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Why Secure Act 2.0 Should Fly Through Congress: Michael Finke

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What You Need to Know

  • Retirement issues like changing the RMD age are “an easy problem,” unlike fixing Social Security, he said.
  • While delaying RMDs is popular, it goes against the spirit of tax-favored retirement savings, says Morningstar's David Blanchett.
  • The legislation allows collective investment trusts to be in 403(b) plans, which Blanchett supports, but insurers may oppose.

The Securing a Strong Retirement Act of 2021, which cleared the House Ways and Means Committee Wednesday, “is going to be easy to pass and is a significant net positive for workers,” said Michael Finke, professor of wealth management at The American College of Financial Services, in an interview Wednesday.

The legislation, dubbed the Secure Act 2.0, raises the required minimum distribution age from 72 to 75 over a 10-year period. It also expands automatic enrollment in retirement plans and enhances 403(b) plans.

This is the kind of bipartisan legislation that makes you think the government could work again,” Finke quipped.

“What’s key,” he explained, “is that it isn’t going to break the federal budget, which should help the bill.” For instance, provisions that allow “for more savings later in life by indexing the catch-up [contributions] and increasing limits between age 62 and 64 won’t be a big tax expenditure, because the tax deferral benefit is modest.”

Plus, pushing the RMD age by three years “will happen slowly, so it won’t reach age 75 until 2032.” This 10-year stretch also “blunts the impact of delaying the RMD, since the government will be able to tax inherited IRAs over a shorter period of time,” Finke points out.

Solving an ‘Easy Problem’

Like the first Secure Act that became law in late 2019, this legislation “will provide a lot of much-needed improvements to the defined contribution retirement system,” the retirement expert says. 

“More employees will be saving for retirement, workers will save more of their paycheck, public-sector workers will gain access to lower-cost investments, and retirees and financial planners will have more flexibility to decide how much and when to withdraw funds from an individual retirement account (or IRA),” Finke explained.

In general, retirement issues like changing the age when RMDs begin are “an easy problem, but there’s no solution to Social Security that doesn’t make a significant number of people unhappy,” he said. 

“It’s likely the Act won’t see significant opposition because many of the proposed changes will be embraced by the industry, and few voters think saving more for retirement is a bad idea,” according to Finke.

Measures to delay RMDs are “always a crowd pleaser,” he adds, “although it’s a regressive policy that provides greater tax deferral benefits to wealthier retirees. Most retirees just find them annoying.”

The RMD Debate

While delaying RMDs is popular, the move isn’t supported by David M. Blanchett, head of retirement research for Morningstar’s Investment Management group. 

I’m not generally in favor” of increasing the RMD age from 72 to 75,” he said. “Just because someone is forced to take an RMD from his or her qualified account doesn’t mean he or she has to spend it.”

Blanchetts adds that he is “a big fan of allowing for pretax contributions into tax-favored accounts (e.g., an IRA or 401(k)) for Americans saving for retirement” in order to incentivize saving. 

“But … at some point these monies (which are supposed to be saved to specifically fund retirement) should be used to actually fund retirement. If you’re not forcing distributions [which taxes these monies], you’re just effectively allowing someone to grow a larger and larger nest egg, which I think goes against the spirit of the intended benefit,” he explained.

Other Issues in the Bill

“There’s lots of other attractive things in the bill, though,” according to Blanchett. He says he “really likes the idea of allowing collective investment trusts in 403(b) plans, employer matching for qualified student loan payments [and] higher catch-up limits (for ages 62-64).”

But this is one area where there could be “intense opposition,” namely by insurance companies dominating the 403(b) space, says Finke. CITs have “gained significant market share in defined contribution plans as a lower cost alternative to mutual funds,” he points out. 

“Opening up 403(b)s to collective investment trust could be a game changer, especially for larger public-sector plans,” the retirement plan expert explained.

Secure Act 2.0 also allows smaller plans to “band together in multi-employer plans to potentially take advantage of lower-cost 403(b) options,” according to Finke. 

“CITs likely won’t gain traction quickly because plan sponsors don’t have a fiduciary motivation to identify a new provider and employees generally won’t be beating down [the doors of] HR offices’ asking for a replacement,” he added.

(Pictured: Michael Finke)