For many hoping Congress would pass more retirement system
improvements last year, 2021 ended with a thud. Early momentum for “SECURE 2.0”
(a collection of several proposed bills) was stymied by a congressional agenda
overtaken by pandemic relief, government funding and debt-ceiling deadlines,
and repeated attempts to advance the President’s signature social spending
package, the Build Back Better Act, or BBB.
With fall midterm elections on the horizon, bipartisan
movement will need to happen sooner to give SECURE 2.0 a chance to be wrapped
up later in 2022. BBB also has a chance to rise from the ashes and potentially
introduce some concerning restrictions to retirement savings (if Democrats can
bridge differences within their own caucus).
Add an aggressive regulatory agenda with a long list of
Department of Labor (DOL) rules, and there’s much to consider. To keep pace,
four committees are ready to get to work—if their efforts can beat the clock,
several noteworthy retirement provisions could surface in the months ahead.
How a bipartisan SECURE 2.0 could reshape retirement
security
As committees in both the House and the Senate prepare to
reintroduce their pieces of the SECURE bills, there will inevitably be some
changes. However, many previously introduced provisions are sure to stick, with
the following carrying the most potential for impacting retirement savers:
1. Required automatic enrollment across new
employer-sponsored plans: Contribution rates would start at a minimum of 3%
and auto increase 1% incrementally each year until they’ve reached a ceiling of
10%.
Why this is important: Principal Retirement Security Survey
(June 2021) findings show that 84% of workers who were auto-enrolled said it
helped them start saving sooner than if they’d made that decision themselves.
And, on the other side of the desk, that same survey reports nearly 6 in 10
(58%) employers indicate automated features have positively impacted their plan
success.
Although a 3% automatic contribution can be a good start, we
believe the starting rate can and should be higher. In fact, our 2020 data
shows that plans with a 6% starting automatic enrollment rate tends to be a
good baseline for most workers.
2. Incentives for small businesses to offer retirement
plans—in the form of new and expanded tax credits for businesses establishing
plans.
Why this is important: An increase to the current three-year
new retirement plan credit (for employers with 50 or less employees) from 50%
to 100% of eligible start-up expenses (up to a $5,000 annual cap) could help
broaden coverage and increase retirement savings to employees who would
otherwise not have had access.
An additional brand new credit could further encourage small
employers to make employer contributions to their participants’ 401(k)s. This
measure would offset as much as $1,000 of employer contributions for each
participant in their first year (decreasing slightly over a five-year period)
and would apply to companies with under 100 employees.
Both these tax credit provisions could bring much-needed
benefits to small business decision makers and their workers—and attract and
retain talent in today’s job market.
3. Support for employees with student loans: Changes
would allow employers to treat employee-qualified student loan payments as
deferrals for purposes of matching contributions.
Why this is important: According to a March 2021 U.S.
Department of Education report, American student loan borrowers owe a
collective $1.6 trillion in federal and private student loan debt. Although the
legislation wouldn’t help employees directly repay their loans—it would let
employers “match” their employee’s student loan payments with a contribution to
their retirement plan. This could be particularly beneficial for people who
might not otherwise believe they can financially support paying down student
loans while also building retirement savings.
4. Changes to the required minimum distribution (RMD)
age, from 72 (the current age) to 75 (by 2035).
Why this is important: Today, anyone at the age of 72 is
required to start taking distributions from their retirement funds. But with
people living longer and working later
in life, this is quickly becoming an outdated age requirement.
Principal® Retirement Security Survey (first quarter 2022) shows that only 31%
of workers and 56% of retirees say they’ve started to prepare for these RMD
withdrawals.This new legislation would give individuals more time to work,
plan, and consult with their financial professionals.
(Re)building the BBB: Impacts to IRA contributions, Roth
conversions, and DC plans
Although the President’s spending package didn’t pass last
year, some members of Congress haven’t given up on BBB. Rather than take
another shot at moving the entire package, Democrats seem focused on including
pieces of BBB in a potential reconciliation bill.
If successful, it’s likely that several new limitations on
retirement accounts could hitch a ride:
1. Limitations on contributions to an IRA:
Individuals in higher income brackets would feel the impacts of these changes,
specifically single taxpayers (or married taxpayers filing separately) with
taxable income over $400,000, married taxpayers filing jointly with taxable
income over $450,000, and heads of households with taxable income over $425,000
whose total retirement savings exceeds $10 million. These high-income earners
would be impacted by:
Restrictions on IRA contributions
A $10 million cap on combined IRA and defined contribution
(DC) plan balances (with mandatory minimum distributions for excess amounts)
Prohibition on Roth conversions of tax deferred IRA and DC
accounts
Why this is important: This provision won’t restrict
rollovers or prohibit accounts obtained due to a death or divorce. It also
won’t prevent additional contributions to employer-sponsored DC plans, SIMPLE
IRAs, SEPs, or nonqualified deferred compensation plans. But financial pros may
still want to give their high-income clients a heads-up if Roth conversions are
an intended strategy—so they can consider initiating Roth conversions before a potential cut-off.
2. “Super Roth” conversions banned for all taxpayers:
Conversions of after-tax monies to Roths would be prohibited, causing the
taxpayer to ultimately pay income taxes on potential investment earnings.
Why this is important: Taxpayers would ultimately pay income
taxes on potential investment earnings (because after-tax monies would no
longer be available for Roth conversion).
This would impact anyone with after-tax IRA or after-tax
employer-sponsored accounts, regardless of income, and would be a significant
change for those with employer-sponsored plans allowing after-tax contributions
and anyone having the financial means to save beyond the statutory qualified
retirement plan cap.
The busy regulatory reform agenda: Wildcards to watch
Planned retirement reforms and new regulatory developments
could make the year an eventful one. We’re most interested in:
1. How the environmental, social, and governance (ESG)
landscape is shifting. A finalized DOL rule outlining ERISA fiduciaries’
considerations when considering ESG factors for their plans’ investments is
expected very soon and the DOL is also seeking input on potential actions to
protect retirement savings from the threat of climate-related change, including
potential new questions on IRS Form 5500.
2. A new DOL fiduciary rule will likely be proposed by
midyear.
3. Later in the year we anticipate broader proposed
changes to IRS Form 5500 as well.
Why these are important: A growing number of retirement
savers report they have questions about ESG considerations and want to learn
how to incorporate them into their investment portfolios. In fact, our
Retirement Security Survey (consumer results, December 2021), shows 33% of
workers and 26% of retirees are interested in ESG investments.
Add to the mix one-quarter (28%) of plan sponsors reporting
plan compliance and fiduciary issues as top concerns, and an update to IRS Form
5500 on the horizon, and there’s a lot of questions still in the air.
Critical steps will no doubt need to occur before the
anticipated retirement of several SECURE 2.0 architects, Congress’ August
recess, and the impending midterm election. This trifecta could contribute to
fewer floor days in Congress during the second part of the year—but this may be
just what we need to get the job done in 2022.
Click here for the
original article.