Could a sweeping new bill help the country overcome its retirement savings crisis?
That’s what some lawmakers envision with the Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act. The far-reaching bill includes 29 provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.
- The SECURE Act would make it easier for small business owners to set up “safe harbor” retirement plans that are less expensive and easier to administer.
- Many part-time workers would be eligible to participate in an employer retirement plan under the bill.
- The Act would also push back the age at which retirement plan participants need to take required minimum distributions (RMDs), from 70½ to 72.
- The legislation, which passed overwhelmingly in the House in May 2019, remains tied up in the Senate.
A Troubled Retirement System
That there’s trouble brewing in the U.S. retirement system, which requires most workers to supplement Social Security with personal savings, has been widely acknowledged.
According to data from the U.S. Bureau of Labor Statistics published in 2018, only 55% of the adult population even participate in a workplace retirement plan. And even those who do are often woefully behind when it comes to investing part of their paycheck.
The wealth management giant Vanguard, for instance, revealed early in 2019 that the median 401(k) balance for those ages 65 and older is just $58,035. The SECURE Act aims to encourage employers who have previously shied away from these plans, which can be expensive and difficult to administer, to start offering them.
“With [the] passage of this bill, the House made significant progress in fixing our nation’s retirement crisis and helping workers of all ages save for their futures,” Rep. Richard E. Neal (D-Mass.) said in a statement after the bill sailed through the House in May.
As of late November 2019, the bill was stalled in the U.S. Senate.
Major Provisions of the SECURE Act
The SECURE Act would tweak a number of rules related to tax-advantaged retirement accounts. For example, it would:
- Make it easier for small businesses to set up 401(k)s by increasing the cap under which they can automatically enroll workers in “safe harbor” retirement plans, from 10% of wages to 15%.
- Provide a maximum tax credit of $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment.
- Enable businesses to sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service.
- Encourage plan sponsors to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations.
- Push back the age at which retirement plan participants need to take required minimum distributions (RMDs), from 70½ to 72.
- Allow the use of tax-advantaged 529 accounts for qualified student loan repayments (up to $10,000 annually).
Planners Evaluate These Changes
While retirement planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Md., cautions that the bill is far from a cure-all for the nation’s retirement challenges, she says several of the provisions represent a step in the right direction.
In particular, she notes, reducing the number of hours that employees are required to work in order to sign up for 401(k)s can help expand participation. “That’s helpful for part-time employees, whether they’re just entering the workforce or about to leave,” Cheng says.
And she’s in favor of adding flexibility to 529 accounts, which could be used to repay some student loans under the bill. That’s a good option, she says, for parents who may have funds remaining in an educational savings account and want to help a child who has already graduated. “The SECURE Act provides more flexibility,” says Cheng.
For David Rae, a financial planner based in Los Angeles, moving the starting age for required minimum distributions to 72 also makes sense, given that people are living longer than they did a generation ago. “Pushing back RMDs will help people make their money last just a little bit longer, especially since more of them need to work later,” Rae says.
Tangled Up in the Senate
Despite the SECURE Act’s overwhelming support in the House, it may take time before the Senate even gets to vote on the bill. In early July, PlanAdviser reported that two Republican senators—one of them Ted Cruz (R-Texas)—were holding it up. According to a Washington insider, Cruz was trying to tweak the section on 529 accounts so that parents can use them for home-schooling expenses as well.
417 to 3
The margin by which the SECURE Act passed in the U.S. House of Representatives in May 2019.
In October, PLANSPONSOR quoted Chris Spence, TIAA’s senior director of government relations, as saying the bill has been sitting "in something like legislative limbo." Along with Cruz, two other senators—Mike Lee and Pat Toomey—had reservations about some technical points. Spence remained optimistic that the bill could still get unanimous content, or get through by being attached to a broader bill that has to be passed by the end of 2020.
The upshot: Even with only a few senators standing in the way, the passage of the bill could take a lot longer. Without unanimous consent, the bill would have to go through the committee process, followed by floor debates and subsequent votes. And if senators succeed in changing some of the bill’s language, the House would have to vote on the newer version as well. It remains unclear how long all that might take.
The Bottom Line
While it’s still possible that the SECURE Act will go through some minor changes, the bipartisan support behind the legislation means it’s likely to end up passing in the Senate, too. Whether it ends up being a game-changer or not remains to be seen. But one thing is abundantly clear: The current rules aren’t allowing nearly enough Americans to put away the nest egg they’ll ultimately need for a secure retirement.