Another seemingly well-intentioned bill is making its way
through Congress designed to help all Americans prepare better for retirement.
It comes less than two years after a previous legislative package, the Secure
Act, was passed with the same aim.
The new Securing a Strong Retirement Act of 2021 has
bipartisan support and appears to stand a good chance of enactment in some
form, having passed through the House Ways and Means Committee on May 5.
But will it really help all Americans, especially those on
the wrong end of the widening retirement wealth gap?
The many federal retirement incentives adopted in recent
decades clearly have made a difference, with Americans now collectively holding
more than $32 trillion in Individual Retirement Accounts, workplace
401(k)-style accounts and more.
But the totals are highly skewed, with some people
overseeing multimillion-dollar retirement balances and others with nothing.
More than one-third of Americans, 36%, have neither IRAs nor
workplace 401(k)-style accounts, and a large chunk of those with accounts don’t
have much money in them, reports the Investment Company Institute. Confusion
about rules, income ineligibility, a lack of access and insufficient income all
play a role.
Here’s a look at some of the key provisions of the Securing
a Strong Retirement Act, sponsored by Rep. Richard Neal, D-Mass., and others,
with a special focus on whether these rule changes would help those Americans
with little or no current retirement savings.
Raising the RMD age
One provision of the act would let people build up their IRA
and 401(k)-style accounts for a little longer before they’re required to
withdraw money. The Secure Act passed in 2019 raised the age when RMDs or
required minimum distributions kick in, from 70½ to 72.
The Securing a Strong Retirement Act would boost that to 73
next year and, eventually, to 75 by 2032. Delaying the deadline for taking
withdrawals, and paying taxes, would help ensure that investors don't run out
of money prematurely in their older years.
But it doesn’t provide much assistance, at least anytime
soon, for people with minimal or no retirement assets. Nor is it of much help
to those who actually need to make withdrawals to meet spending needs — which
is the basic idea of having retirement accounts in the first place. The rule
would mainly help well-off investors.
Increasing catch-up contributions
The idea here is to allow people nearing retirement to sock
away more money than younger investors can. Currently, for example, working
individuals ages 50 and up may contribute an extra $6,500 beyond the $19,500
annual limit that normally applies for 401(k) plans. For people ages 62, 63 and
64, the proposed legislation would boost the additional catch-up maximum to
$10,000 and index it to inflation. Other maximums would apply to certain other
accounts.
This provision would help affluent people but not those who
don’t max out on their retirement opportunities to begin with. In other words,
retirement have-not investors wouldn't likely benefit much, if at all. As it
is, catch-up contributions aren't that common.
For example, just 5% of households with at least one member
50 or older contributed any money to a traditional or Roth IRA, according to an
Investment Company Institute study that assessed investing patterns as of
mid-2020. Another 4% made regular contributions and took advantage of catch-up
provisions. IRA balances have grown, but most new funding is coming as
rollovers from workplace retirement plans.
Further endorsing auto enrollment
Many Americans won’t invest in 401(k) and similar workplace
plans unless they’re forced to do so. That’s the idea behind enrolling people
automatically and frequently raising their contribution levels over time. Once
enrolled, workers have the ability to opt out but most don’t. The auto-enroll
and auto-invest concepts rely on investor inertia, first getting them into a
retirement program and then having them invest more over time.
The proposed legislation would generally mandate auto
enrollment in newly created workplace plans, while keeping it voluntary for
existing plans. It also would boost employee contributions, starting them at 3%
of pay and boosting that by 1% annually to a maximum of 10% (again, with an
opt-out feature).
This provision and a proposed $1,000 credit per employee to
encourage small businesses to set up retirement plans would help those people
lacking assets.
“Mandating of auto enrollment is, in our view, the most
significant (provision) since it will likely have the greatest impact on
getting employees into plans and enhancing their retirement benefit over time,”
said law firm Faegre Drinker in a commentary.
Enhancing the saver’s credit
The legislation also would, finally, boost the retirement
saver's tax credit, a somewhat obscure source of matching funds provided by the
federal government that's available to lower-income workers. The maximum credit
for years has been set at 50% of contributions of up to $2,000, making for a
$1,000 net benefit (some people eligible at higher income levels receive lower
credit amounts of 10% or 20%).
The new proposal would set a single 50% tax credit and raise
the maximum dollar benefit to $1,500. It also would increase the
income-eligibility threshold, meaning more people could take advantage.
The saver's credit provides retirement matching funds, in
the form of a tax credit, to low-income workers. Sometimes the hardest part of
getting started with an investment program is taking the first step. This
credit can help people in the have-not group do so.
Bringing student loans into the picture
Another provision in the legislation would allow workers to
receive employer retirement matching funds while paying down student-loan
debts. This proposal aims to "assist employees who may not be able to save
for retirement because they are overwhelmed with student debt and missing out
on available matching contributions," according to ThinkAdvisor, a news
source for financial professionals.
This proposal would benefit many retirement have-not
investors.
In addition to the provisions addressed above, there are
many other potentially helpful changes in the legislation. For example,
employers could be able to offer modest financial incentives such as gift cards
to drum up enthusiasm among workers for their retirement programs. Such
incentives currently aren’t allowed.
So on balance, many of the rule changes in the Securing a
Strong Retirement Act would help people with little or no current retirement
assets. But other proposals would mainly benefit investors who already have
secured a strong retirement account.
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