Americans may look forward to retiring, but many aren’t prepared. MagnifyMoney’s latest study on retirement found that only 47% of respondents are happy with the amount of money they’ve saved for retirement, and 60% don’t know exactly how much they’ve put away.
A bill that’s currently making its way through Congress is designed to help Americans build their nest egg. It’s called the SECURE Act — which stands for Setting Every Community Up for Retirement Enhancement — and it includes several provisions that would provide new ways and motivations for saving for retirement.
What is the SECURE Act?
The SECURE Act was introduced to the House of Representatives on March 29, 2019 by Rep. Richard Neal of Massachusetts to amend the Internal Revenue Code of 1986 and encourage retirement savings.
While Americans’ savings habits are certainly concerning, the Bureau of Labor and Statistics’ latest Employee Benefits Survey found that 32% of workers don’t even have access to a retirement savings plan. If the SECURE Act is passed into law, it will address the challenge by:
- Creating opportunities for part-time workers to contribute to 401(k) retirement plans
- Extending the amount of time that individuals can contribute to traditional IRAs
- Increasing the required minimum distribution (RMD) age for retirement funds
- Giving tax credits to businesses that automatically enroll employees in retirement savings plans
The provisions are designed to increase the availability of workplace retirement savings plans.
Additionally, the act also attempts to address the fact that people are living and working longer, and the impact that can have on when someone retires and the amount they have in savings. Human lifespans are increasing by approximately three years each generation, and biologists predict that the trend is likely to continue. And since 1996, the rate of retirement-age Americans (those aged 65 to 74) who are in the workforce has steadily increased. The Bureau of Labor Statistics projects that it will climb to 30.2% in 2026, compared with 17.5% in 1996.
How the SECURE Act could impact your retirement
From creating more opportunities to save to providing incentives to businesses that set up and encourage retirement planning, the SECURE Act could impact your own retirement options and balances in several distinct ways.
1. Part-time workers would have more opportunities to save
Part-time employees who don’t work at least 1,000 hours a year currently can be excluded from an employer’s 401(k) plan. This will change if the SECURE Act is passed.
Under the proposed legislation, employers must allow part-time employees that have been at the company for at least three consecutive years and work at least 500 hours a year an opportunity to participate in its 401(k) plan.
2. Older Americans could contribute to traditional IRA accounts for longer
Under current law, Americans can no longer contribute to a traditional IRA after they turn 70 1/2, even though several continue to work beyond this age. The SECURE Act would remove this limitation by repealing the age limit. This would mean that Americans could continue to save money for retirement as long as they choose.
3. Americans could let their retirement savings grow a little longer
Current law requires individuals to start withdrawing money from their retirement accounts once they reach the age of 70 1/2. Under the SECURE Act, the RMD age would change to 72. If the account holder doesn’t need the money right away, it could be left untouched to grow and potentially provide a significant boost to their overall retirement savings.
“The expansion of the RMD to 72 can add about 12% to an IRA balance at age 72 and increase the residual value of an IRA by about 8% at age 85, using 6% and RMD withdrawal,” said Leon C. LaBrecque, chief growth officer of Sequoia Financial Group in Troy, Mich.
4. New savings products would be offered in employee 401(k) plans
Many 401(k) providers avoid offering in-plan annuities to employees, in part due to concerns about liabilities. The SECURE Act, however, would protect employers by taking away some of the associated legal risks, potentially opening a new savings option to employees.
Annuities provide guaranteed payments over a period of time in exchange for an upfront, lump-sum payment. In retirement, these payments can act as a fixed stream of income over your lifetime, helping to prevent a person from outliving their savings.
“In principle, this could be wonderful, if the bills permitted only true annuities — that is, investments that pay a guaranteed, fixed sum of money each year — and if the fees they charged savers were kept in check,” said Nancy Hite, founder of the Strategic Wealth Advisor in Boca Raton, Fla. “Unfortunately, neither is the case. Currently, 401(k) providers are shielded from liability. If annuities are used they should only be low-priced and not complicated, which might limit the option to fixed annuities.”
