Changes May Be on The Horizon for Your 401(k) Or IRA
August, 2018
Retirement Reform Provisions Would Offer More Options for Savers
Lawmakers in Congress are working on a host of proposals that would ease rules on tax-deferred savings vehicles while introducing new savings plans to the mix. Whether you find it easy or difficult to save for retirement, or you are already retired and want to continue saving, there may be something in the new proposals to motivate you to save even more.
Versions of the Retirement Enhancement and Savings Act of 2018 (RESA) in Congress and the Senate would encourage more small businesses to provide employer-sponsored plans for their workers, and increase auto-enrollment features.
Benefit statements from plan sponsors would also include a “lifetime income” disclosure at least once a year. That means if you’re enrolled in a 401(k) or other savings plan sponsored by your employer, you would see what your monthly payments would be if your total account balance were used to provide lifetime income streams.
There would also be a wider role for annuities within 401(k) plans and other employer-sponsored retirement plans. Few employers currently offer this option.
“Lifetime income products, such as annuities and financial guarantees, may help mitigate longevity risk and alleviate some of the challenges associated with managing withdrawals throughout retirement by providing a basic level of income security,” according to a July 2018 ViewPoint report by Blackrock.
The legislation includes language to make annuities more portable, meaning that it would allow direct transfers of an annuity’s lifetime income investments or distributions to another trustee or directly into an Individual Retirement Account (IRA). This means retirement plan participants wouldn’t lose those benefits if employers make changes to the plan and no longer offer an annuity as an option. The change would also allow retirement savers to avoid surrender charges and fees.
Below are three other proposed changes:
Allows for tax-free contributions to traditional IRAs after age 70½ for those still working. Those over 70½ and still working aren’t able to make these contributions under current rules. The proposals in Congress would remove the age cap and allow people over 70½ with earned income contribute up to $6,500 a year in a traditional IRA or a Roth IRA.
Increased access to retirement plans for workers in smaller companies. Small employers would be able to join together to sponsor retirement plans for their workers. Doing so would let these multi-employer plans, or MEPs, obtain more efficient and less expensive management services. This could help remove concerns that small employers may have had in the past about the administrative complexity, costs and potential liability they might face from offering savings plans to their workers.
“MEPs significantly reduce and simplify the burdens on employers, particularly smaller companies that would like to offer a plan but are concerned about the time, complexity, and fiduciary risk associated with doing so,” according to the recent Blackrock ViewPoint report.
Small employers would also get tax credits toward the start-up costs of setting up plans. That annual credit would start at $500 and increase up to as much as $5,000 for up to three years. Other tax credits could be applied to plans set up with automatic enrollment or by converting an existing plan to an automatic enrollment design.
Encourage more savings automatically. Speaking of automatic enrollment, another proposal being considered by lawmakers would lift the 10% “safe harbor cap” on default contributions for automatic enrollment in defined contribution plans.
Auto-enrollment and opt-in features have been among the more popular retirement plan changes in recent years. In early July, for example, T. Rowe Price Retirement Plan Services reported that participation in auto-enrollment plans was at 87%, or 42 percentage points higher than in non-auto-enrollment plans. The report’s findings were based on data from over 1.6 million participants in 636 plans.
In addition, the adoption of auto-increases (or the amounts workers have automatically deducted from their paychecks) was more than five times higher in plans where workers have to opt-out before the increases go through than for those where workers are required to opt-in (66% compared with 13%).
Blackrock says the 10% cap may be a detriment to lower compensated employees who may want to save a greater percentage of their income and to two income households where only one spouse has access to a plan. “Removing the cap would provide additional flexibility for individuals with different life circumstances to invest based on their needs, goals, means, and desires,” Blackrock noted in its recent ViewPoint report.
If you’re looking for more ways to save in your IRA or employer’s plan, contact us to learn more.
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