Several retirement security bills are now under
consideration by Congress that would extend the age for required minimum
distributions and allow greater catch-up contributions to qualified accounts,
among other things, in the latest effort to overhaul the nation’s retirement
system.
What the final legislation will look like remains to be
seen, but there is strong bipartisan support for legislation that would broaden
access to retirement savings plans and help savings last longer. The bills seek
to build on the Setting Every Community Up for Retirement Enhancement, or
Secure, Act, which was passed and signed into law in 2019 to increase access to
retirement plans.
The efforts have support in the financial-services industry,
but some industry watchers say that while the current legislation offers some
good features it doesn’t go far enough.
“The big problem is that about half of the private-sector
workforce is not covered by a retirement plan at work at any given time, and we
need to close that gap,” says Alicia Munnell, director for the Center for
Retirement Research at Boston College. “Everything else is sort of playing
around the edges.”
Required Minimum Distributions
Little more than a year after the 2019 Secure Act raised the
age for required minimum distributions from tax-deferred retirement accounts to
72 from 70½, two of the bills would raise the RMD age further over time, to 75
from 72.
The Securing a Strong Retirement Act of 2021 in the House of
Representatives would increase the age for RMDs from 401(k)s, 403(b)s and
non-Roth individual retirement accounts to 73 starting in 2022, to 74 in 2029
and to 75 in 2032.
The Retirement Security and Savings Act in the Senate would
increase the age to 75 in 2032. It would also create an exemption from lifetime
required distributions for those who have $100,000 or less in retirement
savings.
With many people now working longer, they may not need to
take distributions, so increasing the age for RMDs is a positive step, says
Heather Lavallee, CEO of Wealth Solutions for Voya Financial.
But Munnell objects to increasing the age for RMDs to 75.
Employees are permitted to save pretax dollars so they can have a decent
retirement, she says. Postponing RMDs to 75 would permit wealthy people to
build up big cash piles that they don’t need to touch, she says.
Retirement Plan Auto-Enrollment
The House proposal would take a bold step—mandating that new
defined-contribution plans, including 401(k)s and 403(b)s, automatically enroll
eligible employees. Currently, autoenrollment is optional for employers.
Because the autoenrollment and autoesclatation won’t be
retroactive, “it’s not going to help the millions and millions of workers who
need to save more but already participate in an employer’s 401(k) or 403(b),”
says Jeffrey Levine, chief planning officer at Buckingham Wealth Partners in
St. Louis.
Under the bill, eligible employees would be enrolled at the
pretax level of between 3% and 10% of pay with increases of 1% annually until
their contribution reaches between 10% and 15%.
Employees could opt out of enrollment, and there’s an exception for
small businesses with 10 or fewer employees, businesses in existence for less
than three years, and church and government plans.
In contrast, the Senate proposal doesn’t require companies
to automatically enroll participants or to automatically escalate their
contributions. Instead, it seeks to encourage companies to do so by exempting
them from annual nondiscrimination tests that measure participation levels to
ensure employees have equal access to benefit plans. Under the bill, a plan
would be exempt if the minimum default level of contributions for new employees
is set at 6% for the employee’s first year, up from the current 3%. That would
increase to 10% over the subsequent four years.
To qualify for that exemption, employers would also be required
to make matching contributions on behalf of all eligible non-highly compensated
employees. The bill would provide for a tax credit to certain
employers—generally those with 100 or fewer employees—for matching
contributions under the exemption for the first five years of participation up
to 2% of a eligible employees’ compensation.
Boosting autoenrollment will help drive the right behavior
by plan participants, says Lavallee. “It’s so important to be able to set it
and forget it and to start that behavior early,” she says.
Catch-Up Contributions
The primary House and Senate bills would raise the amount in
catch-up contributions some older workers could make to their 401(k)s, though
they would go about it differently.
Currently, employees 50 or older may make catch-up
contributions of no more than $6,500 annually to their 401(k), and the amount
is indexed annually for inflation.
The House measure would increase that to $10,000 for those
ages 62 through 64. The Senate proposal would increase 401(k) limits for
catch-up contributions to $10,000 for those over age 60.
Levine says it makes no sense to allow larger catch-up
contributions only for those age 62 through 64. Those who are 65 and older may
also need to save more, he says.
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