In what has been called the most comprehensive retirement security legislation in a decade, President Donald Trump on Saturday signed a spending bill that includes the Setting Every Community Up for Retirement Enhancement (Secure”) Act. This means changes to retirement plans going into the new year.
Key changes include:
- It will be easier for small businesses to set up 401(k)s by increasing the cap under which they can automatically enroll workers in “safe harbor” retirement plans, from 10% of wages to 15%;
- A maximum tax credit of $500 per year will be provided to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment;
- Businesses can now sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service;
- Plan sponsors are encouraged to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations;
- The age at which retirement plan participants need to take required minimum distributions (RMDs) is pushed back from 70½ to 72.
The American Council of Life Insurers estimates that the Secure Act will result in 700,000 more American workers saving for retirement.
When asked his thoughts on the changes, Ted Benna, a former benefits consultant — often called the “Father of 401(k)s” — provided ThinkAdvisor these comments:
- “Hopefully the operating efficiencies a multiple employer plan can provide will result in reduced fees rather than increasing service provider profits.
- MEPs should help increase coverage among smaller employers.
- MEPs don’t impact the two major compliance issues that make 401(k)s undesirable for many small employers — top heavy and the non-discrimination testing.
- A 401(k) isn’t the best option for many small employers that don’t have retirement plans. As a result, many small employers are likely to be pushed into 401(k)s via MEPs instead of one of the better alternatives.
- There has been a lot of negative reaction to eliminating the stretch IRA. I am in agreement with this change because the reason employees are given tax breaks is to help them accumulate what they need for retirement rather than to pass money to their heirs.”
What to Watch For
Taking a broader look at retirement trends in 2020, we asked experts on what to expect, even beyond the Secure Act.
What if the Market Drops?
Benna, 77, believes that another market crash, such as what happened in 2000 or 2008, will have a major impact on two groups: retirees or those close to retirement who “are anticipating heading off into the sunset and their plans get disrupted when [there’s a market break]; and the younger generation. [A market break] will be the first experience of that type for them, and [it will be] unsettling.”
Also, the “persistent low interest rate environment is impacting how people saving for and living in retirement are planning to ensure their retirement needs are met,” according to Dylan Huang, senior vice president and head of retail annuities at New York Life. “Most people have under-saved for retirement, which means that the need to stay in the market is critical.”
This topic sows worry among most experts. “What’s happening is benefits are being paid out with taxes coming in or from the phantom trust fund,” Benna says. He warns that a recession will affect Social Security because “it will accelerate retirements.” That is, older people may lose their jobs and opt to take Social Security. “That ratchets up the benefits being paid out, and [at the same time with a recession] there is a drop off in taxes.”
Steve Vernon, author and research scholar at the Stanford Center on Longevity, believes that because “Social Security is the foundation of most people’s retirement,” politicians have to make it sustainable, but “they aren’t doing their duty, and it’s not going to happen.”
He does add that people should delay claiming Social Security benefits, using other savings as a bridge.
Benna isn’t “a big fan” of variable annuities but believes fixed income annuities work because “you get a guaranteed lifetime income.” However, he says any annuities must come from “strong companies like New York Life” (and others) that know the market.
Huang believes indexed annuities or variable annuities with a guaranteed minimum accumulation benefit rider that can provide market upside and downside protection “will continue to gain popularity in the New Year.”
Christine Benz, Morningstar’s director of personal finance, agrees, but adds [with indexed annuities] “you also surrender a significant part of your upside in that typically you only earn the capital appreciation component of the equity market’s returns. You don’t earn your dividends or interest.”
She notes that another product that will grow in importance as the population ages are hybrid long-term care products, adding that “it’s typically a life insurance policy with a long-term care rider. The idea is it gives the buyer some optionality. One of the impediments to people purchasing pure long-term care insurance is some people feel reticent to pay into a policy for many years knowing they may not need it. A hybrid product gives you some flexibility. If you end up not needing long-term care, then it defaults to a death benefit that is there for your heirs.”
Vernon has “mixed feelings about annuities. They have their place, but they’re oversold. To me it makes no sense from a financial perspective to start Social Security early and buy an annuity. Any money you use to buy an annuity should be used to fund your own Social Security bridge loan payment because the increase in your SS benefit [if you wait] far exceeds the amount you could have bought with the same amount of money. It’s almost financial malpractice for an advisor to sell somebody an annuity and encourage them to start Social Security early.”
“The best benefit of 401(k)s, I’ve learned,” says Benna, “is they’ve turned spenders into savers.” And with the savings coming off the top of earnings, people usually don’t miss it. He believes retirement program “gaps will have to be changed by mandate. [And Secure is a good start].” He also believes there should be a mandate so that when people change jobs they “keep their money invested in retirement.”
Benz agrees that “leakage” — when employees who move jobs cash out their retirement savings — is a growing problem. “We’re a nation of job hoppers,” she says. “We do see leakage when people leave employers, and it’s [usually] young investors with $10,000 in the 401(k).”
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