax, the more they will save over the long term.
- New parents (by birth or adoption) could withdraw up to $5,000 from their IRA or retirement plan without penalty. This is a nice addition to the provisions already in place, such as first-time homebuyers and people with medical expenses that exceed 10% of their annual income.
If the SECURE Act does pass the Senate—in its current state or in an amended version—retirement savers would be wise to take a close look at their current plan and make any necessary adjustments. The Secure Act is meant to help retirees. However, as drafted, the plan is uniformly bad for middle class Americans. But if this bipartisan legislation gets through Congress, the key will be planning to take advantage of the positive changes while mitigating the impact of the less attractive aspects of the bill. If you need help to ensure your plan is the best it can be to address your own needs and goals, please reach out. As always, we are here to help!
 According to a quarterly annuity report from LIMRA Secure Retirement Institute (SRI).