This year has been an exciting time for retirement policy: Just over the horizon sit several potential updates to the laws governing how Americans plan for life after work. In May, the House of Representatives passed the most significant piece of retirement legislation in more than a decade, and currently, a handful of agencies are considering changes to the policies guiding certain retirement products. Here’s what you need to know.
The U.S. House of Representatives passes the Secure Act
In late May, the House of Representatives passed the largest piece of retirement-related legislation in more than a decade. The bill, known as the Secure Act, is designed to provide employees more choice and flexibility when choosing retirement options from their employer. Key provisions include:
1. It allows employers to offer lifetime income products. Although they are the most popular forms of employer-sponsored retirement products, pensions and 401(k)s are not bottomless. With Americans living longer and healthier lives these days, it’s entirely possible to outlive these sources of income—in fact, that’s the number one fear of pre-retirees when it comes to financial health during retirement.
Conversely, a product like a fixed indexed annuity can offer guaranteed lifetime income, making it one of the only tools that can help ensure you will not run out of money during your post-working years.
The Employee Benefit Research Institute found that 80 percent of 401(k) plan participants surveyed said they were interested in putting some or all of their balances in a guaranteed lifetime income option like an annuity. The House’s Secure Act would enact policies allowing employers to offer annuities as retirement planning products, which could make the possibility of guaranteed lifetime income a reality for more people.
2. It encourages small businesses to offer 401(k) plans. As a primary way working Americans save for retirement, 401(k) plans are important to most pre-retirees. Additionally, IALC research has found that access to planning information, like the kind offered by large employers, correlates with retirement readiness.
However, small businesses typically do not offer 401(k) plans due to the high costs they incur. As a fix, the Secure Act would allow small businesses to link with each other and join a much larger—and thus more cost-effective—401(k) network, which could expand access to these products to a larger portion of U.S. employees. The Act would encourage small employers to take part in these plans through tax breaks and other incentives.
3. It delays forced IRA withdrawals until age 72—up from 70.5. Currently, the law requires retirees to begin withdrawing money from their IRA accounts when they turn 70 and ½ years old, but the House bill would increase the maximum to age 72. That would create more time to take advantage of the tax-deferred growth these products offer. A couple, for instance, could add an extra $14,000 each year to a spousal IRA before the new law would force them to start making withdrawals.
The bill passed the House with an overwhelming majority of 417-3. It still needs to pass the Senate before it can become law, but it has widespread bipartisan support, which suggests an optimistic future. Note that the Senate is already considering a similar version of the Secure Act, and IALC supports both bills.
The National Association of Insurance Commissioners is expected to update its guidelines
Earlier in the year marked the end of the comment period for draft updates to guidelines managed by the National Association of Insurance Commissioners (NAIC). The drafts were released in November 2018 and seek to clarify information around the ways annuity sales are conducted. Final versions are expected later this year.
What does this all mean?
In addition to the tax bill passed in late 2017, the retirement landscape is changing—and many agree it’s for the better. To stay on top of how the changes could impact you, it’s important to talk with a trusted financial advisor or to take advantage of the various retirement tools available today.