The SECURE Act and Your 401(k)
Retirement Readiness (or more accurately, lack thereof) has been a hot-button issue plaguing the U.S. for quite some time now. The impetus for this looming crisis can be traced to the early 90’s when 401(k) plans became the preferred employer-sponsored retirement plan, placing more responsibility on individual employees to prepare and manage their retirement nest egg. Foreseeing a crisis, Congress has taken note with recent legislation that has uncommonly seen bi-partisan support.
The 2016 Department of Labor’s fiduciary rule, designed to provide greater clarity on how a financial advisor provides service, has been bogged down in courts and other government agencies for further clarification. However, 2019 has been an active year for Congress as it pertains to 401(k) plans with the recent Setting Every Community Up for Retirement Enhancement Act (SECURE Act) passing the House in May by a vote of 417-3. The bill is now off to the Senate for review and debate. Undoubtedly there will be tweaks made in the Senate, however with such strong support on both sides of the aisle, we venture that the SECURE Act will be taking effect sometime in the near future. The bill encompasses 29 total updates to a number of tax deferred retirement vehicles. Here are the major proposed changes affecting 401(k) plans:
- 401(k) statements need to express retirement income at retirement age. A good financial advisor will always express the goal of retirement in income replacement. Social Security and Pension (Defined Benefit) plans have always expressed retirement savings by retirement payments. 401(k) and other Defined Contribution plan statements have historically just shown a current value balance. They will now also have to include estimated income streams during retirement.
- Multiple Employer Plans (MEPs) will increase 401(k) accessibility for small businesses. MEP’s have been a grey area for some time, as there have been differing ERISA opinions and confusion when it comes to unrelated employers banding together with each other to create economies of scale. Clarifying the rules to allow small businesses to band together should provide a low-cost alternative to starting a 401(k) plan for their employees.
- New rules will make it easier for part-time employees to be eligible for a 401(k) plan. Currently, the most stringent eligibility requirements a Plan Sponsor can select are (1) to make employees work 1 year of service and (2) to make each employee work 1000 hours during the year. The proposed legislation will knock the hours requirement down to 500, which works out to about 10 hours a week. This new provision seems to be geared towards employees close to, or maybe near retirement age who are working part-time.
Other changes include moving the Required Minimum Distribution age from 70.5 to 72, providing safe harbor when it comes to allowing annuities in a 401(k) plan, providing a $500 tax credit to have an auto-enrollment plan, and changing to the hardship distribution rules.
This piece of legislation is broad and sweeping; However the intent is to encourage more Americans to save – and that is something everyone should be excited about.
Located in Denver, Colorado with a satellite office in Metairie, LA, LT Trust is a low-cost 401(k), open architecture 401(k) recordkeeper that helps financial advisors and plan sponsors to achieve retirement readiness. With a focus on small business 401(k)s, LT Trust is on a mission to provide cost-efficient retirement plans without compromising quality or customer service.