Saving for and spending in retirement is difficult and not every employee has access through their employer. But it might be about to get just a little bit easier and access may expand.
Last Friday, President Trump signed an executive order that spurs the Department of Labor and the Department of Treasury to push forward several bipartisan changes to how retirement plans operate.
Here are the big initiatives:
- Review Required Minimum Distribution (RMD) rules with an eyes towards starting them later than age 70 ½ and/or reducing them once they start;
- Consider the creation of pooled Multiple Employer Plans, which would allow companies to offer financial institutions’ 401(k) plans with participants pooled from multiple unaffiliated employers, rather than asking employers to create their own independent 401(k) plan from scratch; and
- Review paperwork and administrative requirements for employers’ workplace retirement plans with the intent of lowering costs and spurring retirement plan adoption among small and medium businesses.
No changes are certain, and the changes if enacted would likely take months or years to go into effect. And it’s also unclear what impact (if any) the executive order will have on pending bipartisan retirement legislation in Congress.
First, A Review of Required Minimum Distributions
There are many benefits of investing in a 401(k) or IRA, most especially the tax deferred growth of invested assets. But among their drawbacks is that those over age 70 ½ are required to withdraw (and incur taxes on those withdrawals) a certain amount of money each year even if they don’t want or need that money. The age RMDs kick in hasn’t changed since the 1980s when average lifespans for 65 year olds were approximately 3 years shorterthan they are now. Based on that fact alone, altering RMD start ages to reflect this new reality seems like a no-brainer.
It’s unclear how long RMDs would be pushed out, if at all. The Department of Treasury could opt to push back the age at which RMDs kick in, lower the percentage amount per year that has be withdrawn, or enact a combination of the two.
How Will RMD Changes Impact Current And Future Retirees?
Since no changes have actually been enacted, it’s still unclear. It may mean that some people who have already started RMDs but are under age 73-75 will be able to pause them. It may mean that anyone who hasn’t already started RMDs may not have them start as early as expected. It may mean that those well into retirement will soon have lower reduced RMD requirements.
Next, Pooled Employer Plans
The order calls on the Labor Department to consider allowing small businesses to jointly offer 401(k) plans across unaffiliated entities via a mechanism known as open Multiple Employer Plans. The practical impact should be to significantly reduce the cost and complexity for an employer to start and maintain a 401(k) plan, which should increase the number of employers offering 401(k)s, although participation will still be voluntary.
Paperwork and Administrative Burden
The order will also call on the Labor and Treasury departments to consider ways to reduce paperwork and administrative burdens that might prevent businesses from offering retirement savings plans. While there is some debate about how far this push should go and what the magnitude of its effect on costs will be, there’s general agreement that some streamlining is overdue.
Retirement Enhancement Savings Act (RESA)
The Executive Order has some significant overlap with the Retirement Enhancement Savings Act (RESA). RESA is more comprehensive than the Administration’s executive order.
According to PlanAdviser, RESA also includes other proposals beyond RMD changes and pooled employer plans. Here are some of those aspects of the bills:
- Require[s] “lifetime income estimates at least annually on participants’ retirement plan statements;”
- Establishes “a fiduciary safe harbor for the selection of lifetime income providers for retirement plans;”
- Allows “more time for participants who terminate with an outstanding loan to rollover the loan and pay it off without it being a deemed distribution;”
- Enacts “other proposals that would affect nondiscrimination rules, the automatic enrollment safe harbor default rate and the treatment of 403(b) custodial accounts upon plan termination.”
Likelihood of These Proposed Changes Happening
The chances are high that the initiatives from today’s executive order will go into effect, either through the passage of a new law or by executive action alone. I don’t need to be the one to tell you that there’s little common ground between Republicans and Democrats these days. But the retirement initiatives in this Executive Order and in the RESA bill represent one of the few pieces of common ground left inside the Beltway.
This doesn’t necessarily mean that RESA will pass before the November elections. But it does mean that this increases the chance of passage and that something could get done in relatively short order. The bill’s leading Republican sponsor, Orrin Hatch, will be stepping down in January 2019, further increasing the likelihood of near-term passage. On the flip side, if RESA becomes entangled in a broader Republican-led tax reform effort — dubbed Tax Reform 2.0 — its passage any time soon is far from secured.