Americans are living longer. From 1960 to 2016, the
average American
life expectancy increased by nine years. Despite the increase
in life expectancy, workers are retiring at the same age as they did in 1960.
Yet, the landscape of retirement plans has changed, as the private sector has
moved away from lifetime
income annuities and pensions, called “defined benefit” plans.
They now offer employer-sponsored 401(k) plans instead.
A
majority of employer-sponsored plans are set up as defined contribution (DC)
plans, meaning that unlike defined benefit plans where the benefit is defined (usually a
percentage of current income) a defined contribution (DC) plan defines the contribution that
can be made to the plan subject to IRS limits. An employee can only
withdraw what has accumulated in the plan and since typically the money is
invested in the stock market, payments are not guaranteed
for both participant and survivor as under traditional pensions and annuities.
Unfortunately,
these stiffer plans mean retirees must make their retirement savings last
longer or risk outliving their savings. However, the House Ways and Means
Committee is looking to change this bleak financial outlook.
Brady retirement provisions
Many plan
sponsors avoid lifetime annuity offerings in their retirement plans in fear of
lawsuits. Under the current law, plan participants who select a lifetime-income
option that could later be discontinued by the plan sponsor can suffer from
"surrender fees," taxes or early distribution fees.
To avoid the
risk associated with plan discontinuation, plan sponsors choose to offer only
DC plans that are easily rolled into an IRA. Without lifetime annuity options,
many 401(k) participants are left to manage their saving, and more importantly
their distributions, on their own.
H.R.
88, the provision from outgoing House Ways and Means Committee
Chairman Kevin Brady, would allow any participant to convert their retirement
savings into a stream of income. Employees converting their retirements can
avoid the hassle of manually withdrawing cash or rolling over their account
balance into a separate annuity.
Additional proposed retirement changes
Brady's
provisions include other options that make retirement savings both more
manageable and available for all workers. One requirement would let small
employers join other employers in multi-employer retirement plans.
This
provision gives retirement options to the oftentimes lowest-paid employees
while allowing small employers the ability to offer a benefit not typically
available to them. Another Brady provision would require plan sponsors to
provide lifetime income illustrations to employees.
This
lifetime-income disclosure grants transparency and planning abilities to
employees regarding their retirement savings. Unfortunately for the Republican
Brady, incoming Democrat Rep. Richard Neal, is expected to take over the
chairman position in the House Ways and Means Committee.
However,
this change in leadership does not mean that all proposed changes to retirement
legislation are dead. Neal has proposed his own version of retirement
regulation changes under H.R.
4524, titled "Retirement Plan Simplification and Enhancement
Act of 2017."
Neal's retirement proposal
Neal's
bill proposes several changes to current retirement regulations. One of the
most important provision regarding retirees outliving their savings is a
lifetime income portability option. Under the portability option, participants
can avoid early withdrawal penalties and taxes of a discontinued sponsored plan
by moving their funds to another plan.
While
it is common for employees to rollover funds from one employer to another, the
provision adds an important component to current regulations. The receiving
plan sponsor does not need to provide a lifetime income option for the employee
to move the funds.
Essentially,
this provision removes existing barriers for workers selecting a lifetime
income investment.
Potential issues with the provisions
While
the proposed legislation appears to offer only good news to employees saving
for retirement, some issues could arise if the legislation is passed. Life
insurance agents and financial professionals will have to deal with a different
retirement landscape.
The
provisions could potentially lead to a reduction in the number of retirement
plan rollovers that occur. Retirees who opt for lifetime income annuities will
no longer need to shop for annuities at the time of retirement.
Rollovers
into Individual Retirement Accounts (IRAs) and Individual
Retirement Annuities generate work and income for financial
professionals. Also, life insurers could change their desired consumer,
becoming more interested in courting plan sponsors who offer lifetime income
provider needs and less interested in retirement savers and their financial
advisors.
Although
innocuous at first glance, the lifetime-income disclosure could bring about
lawsuits while other provisions are trying to minimize risk. One concern is
that if the disclosure projects more income than will be available, it will
cause retirees to run out of savings regardless.
What
is unknown at this time are the potential costs and fees that could be
associated with the provisions. Changes like the provisions recommended could
bring about hidden fees for plan sponsors as the regulations are implemented.
While all the provisions are attempting to align with nine
recommendations to facilitate retirement health, potential
industry impacts have yet to be uncovered.
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