Along with new sweeping retirement planning rules ushered in under the Setting Every Community Up for Retirement Enhancement (Secure) Act, advisors and broker-dealers will have new fiduciary-related rules to comply with in the new year.
President Donald Trump signed the Secure Act into law on Dec. 20 as part of the year-end spending bill, the Further Consolidated Appropriations Act of 2020 (FCAA).
Along with retirement planning changes, the new law also allows tax-free 529 college savings plan distributions to be used to pay for registered apprenticeship programs and up to $10,000 in student loan payments.
The new changes under Secure will “give rise to questions in the coming days,” with more federal guidance “needed to resolve certain matters” ushered in by the new law in 2020, notes recordkeeper Ascensus in a recent brief.
The FCAA also includes bills that provide disaster relief and new health and welfare provisions. The most significant health and welfare measure repeals the controversial “Cadillac Tax.”
Stretch IRA Limits, RMDs
As popular advisor and Nerd’s Eye View blogger Michael Kitces notes, the elimination of the so-called “stretch” provision “for most (but not all) non-spouse beneficiaries of inherited IRAs and other retirement accounts” will have repercussions for advisors’ clients.
Under current law, Kitces explains, non-spouse designated beneficiaries can take distributions over their life expectancy, “but for many retirement owners who pass away in 2020 and beyond, beneficiaries will have only 10 years to empty the account.”
On the one hand, Kitces continues, “without any other distribution requirements within those 10 years, designated beneficiaries will have some flexibility around the timing of those distributions; however, certain types of ‘see-through’ trusts that have been drafted to serve as beneficiaries of retirement accounts may find that they are no longer able to make annual distributions to the trust under the new rules (only to suddenly have both the IRA and trust forcibly liquidated at the end of the 10-year window).”
Secure also lifted the restriction on making contributions to a traditional IRA after 70 1/2, as long as “there is earned income to contribute in the first place,” Kitces notes, “and an age increase for the onset of RMDs” from age 70 ½ to 72.
Kitces adds that, as was the case with the IRS’ recent proposals to update the RMD life-expectancy tables, “since only about 20% of retirees take no more than only the amount that they’re actually required to take, any changes in the rules around RMDs will have little effect on the remaining 80% who are already withdrawing more out of their accounts than the IRS requires.”
The SEC and Regulation Best Interest
The new year will also bring at least one new face — as of press time — to the Securities and Exchange Commission.
The White House is expected to nominate Caroline Crenshaw, an attorney at the SEC, to fill Commissioner Robert Jackson’s Democratic seat next year, according to Reuters. Crenshaw currently works as an attorney in Jackson’s office. Senate Democratic leader Chuck Schumer has sent Crenshaw’s name to the White House as a nominee for the post, Reuters reported.
Jackson’s term expired in 2019, but commissioners can stay on up to 18 months after their term expires or they are replaced. The term of Commissioner Hester Peirce, a Republican, expires in 2020. The commission has two seats for Democrats and two for Republicans, plus the chairman.
SEC Chairman Jay Clayton’s term expires in 2021, but depending on how the 2020 presidential election turns out, his stay at the commission could end sooner.
Sen. Sherrod Brown, D-Ohio, ranking member on the Senate Banking Committee, said during a Dec. 10 SEC oversight hearing that the Trump administration has dismantled many of the protections Congress put in place after the last financial crisis, “putting our financial system and hardworking Americans at risk.”
The SEC “has flown under the radar,” Brown told Clayton, “but often the agenda has been the same: taking Wall Street’s side over and over instead of standing with investors saving for retirement or college.”
Brown continued: “You’ve done so much damage by adopting what you call ‘Regulation Best Interest.’ Under that rule, brokerage firms can merely disclose but don’t have to eliminate firm-level conflicts. It should be simple: Investment firms need to work for the people whom they serve; Americans need to have confidence that the professionals that they’re trusting with their hard-earned money or working for them are not scamming them to line the firm’s own pockets.”
The SEC, Brown said, “could have simply followed Congress’ guidance in Dodd-Frank to create a uniform fiduciary standard for brokers and advisors, which would be the best way to give investors confidence that their interests comes first. But you didn’t do that.”
The Financial Industry Regulatory Authority, the enforcer of Reg BI, held a one-day conference on the new rule in Washington on Dec. 18. “There’s a great deal for firms and regulators to do before the implementation deadline,” Robert Cook, FINRA’s CEO, told attendees.