Laws regarding retirement savings plans don’t change all that often or all that much. Occasionally, new regulations are issued mandating disclosures that no one ever reads – and inflation-adjusted contribution limits tend to inch up each year. However, there is one phenomenon that has been increasing over the past decade, and Congress is finally starting to address it.
This phenomenon is that retirees are living much longer than in the past. According to Olivia Mitchell, Wharton professor of business economics and public policy, demographers have reported that the baby who will live to be 200 has already been born. Because few people plan on 40 years (or more) in retirement, increasing numbers of retirees rely solely on Social Security benefits during their final years. As a result, many retirees begin to struggle financially right about the time when their health is failing and they need long-term assistance.
To help avoid this problem in the future, Congress is looking at ways to align retirement plan provisions with longer life expectancies.
In May of this year, the House of Representatives voted 417-3 to pass a bill titled the Setting Every Community Up for Retirement Enhancement Act of 2019 (Secure Act). While the bill offers a wealth of provisions designed to enhance retirement plans, its primary goal is to enable Americans to maximize their savings for long-term retirement income.
The following are some of the key provisions of the Secure Act:
- Eliminates the maximum contribution age of 70½ for various retirement plans
- Delays the age when participants must begin taking required minimum distributions (RMDs) from 70½ to 72
- Enables employer ability to offer an annuity option in retirement plans
- Requires plan sponsors to provide an annual calculation of how much retirement income may be generated based on each participant’s account balance
- Requires long-term, part-time workers to have the option to participate in the company retirement plan
- Requires retirement account balances to be distributed as taxable income to named beneficiaries within 10 years of an IRA owner’s death
While the Secure Act is being considered in the Senate, this branch of Congress also has been working on a bill to enhance retirement plans. The Senate’s Retirement Enhancement and Savings Act of 2019 (RESA) does not include provisions for part-time workers or increase the age for RMDs, but it does offer the following provisions:
- Encourages wider availability of multiple employer plans (MEP) for retirement plan access for small business workers
- Eliminates the 10 percent auto escalation cap on salary deferrals under an automatic enrollment safe harbor plan
- Establishes up to a $500 per year tax credit for small business owners to help defray the cost of implementing automatic enrollment in a new retirement plan (or transition a current plan)
- Repeals the maximum age (currently 70½) for traditional IRA contributions
- Requires retirement account balances to be distributed as taxable income to named beneficiaries by the end of the fifth calendar year following the year of an IRA owner’s death
These bills reflect three important changes that could address the issue of providing income over a longer lifespan. First, the new legislation would allow seniors who work past traditional retirement age to continue making contributions to a traditional IRA, up to the annual limit.
Second, delaying the age at which tax-deferred retirement account owners must being taking required minimum distributions would allow those investments more time to grow.
And finally, annuities are increasingly being recognized as an additional guaranteed income source for life (similar to Social Security, only guaranteed by the insurer rather than the government). The Secure Act offers a provision to ease the liability a plan sponsor assumes in selecting annuity providers, which may incentivize more employers to offer a retirement plan annuity option.
While the two bills are somewhat different, bipartisan support in both houses of Congress signal that there may be enough consensus to pass retirement legislation reforms by the end of the year.