Washington is so mired in political gridlock these days that you don’t expect to see much bipartisan action anytime soon on much of anything. But legislation to enhance retirement savings seems to have legs, especially after the House passed the bill May 23 by a whopping 417-3 vote.
House Resolution 1994, the Setting Every Community Up for Retirement Enhancement or SECURE Act, and a similar bill in the Senate would expand access to retirement-savings programs for part-time workers and people employed by small businesses.
It would provide incentives to employers to encourage this and even offer enticements to well-off seniors who own IRAs.
Focus on 401(k) plans
The emphasis, though, is on workplace 401(k)-style programs and getting more nonsavers to participate in them.
Roughly every other U.S. worker holds a job that doesn’t offer retirement benefits, according to AARP. The legislation would allow more smaller employers, regardless of industry or business, to band together to create collective 401(k) plans and thereby benefit from economies of scale and reduced administrative hassles.
“It allows for nationwide plans where hundreds or thousands of employers could join together,” said Andrew Schreiner, a senior vice president focused on workplace investing at Fidelity Investments. “The No. 1 way to get people on the right path to retirement is to have their employers offer a plan.”
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The legislation would offer expanded incentives to encourage more smaller employers to offer retirement programs, such as a new $500 annual tax credit to help pay for plan-adoption costs.
Tax credits would be available to employers that adopt retirement plans that use automatic enrollment, automatic contributions, low-cost accounts and similar features. Auto enrollment involves signing up workers unless they opt out.
It’s an effective way to get reluctant, less-sophisticated people on board by taking advantage of the natural human tendency toward inertia. Once workers are enrolled, they typically stay put.
Retirement coverage still lacking
Granted, workers who lack workplace 401(k)-style plans generally still have access to IRAs, yet they are underutilized. Only 11% of American households contributed to either traditional or Roth IRAs in 2017, according to a study by the Investment Company Institute, a mutual-fund trade group.
That means the better opportunity to extend retirement preparedness lies in employer-sponsored programs, which typically include matching funds and convenient paycheck deductions, among other features.
Another promising aspect of the legislation is that it would expand access to retirement-savings programs beyond full-time staff to include many permanent part-time employees.
Part-time workers and those employed by small businesses are two demographic groups that have been falling behind in retirement preparedness, and part-time employment could expand further with rise of the gig economy.
“Overall, we think it’s a great common-sense piece of legislation to make a dent in the (retirement) coverage gap,” Schreiner said.
Changes affecting IRAs, annuities
While 401(k) plans are the focus, the legislation also would tweak certain other types of savings accounts, including IRAs.
For seniors who have traditional IRAs and don’t immediately need to spend their money, the act would raise the age when required minimum distributions must start from age 70½ currently to 72.
Many affluent people in this group often dislike RMDs because withdrawals from traditional IRAs are taxed as ordinary income, and that can make some of a person’s Social Security benefits taxable, too. (Roth IRA distributions aren’t subject to RMD rules.)
Also under the proposal, people who continue to work into retirement age would be able to continue socking away money into IRAs. Currently, contributions are prohibited beyond age 70½.
The program also could expand access to annuities in workplace 401(k)-type plans. Many conservative investors might appreciate this feature, as annuities typically are risk averse and offer a guaranteed income stream for life, making them especially attractive for people who expect to live a long time.
However, most Americans already have or will have access to an annuity-type asset that pays income for life in retirement — Social Security. Many people thus might want to invest more aggressively outside annuities in stock mutual funds, the mainstay holdings of most 401(k) plans.
Reaction generally favorable
In addition to broad bipartisan appeal, the legislation has been welcomed warmly by many in the financial industry.
“Reforms such as repealing the maximum age for making traditional IRA contributions and increasing the age required for mandatory distributions will help align policy with the reality that people are living longer today,” said Paul Schott Stevens, president and CEO of the Investment Company Institute, in a prepared statement.
Roger Ferguson Jr., president and CEO of investment-company TIAA, in a prepared statement said the legislation would “holistically improve” the retirement situation for millions of people.
“It will ensure that retirement plans cover more Americans and that they can save enough in such plans to fund sufficiently their retirement,” he said.
A bill similar to the House measure has been introduced to the Senate Finance Committee by its chairman, Sen. Charles Grassley, R-Iowa, and Sen. Ron Wyden, D-Oregon.
Alleviating financial regrets
The SECURE Act, if passed, could help Americans deal with some of their most pressing financial regrets. Most people in this country admit to having some money-related misgivings, and failure to save is a big one.
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Bankrate.com has updated its annual study on financial regrets, which I cited in an earlier column. In the new survey, 76 percent of respondents said they have at least one financial regret. Topping the remorse list is not having saved early enough for retirement (cited by 27 percent), followed by not having enough money saved up in an emergency fund (19 percent).
Other common money regrets include taking on too much credit-card debt (cited by 16 percent), amassing too much student-loan debt (11 percent) and not saving enough for a child’s education (10 percent). The survey of 1,000 people was conducted in late April and early May.
Reach Wiles at firstname.lastname@example.org or 602-444-8616.