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SECURE Act: What's it securing, actually?


In May the House passed the SECURE (Setting Every Community Up for Retirement Enhancement) Act, which proposes a lot of changes affecting retirement accounts. As of now it looks like the Senate will pass the legislation. Some details are still to be worked out between the two chambers' versions, but some of the main takeaways are:

  • Annuities in 401(k)s: it's currently pretty rare for annuities to be offered in workplace plans, because employers don't want to be held responsible if the insurance company behind the annuity product goes out of business. The legislation allows for a stronger safe harbor provision shielding employers from action by the participants. See below for why this might not be a benefit to employees, though.

  • Increasing the age at which account owners are required to initiate - and pay tax on - distributions from their tax-deferred savings accounts from the current 70 1/2 (which is a little difficult to plan around, and also many people are still working at age 70 besides) to 72

  • Repeal of the Kiddie Tax changes introduced in the 2017 tax bill, which had the effect of outsized tax increases on many families

  • Some more access to 401k's for previously underserved employees: small employers will more easily able to join together to offer plans, where it might have been too expensive for them to do so in the past; and long-term part-time employees will be able to participate.

  • 529 assets can be used to pay student loans. This might seem counterintuitive (why take a loan when the assets are there to pay the expenses in the first place?) but there might be a planning opportunity there, to take a loan and repay it quickly with pre-tax dollars.

  • New inherited IRAs (these are the retirement funds remaining when someone passes away) will be subject to new rules when left to non-spouse beneficiaries. Currently those beneficiaries are required to take a minimum distribution each year, but can "stretch" those over their lifetimes, which provides a valuable planning opportunity for younger heirs. But the new law will likely require the balance to be distributed completely over the first 10 years after death. Specifics can still change, and spouses would still have more flexibility, as they do now. But this is likely to prompt a shift in the advice we give clients, whether you're the IRA owner or the potential beneficiary.

On balance, I think it will be marginally positive. But it doesn’t go nearly far enough: really, if the aim was to actually provide more stability and security around retirement, we should focus a lot more on contributions and make it much, much easier for workers to save. Remove complicated income thresholds, automate a LOT more, simplify plan offerings and make them a lot cheaper.

A quarter of the country has nothing saved for retirement and this bill won’t really move that needle very much. What it will do, I fear, is usher in an era of overpriced and unnecessary annuities in 401(k) plans. We have a model to look to here: 403(b) plans are the savings plans for nonprofit organizations, such as public schools. But there’s a lot less regulation there, and they’re notorious for offering terrible options, in particular the annuities on the menu. We don’t have to make this mistake again! And remember, just because you CAN do something doesn’t mean you SHOULD do something! Have a conversation with your planner periodically to review the menu of options in your workplace plan and don’t hesitate to make sure you understand the pros and cons of everything.

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