Retirement Security Legislation Advances in Washington
House and Senate Aim to Expand Retirement Plan Coverage and Benefit Security
- Creates a new pooled 401(k) plan allowing employers to band together and share investment and administration costs
- Shifts plan fiduciary responsibilities from the employer to the pooled 401(k) provider
- Extends the age retirees must begin retirement distributions from age 70 ½ to 72
- Requires 401(k) coverage of "long-term part-time" employees
- Encourages offering annuity investment options to 401(k) participants
- Provides new tax credits for auto enrolling plan participants
For the first time in 13 years, retirement reform legislation advances in Congress.
The most vexing problem in retirement security is expanding retirement plan coverage to small business employees and "gig" economy workers. Statistics show that workers are 12 times more likely to start saving at work rather than on their own. In addition, there is a savings challenge for a growing class of part-time workers known as "long-term part-time employees" who are generally excluded from most workplace plans. Retirement coverage is vexing to Washington policymakers because taxpayers provide over $100 billion in annual tax breaks to the private retirement system and coverage hasn't improved in over 40 years.
What is the SECURE Act?
It is sponsored by Chairman Richard Neal (D-Ma). Neal, Chair of the House Ways and Means Committee, passed the legislation through the Committee on bipartisan basis in April. The House of Representatives will pass the legislation in May. In a show of support, the Senate Committee on Finance held a hearing on similar legislation in May. The Chair of the Senate Committee on Finance, Chuck Grassley, (R-IA) says he wants to pass the legislation in 2019. These are positive signs from Congress that has accomplished little this year and signals a rare instance of bipartisanship.
Tackles coverage by creating a new "pooled" 401(k) plan
The plan would allow unrelated employers of all sizes (including self-employed individuals) to join a central plan sponsored by a financial services firm. Costs related to plan investments and administration would be shared across all member companies. In addition, and most importantly, many of the fiduciary duties related to selecting and monitoring plan investments and plan administration would be assumed by the financial services firm sponsoring the pooled plan. This is a significant shift in plan administration and fiduciary responsibilities to the pooled plan provider and away from the plan sponsor. Employers often cite the cost of plan administration and the fiduciary oversight and risk of sponsoring a 401(k) plan as top concerns related to offering a workplace plan. Many national financial firms plan to offer a pooled 401(k) plan once the legislation passes.
Requires 401(k) plan coverage for employees who work at least 500 hours in three consecutive years
A provision aimed at expanding retirement plan coverage by offering a new tax credit for auto enrolling workers is also included. In addition, the legislation encourages plan sponsors to offer 401(k) investment options that include income guarantees like annuities over concerns that retirees may outlive their savings. Today, many plan sponsors are reluctant to offer insurance type investments in retirement plans because of the cost of insurance products and fiduciary oversight related to the long-term health of the insurance provider which can extend years into the future.
And last, the legislation helps individual savers by permitting IRA contributions after age 70 ½ and extending the age for required distributions from IRAs and 401(k)s from 70 ½ to 72. The Secure Act is a beacon of bipartisanship in a sea of acrimony in Washington. I expect the legislation to pass the House of Representatives in May and the Senate take action in the fall.
Don't miss the recently posted articles on investing in opportunity zones and tax breaks for pass-through businesses here.
Boston Private is pleased to announce a partnership with Doug Fisher, a Washington Policy expert, who will offer a series of insights into a number of reform proposals making their way through Congress in 2019. Doug is Director of Retirement Policy at the American Retirement Association. In this role, Doug works with the ARA membership to protect, advise and grow their businesses through ideation and advocacy in the benefits area. Before joining ARA, Doug led Fidelity's legislative policy and thought leadership development teams involving retirement, health and welfare benefit plans. Doug has advised many Fortune 1,000 companies on the impact of legislation and regulation on the design and delivery of benefits. Before joining Fidelity, Doug served as tax counsel to the U.S. Senate Finance Committee and was involved in writing the pension, health and insurance provisions of the Small Business Job Protection Act of 1996; the Balanced Budget Act of 1997, including the Roth IRA, Simple retirement plan, medical savings account (predecessor to the health savings account); and the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
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