Last week the House of Representatives passed a new bill by an overwhelming majority revising the treatment of key parts of American retirement systems entitled the Setting Every Community Up for Retirement Enhancement or “SECURE” Act. The bill was passed by a massive majority of 417-3 and signals from the Senate and President indicate that the law would likely pass.
There are several key changes proposed in the Secure Act:
Required Minimum Distributions (RMDs) would be delayed from age 70.5 until age 72 in Individual Retirement Accounts and 401(k)s. Meaning those who’ve contributed to these plans would be able to defer taking money out for an additional 1.5 years.
In order to pay for the decreased revenues, the treatment of IRAs and 401(k)s inherited by individuals other than the spouse would be changed. Rather than being allowed to “stretch” the withdrawals from an IRA across the inheritor’s full lifespan, under the current terms of the legislation, such withdrawals would be limited to a 10 year time frame.
There would no longer be an age cap (currently 70.5) on the ability to contribute to an Individual Retirement Account (IRA) or 401(k).
It would make it easier for people to annuitize their 401(k) plans and convert their cash balance into a consistent retirement stream of monthly payments-- essentially more like a traditional defined benefit pension. It also means that the fiduciary responsibility would be shifted from the employer to the possible supplier of the annuity (likely an insurance company).
All 401(k)s would need to include the amount of sustainable monthly income their balances could sustain.
There are additional changes, including allowing employers to band together across industries to supply 401(k) plans to their employees and other methods for making it easier for small businesses to offer retirement plans at less cost (including a 500 dollar tax credit for creating a 401(k) plan).
While the final text of the bill will need to be examined, there are some interesting planning opportunities and pitfalls available in this bill (for instance, the longer time horizon for contributions, combined with the changed tax treatment for inherited IRAs may mean that Roth Conversion becomes a better option for many clients). And, given the increased lifespan of retirees, changing both the RMD start date and amounts (determined by actuarial tables) makes a great deal of sense. Additionally, there are new withdrawal exemptions for child birth and student debt which will help many younger people facing sudden cash needs.
However, more broadly, at Walkner Condon, we’re concerned that this plan could be a huge benefit to the insurance industry which, while frequently presenting itself as an industry in “wealth management,” doesn’t have the same level of fee-transparency as the wealth management industry and fee-only advisors or even broker-dealers. In particular, this concern is related to the possibility of annuitizing assets within a 401(k), because such products (annuities) frequently increase costs for investors rather than lower them and mean less money in retirees pockets at the end of the day. Moreover, the fees for annuities are often needlessly complex and hidden by opaque language. This could also mean that retirees may lock themselves into contracts that don’t fully account for cost-of-living inflation or other risks. Finally, the shift of fiduciary responsibility away from the companies creating the 401(k) plans may mean they will be less attentive to these hidden costs than they would be if they were more legally responsible for the maintenance of the 401(k) plan.