Personal Finance: Congress acts to promote retirement saving

 IRA 401k ROTH handwritten in a note. Retirement plans. retirement savings tile retirement tile / Getty Images
IRA 401k ROTH handwritten in a note. Retirement plans. retirement savings tile retirement tile / Getty Images
photo Christopher A. Hopkins

In an age of contention and polarization in Congress, it is refreshing to see a truly bipartisan effort to address a serious deficiency. Last Thursday, the House of Representatives voted to adopt the "Setting Every Community Up for Retirement Enhancement Act of 2019", known as the SECURE act. Despite the ungainly title, the act represents the most significant change to retirement plans in over a decade, and passed overwhelmingly on a vote of 417 to 3 (three were apparently not paying attention). The Senate is considering a similar measure, with final reconciliation and submission to the President likely before the end of the Congressional term.

The legislation attempts to deal with a mounting crisis: the deficiency in retirement savings. According to a recent Federal Reserve study, 25 percent of Americans have nothing saved up for retirement. Compounding the problem is the disparity in access to employer plans. The Stanford Center for Longevity reports that only half of adults have access to a 401(k) plan at work. The SECURE act is intended to address this ticking time bomb.

The new law encourages addition saving by lowering some barriers. For example, it eliminates the age cap at which employees may no longer contribute to a 401(k) plan or IRA. Currently, contributions are prohibited beyond age 70 . In addition, the required minimum distribution now begins at age 72 instead of the present 70 1/2.

Another significant provision opens up plans to part time workers who are often excluded from participating in current plans. If a worker has been employed for three years and works a minimum of 500 hours annually, they may now participate.

One hurdle that small businesses face is the cost of establishing and administering a retirement plan. The bill provides enhanced financial incentives, including a $5,000 tax credit for adopting a plan, and an additional $500 if the firm offers automatic enrollment.

Furthermore, unrelated business enterprises will now be able to band together to offer "pooled provider plans" that spread the cost and relax certain fiduciary requirements. Currently, pooled plans may be established only among businesses with a common relationship like being in the same industry or trade association. This provision seeks to encourage small business who currently offer no 401(k) to adopt one.

The SECURE act aims to expand the availability of fixed annuity contracts that allow retirees to establish a guaranteed income stream for life. A standard feature in most traditional pension plans, annuities have often been excluded from defined contribution plans fearing liability if the annuity provider fails. The bill provides a "safe harbor" shield from liability if the sponsor adheres to certain standards in selecting the provider. Annuity contracts would also be portable, meaning that an employee could roll over the contract into another 401(k) or IRA account.

Workers are frequently uncertain of the impact on their savings (or lack thereof) until retirement is nigh. Employers will now be required to provide participants with an estimate of the monthly income their account balance could reasonably generate, providing a useful benchmark against which to evaluate current savings rates.

In a partial offset to deferred federal tax revenue, the SECURE act eliminates the lifetime distribution option for retirement assets inherited by non-spouses. Beneficiaries will henceforth be required to receive the balance within 10 years and pay the tax man.

The retirement saving crisis is real, and the day of reckoning is fast approaching. With the demise of traditional pensions, the burden is squarely on individuals to lay aside enough see them through. This welcome bipartisan act is a good step in the right direction.

Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.

Upcoming Events