You probably have heard a lot of good things about the recently passed, strangely named but appropriately abbreviated Setting Every Community Up for Retirement Enhancement Act – the SECURE Act.
Many parties will be affected by the SECURE Act, and many entities will profit. However, you may be surprised to learn that the average American’s ability to retire sooner, with more security or even at all, is not materially improved by the Act.
I have scored the major provisions of the SECURE Act below based upon how they help the average American worker prepare for retirement. The purpose of retirement reform legislation, after all, should be to improve the likelihood that American workers are able to retire with dignity. On the scale I am using, a 10 represents a major impact and a 0 no impact at all.
At the end of this piece I share some thoughts on what Congress should have done to improve the odds that more American workers can achieve a secure retirement.
Scoring the SECURE Act
The death/curtailment of stretch IRAs
IRAs were never intended to be tools that allowed the wealthy to pass assets on to future generations. Their goal is to provide income to the contributor in retirement.
The SECURE Act essentially kills what has become known as the “stretch IRA”, an IRA mutation that Congress never intended to create, by shortening the period over which distributions must be taken. Eliminating these wealth transfer vehicles does nothing to help average Americans better prepare for retirement.
Impact on preparing Americans for retirement: 0
Delay in initial minimum distribution date
A lot of joy has been expressed about the SECURE Act provisions that delay the initial minimum distribution age from 70½ to 72. For wealthy retirees who don’t need the money from these distributions to live on, and therefore don’t want to pay taxes on them, this is welcome news.
However, average Americans need to take distributions from their retirement vehicles as soon as possible to survive. Studies show that approximately 80% are taking distributions by age 70½. This is a wonderful provision to reduce the tax burden for well-off retired Americans but does absolutely nothing to help average Americans become better prepared for retirement.
Also, it doesn’t seem like a change to a start date of age 72 really accomplishes much. Why not move the initial distribution date out to 75 or 80?
Impact on preparing Americans for retirement: 0
Repeal of maximum age to make IRA contributions
Many experts have indicated that the repeal of the maximum age to make IRA contributions is a good thing, and while not a bad provision, it is indicative of a wider problem. The number of older Americans who are working is higher than ever. I have seen multiple studies showing that roughly 30% of Americans 70 and older are working.
Regrettably, most are working because they have to rather than because they want to. Many of these workers need every bit of what they earn to live on and won’t be in a financial position to make IRA contributions. This is yet another major provision that does very little to help the average American prepare for retirement.
Impact on preparing Americans for retirement: 1
To say that insurance company executives are breathless in anticipation of all the new annuity business that could flow from 401k plans is to vastly understate their emotional state.
The SECURE Act contains provisions that will require 401k plan sponsors to provide participants with better illustrations of what income from an annuity could look like. Participants who have purchased annuities in one 401k plan will now be able to roll them over to another 401k plan or IRA. Finally, plan sponsors may now find it more palatable to offer annuities in their plans because the legal risks have diminished.
These provisions do nothing to help average Americans better prepare for retirement. In addition, many experts argue that annuities are expensive and that most Americans shouldn’t buy them.
Unfortunately, as a result of these new provisions, it could appear that employers are recommending that their employees purchase an annuity. This could be the biggest win ever for insurance company lobbyists in Washington.
Impact on preparing Americans for retirement: 0
Withdrawals for adoption
Let me say first that parents wishing to adopt should be assisted in nearly every way possible. But not this way.
Allowing withdrawals of up to $5,000 penalty free from retirement accounts for something other than retirement only makes it less likely these parents will be successful in funding a secure retirement.
Why not provide a significant federal tax credit instead?
Impact on preparing Americans for retirement: -10
Allowing part-time employees to participate
The SECURE Act has provisions that will require employers to allow part-time employees to participate in their plans. This is a good thing. However, most part-timers are not likely to end up participating or contributing for a number of reasons.
First, the eligibility requirements are stringent. Part-timers will need to work at least 500 hours per year for three consecutive years to be eligible. So it appears the Act seeks to benefit those few employees who are considered permanent part-timers rather than the much larger group that is using part-time work (maybe two or three part-time jobs) just to survive.
And then, in a rather harsh twist, the Act states that employers are not required to provide any employer contributions (including company matching contributions) to those part-timers who decide to participate.
In other words, in a given year, matching contributions can be given to full-timers but not part-timers. Why? The cost to employers would be insignificant given the few part-timers who would contribute and the limited amount of contributions they would be able to make.
Upon greater scrutiny, what initially looks like a provision to celebrate appears to be rather disappointing.
Impact on preparing Americans for retirement: 1
MEP time for small businesses
The Multiple Employer Plans (MEPs) concept is a good idea that has suffered from bad regulation. The SECURE Act contains adjustments to MEP provisions that make it much easier and safer for small businesses to adopt a MEP retirement plan.
