Securing Your Retirement Savings
The Securing a Strong Retirement Act is a new piece of proposed legislation designed to encourage individuals to save more in their working years so they can enjoy a financially secure retirement. It has already been dubbed the SECURE Act 2.0 since it is building off of the SECURE Act implemented in December 2019. While positive changes in the retirement system have already started to occur, with this new proposed bill, it is evident that more work still needs to be done.
A National Retirement Crisis
Americans need this extra support now more than ever. This past year has been a difficult one dealing with the fallout of a global pandemic. It forced many people into early retirement and into a retirement they may not have been prepared for.
According to the Center for Retirement Research, the number of Americans who will be unable to maintain their pre-retirement standard of living has increased from 50% to 55%.
A Renewed Focus on Retirement Readiness
The SECURE Act 2.0 is another important step closer to improving retirement readiness for many working Americans. Plan sponsors and participants can both benefit from this proposed legislation.
Key Highlights for Participants: Mandatory Automatic Enrollment
The proposed legislation would require employers who offer 401(k) or 403(b) plans to:
- Automatically enroll eligible employees at a contribution rate of at least 3% but not more than 10%.
- Implement an automatic escalation feature whereby the enrolled employee’s contribution rate would increase by 1% each year until it reaches 10%.
- Opt out or adjust their contribution rate up or down.
A recent Vanguard study showed that participation rates for new hires tripled to 91% for those who underwent automatic enrollment, compared to only 28% who voluntarily enrolled.
Saver’s Credit Expansion
The Retirement Savings Contribution Credit or more commonly known as the “Saver’s Credit” encourages eligible taxpayers to contribute to their employer-sponsored retirement plan or a traditional and/or Roth IRA by reducing their tax burden.
- In the past this credit has been limited by an individual’s adjusted gross income.
- The new bill will increase the credit to 50% of a participant’s contribution regardless of their income level.
Increased Catch-up Limit
- The 2021 catch-up contribution limit for employees who are at least 50 years old is $6,500.
- The new bill proposes that employees aged 62, 63 or 64 would be able to increase their catch-up contribution to $10,000.
Elimination of RMD Obstacles
The SECURE act bumped up the age for required minimum distributions (RMDs) from 70.5 to 72. The new bill will increase the RMD age again to 75 from 72. In addition:
- Individuals who have less than $100,000 saved for retirement would be exempt from the RMD rules.
- The penalty for failing to take an RMD would be reduced to 25% from 50%.
Increasing the age for RMDs helps those individuals who continue to work by increasing their retirement savings.
A qualified longevity annuity contract (QLAC) is designed to prevent an individual from outliving his/her retirement savings. This deferred annuity provides a stream of payments later in life but not after age 85. The amount invested in the QLAC is not subject to the RMD rules. In addition:
- Currently, QLAC premiums are limited to the lesser of $135,000 or 25% of the account balance. The new bill would remove this 25% account balance limit and increase the amount from $135,000 to $200,000.
- It would also allow the use of exchange traded funds (ETFs) to be available in variable annuity contracts.
Key Highlights for Plan Sponsors:
Credit for Small Businesses
The new bill allows small businesses to take advantage of several tax credits while providing employees access to a retirement plan:
- Employers with up to 50 employees would be able to offset more plan startup costs.
- The bill allows small businesses to claim a tax credit for three years for joining a multiple employer plan (MEP). It does not matter how long the plan has existed.
Expand the Employee Plans Compliance Resolution System (EPCRS)
The IRS has implemented the Employee Plans Compliance Resolution System to correct mistakes and avoid the consequences of plan disqualification. The correction should be reasonable and appropriate, and one of the three methods should be applied: Self-Correction (SCP), Voluntary Correction Program (VCP) or Audit Closing Agreement Program (Audit CAP). The new legislation would allow:
- More errors (e.g., plan loans and inadvertent compliance failures) to be corrected through self-correction.
- Exempt certain RMD errors from excise taxes if the failure is corrected within 180 days.
- Custodians of IRAs can use EPCRS to address inadvertent failures whereby the IRA owner was not at fault.
Key Highlights For Both Plan Participants & Plan Sponsors:
Student Loan Repayment
Student loans can be a huge obstacle for younger workers. This often results in employees feeling overwhelmed and delaying making contributions to a retirement plan.
In 2019, the average student loan debt was $28,950.Nerd Wallet, May 26, 2021
- This legislation would allow employees who may not be saving for retirement but are still making payments on their loans to receive employer matching contributions.
- A company can match a loan payment, up to a certain percentage of an employee’s salary, and deposit their matching contribution in the employee’s retirement account.
- This provides an effective solution and relief to those burdened with student loan debt.
- Employees will not miss out on those crucial early years to save for retirement.
- Employers will be able to attract and retain talent if this assistance is provided.
Collective Investment Trusts Permitted in 403(b) Plans
Collective Investment Trusts (CITs) will now be permitted in 403(b) custodial accounts. 403(b) plans have historically been limited to annuity contracts and mutual funds.
- CITs are tax-exempt, pooled investment vehicles that offer a lower cost and use a strategy similar to a mutual fund.
- According to DST (now SS&C Technologies), CIT products can cost 10 to 30 basis points less than mutual funds with similar features.
- This will reduce investment and administrative plan fees allowing these fee savings to go directly back into the participant’s account.
Where Does This Bill Stand?
The Ways and Means Committee unanimously passed the bill on May 5th. The bill is now making its way through the House. Much like the SECURE Act, the same level of bipartisan support is expected for this bill. It most likely will be signed into law, with possible modifications, this year. Plan Sponsors should start to familiarize themselves with this new proposed legislation.
Consider ABG Southwest your resource for information on any further developments. Contact your ABG Southwest primary relationship manager for additional information or assistance. Or, contact us!
Plan Adviser, February 8, 2017