5. Small businesses could access lower-cost 401(k) plans to offer to employees
Traditional 401(k) plans can be costly to set up, ranging from $5,000 to $10,000 each year in administrative fees and not including initial set-up fees, which is likely why many small companies don’t offer them. This puts the burden of researching and enrolling in a plan solely on the employee, which can result in fewer people following through.
The SECURE Act would make it easier for small businesses to offer plans by allowing them to join multi-employer plans with the same trustee, fiduciary, administrator, plan year and investment options. Unrelated businesses could leverage the power of scale and reduce their administrative costs.
In addition, the SECURE Act would increase the tax credit given to small businesses for starting a new 401(k) program for its employees to $500, to help offset the fees.
6. Small businesses could automatically enroll employees to encourage savings
The SECURE Act provides another tax credit of $500 to employers that create a safe harbor retirement plan — a type of 401(k) plan that is not subject to IRS nondiscrimination tests —
and automatically enroll employees. While workers could choose to opt out, automatic enrollment boosts participation and encourages workers to save for retirement.
Small businesses that already have a retirement plan would also be eligible for the tax credit if they convert their existing plan to one with auto-enrollment.
7. Automatic enrollment caps would increase to encourage higher saving
In addition to giving employers an incentive to automatically enroll workers in retirement plans, the SECURE Act would raise the cap on automatic increases from 10% to 15% of employee wages for safe harbor plans, which require employers to make a matching contribution. Employees can adjust the enrollment and choose a different contribution rate.
8. Retirement statements would have income stream disclosures
Retirement plan statements currently provide an account balance, but that doesn’t give people the full picture. You need to know how long it will last. The MagnifyMoney retirement study found that 27% of people have never thought about how much money they’ll need.
The SECURE Act will provide some help and context by requiring that contribution plans deliver a lifetime income disclosure to participants at least once every 12 months. The disclosure would show how much income the current lump sum balance in the account could generate. This would provide a reality check on how much money an account holder has, and how it would stretch over their estimated lifetime. If the amount is low, it could spur people to save more to reach income goals.
9. Some types of access to 401(k) funds would be limited
Each year, 11 million Americans take a loan against their 401(k) plan. Currently, you can borrow up to 50% of your balance, up to $50,000. Some 401(k) administrators allow employees to access loans through credit card arrangements.
The SECURE Act would end this practice, preventing easy access to retirement funds for routine or small purchases that could deplete savings over time.
Where things stand with the SECURE Act
The SECURE Act was passed in the House on May 23, 2019 by an overwhelming majority of 417-3. It was moved to the Senate on June 3, 2019, where it sits awaiting a vote.
“Sen. McConnell has hotlined the bill for unanimous consent,” LaBrecque said. “Sen. Cruz has objected to the House’s removal of 529 withdrawal for home-schooling expenses. We anticipate this will be resolved without a floor debate. However, bipartisan passage seems very likely.”
Edward Jasterm, a Certified Financial Planner and director of financial planning for Heritage Financial Services in Westwood, Mass., is more cautious in his outlook. “Although the Act has bipartisan support, it is not certain it will become law,” he said. “The Senate is in recess through Sept. 6, and has critical spending legislation to address in the short-term. If the SECURE Act can be tacked onto another bill, it is possible it could be voted on and moved forward. Proponents of the bill are working on that strategy to try to keep it alive in the Senate.”
The Senate has its own version of the SECURE Act, called Retirement Enhancement and Savings Act (RESA). The bill failed to pass in the last Congress that closed without taking final action. It was reintroduced with some technical modifications, including an exception to the required minimum distribution rules upon death of an IRA owner, and the deletion of a section that provided for an acceleration of Pension Benefits Guaranty Corporation premiums.
The Senate Finance Committee will either reconcile the two acts into a final version or choose to move forward with the SECURE Act. If the Senate does pass it and the president signs it, the law could be effective as soon as next year, LaBrecque said.