The concept of MEPs is sound. A number of small businesses adopt the same retirement plan with the goal of spreading plan expenses over a larger population. However, government regulations have thrown a wet blanket over this good idea in the past. Those regulations are eased or eliminated under the Act.
If you lead a small business that has always wanted to offer a retirement plan to your employees, investigate adopting a MEP. You may finally be able to offer a cost-effective, leading-edge retirement plan.
Impact on preparing Americans for retirement: 10
Additional small business retirement plan incentives
The SECURE Act has increased the tax credit available to small businesses starting a 401k plan from $500/year for the first three years to $5,000/year for the first three years. And if you decide to start a plan with automatic enrollment features, or add them to your existing plan, your company is eligible to receive an additional tax credit of $500/year for the first three years.
Impact on preparing Americans for retirement: 8
Ban on credit and debit card loans
A dumb concept promoted for the wrong reasons is eliminated from 401k plans under the SECURE Act. It is currently possible for participants in some 401k plans to take loans using a credit or debit card. This makes it easy for participants to withdraw money from their plans and use it for something other than retirement (buying a boat, going on vacation, etc.). Because it is so easy to take loans using credit or debit cards, participants are led to believe that doing so is OK.
Retirement plan loans are the worst possible investment any individual can make. And yes, they are considered investments in retirement plan accounts. A large percentage of employees will default on these loans if they change jobs, incurring taxes and penalties and permanently removing the funds from their retirement accounts.
I believe all 401k plan loans should be banned. This is a step in the right direction.
Impact on preparing Americans for retirement: 5
What Lawmakers Should Have Done
1. Increase Health Savings Account (HSA) contribution limits
There doesn’t appear to be an end in sight to rising health care costs. As a consequence, studies show more retirees are likely to be bankrupted by high health care expenses.
Currently, American workers have only one tax-preferenced way they can save for retiree health care expenses — HSAs. But the contribution limits are way too low ($3,550 single, $7,100 family for 2020). Why not increase HSA contribution limits to the same level as 401k limits ($19,500 for 2020 plus $6,500 in catch-up contributions)?
Impact score: 10
2. Require “auto” features
Auto-enrollment and auto-escalation work. Require all 401k plans to auto-enroll all participants and escalate their contributions annually.
Impact score: 10. We know this works!
3. Require re-enrollment
Annual re-enrollment also works. Legislate its requirement into all 401k plans. Those plans that have implemented auto-enrollment, auto-escalation and annual re-enrollment have participation rates of 90% or more.
Impact score: 10. We know this also works!
4. Eliminate participant loans
401k loans are one of the worst financial decisions any plan participant can make. Eliminate them as soon as possible. In addition, they have nothing to do with preparing employees for retirement.
Impact score: 7. Many participants who take loans end up defaulting on them when they leave their employer, permanently removing assets from their retirement account. Putting guard-rails like this on 401k plans guides and protects participants.
5. Allow unlimited after-tax 401k contributions
State and federal governments still get their tax revenue since these contributions are after-tax while those participants – 62% of us according to a recent study — who are behind in saving, have a chance to catch up. The 2020 $6,500 annual catch-up contribution for those age 50 and older is appreciated but falls significantly short of what is necessary to help participants catch-up.
Impact score: 7. Most of us don’t have the capacity to make a large contribution each year. However, many of us occasionally have a year when it is possible. Why not have the option?
6. Require a Qualified Default Investment Alternative (QDIA) in every plan
Participants have shown that they appreciate the do-it-for-me approach in 401k plans. Require every 401k plan to offer at least one series of life-cycle, target date or risk-based investments. Participants are accepting do-it-for-me solutions.
Impact score: 8. Participants have accepted guided solutions by not opting out of auto options. If their contributions are invested in a QDIA and they are advised to leave it alone until they retire, the positive impact could be enormous.
7. Require every party with a signed contract to be a fiduciary
This is an incredibly common sense requirement: If you have a signed contract with a qualified retirement plan sponsor to provide administrative, trust, custody, investment advisory, investment education, audit or any other services, you are a fiduciary. Every action your firm takes must be in the plan participant’s best interest.
Common sense impact score: 10. Why isn’t this the law right now?
All but one of these seven recommendations would cost federal and state governments nothing in lost tax revenue. Similarly, the cost to American businesses of all of these changes would be minimal. However, the improvement to employee retirement readiness would be enormous.
While a few provisions of the SECURE Act may help some American workers, the Act is disappointing, given all of the low-hanging fruit available that could make a difference in helping average Americans achieve a higher level of retirement readiness.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.