Last summer, the US House passed a bill known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act by a margin of 417-3. The act, which impacts retirement plans including IRAs, was never acted upon by the Senate and was assumed to be on hold...until this week. The SECURE Act was added to an appropriations bill to avoid a government shutdown and is expected to be signed into law this week. The act is effective 1/1/20, less than two weeks after it’s expected to be signed.
Based on what I’ve read, the Act has many impacts on individual investors and employees, including:
- Making it easier for small firms to offer retirement plans. This includes improved rules for multiple employer plans, which were impractical in the past but likely to become a viable option under the new rules.
- Allowing long-term, part-time employees (3 years working 500 or more hours per year) to participate in 401(k) plans.
- Increasing the Required Minimum Distribution (RMD) age to 72 for those who weren’t already 70 ½ at the end of 2019. It also removes the restriction on workers above 70 ½ wishing to contribute to a Traditional IRA.
- Beneficiary IRAs inherited in 2020 or later no longer have a RMD but must be liquidated by the end of the 10th calendar year after the original account owner’s death unless the beneficiary is the surviving spouse, disabled or chronically ill, within 10 years of age of the employee/owner, or a minor child of the employee/owner who won’t reach 18 years old by the 10 year mark.
- Expanding 529 Plans to include registered apprenticeships, home schooling, and up to $10,000 in qualified student loan repayment, including for siblings. 529s can also cover private elementary, secondary, or religious schools.
- Creating an annual “Lifetime Income” disclosure based on a to-be-determined Department of Labor formula. It also increases the ability to offer annuities within 401(k) plans.
Additionally, there are corporate tax credits in this Act for companies setting up new retirement plans and any company, regardless of how long they’ve offered a defined contribution plan, that begins auto-enrollment in their plan. Auto-enrollment has proven to be a very effective way to get employees to participate in a plan and begin saving.
I am concerned about the new annuity provisions. 401(k) plans can more easily offer annuities but the increased access comes by removing or lessening some of the fiduciary requirements to evaluate insurance companies and products before they are allowed in the plan. Annuities are frequently complicated and include hidden fees, potentially increasing the incentive to sell a product in spite of the employee’s best interests.
While I am concerned about the annuity portion, overall I feel the SECURE Act is a net benefit to investors. Encouraging greater access to retirement plans can only be viewed as a positive. The increase in RMD age is especially helpful as more and more Americans work into their 70s and live into their 90s and beyond.