Proposed Retirement Plan Legislative Changes

Collectively known as SECURE 2.0

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There are three (3) bills that could have significate changes for retirement plans:

 

  • The Securing a Strong Retirement Act of 2022, which the House passed 414-5 in March of 2022 (H.R. 2954)

 

  • The Retirement Improvement and Savings Enhancement to Supplement Health Investments for the Nest Egg (RISE & SHINE) Act of 2022 (S.4353). The Senate Health, Education, Labor, and Pension (HELP) Committee reported out unanimously on June 14, 2022

  • The Enhancing American Retirement Now (EARN) Act, which the Senate Finance Committee reported out unanimously on June 22, 2022

 

These bills are working their way through Congress now. Many of the provisions are similar, the theme is to encourage workers to save more for retirement. CiR will keep you updated. 

 

Enhanced Savings Incentive Proposals:

 

  • Requirements for automatic enrollment, automatic escalation, and automatic re-enrollment.

    • One bill would require all new 401(k) and 403(b) plans to have automatic enrollment and automatic escalation.

    • A different bill would require auto-re-enrollment every three years for plans first adopting auto-enrollment in the future.

 

  • Introduce a new automatic enrollment safe-harbor plan with higher automatic electives.

    • One bill adds a new auto-enrollment safe harbor with higher minimum and maximum automatic contribution percentages and higher match requirements than those that apply under the current automatic enrollment safe harbor. The safe harbor allows the plan to avoid certain non-discrimination testing rules.

 

  • Allow plans to make matching contributions based on student loan repayments. The bills include a provision allowing 401(k), 403(b), and governmental 457(b) plans to treat a student loan payment as an elective contribution for purposes of triggering matching contributions. There are related changes to the nondiscrimination rules.

 

  • Allow emergency savings. The bills include two approaches to employers setting aside small amounts of money for financial emergencies.

    • One approach is a “sidecar” to a 401(k) or ERISA 403(b) plan (max of $2,500).

    • The other approach is a new distribution rule allowing participants to take a small amount ($1,000) out of their 401(k), 403(b) or governmental 457(b) plan.

    • It’s possible that the final bill will include both approaches with amendments so that the provisions work for both the IRC and ERISA. 

  • Permit older participants to make higher catch-up contributions. Current law allows older workers to make catch-up contributions of up to $6,500 to certain plans starting at age 50.

    • The bills would increase the yearly amount to $10,000 for certain older workers (ages 60–63 in one bill and ages 62–64 in another).

 

  • Revise the definition of “long-term, part-time workers.” The SECURE Act changed minimum participation standards for non-collectively bargained 401(k) plans so that the plan is required to allow long-term, part-time workers to make elective contributions. The SECURE Act defined “long-term” as participants who have 500 hours in each of three years.

    • The bills would change that to two years, eliminate the need to retroactively trace vesting credit, fix some technical issues and add a parallel ERISA provision.

 

  • Require or allow certain contributions to be Roth contributions. Employee Roth contributions, rather than pre-tax contributions, move the budget cost outside of the 10-year budget window used for testing the cost of legislation. The bills vary, but items permitted or required to be treated as Roth contributions include catch-up contributions and, if the employer allows and the employee elects, employer matches and employer non-elective contributions.

 

Enhanced Distribution Changes:

 

  • For Required Minimum Distributions (RMDs) Increase the required beginning date (RBD) age.

    • Under one bill, the RBD age would increase to 75 starting in 2032.

    • Another bill would increase the RBD age to 75 in 2033 with interim increases to age 73 in 2023 and to age 74 in 2030

 

  • Reduce the penalty tax for RMD failure.

    • The bills would reduce the penalty tax on participants who fail to take RMDs from 50 percent to 25 percent.

    • If the failure is corrected in a timely manner, the tax is reduced to 10 percent.

 

  • Waive the penalty tax for terminally ill individuals and long-term care distributions.

    •  The 10 percent early withdrawal tax on distributions would not apply in the case of a distribution to a terminally ill participant (after doctor certification) nor to distributions from retirement plans used to pay for qualified long-term care contracts for participants and spouses.

 

  • Allow the surviving spouse to elect to be treated as the employee. The surviving spouse of a participant who dies before commencing RMDs would be allowed to elect to be treated as the employee for RMD purposes; thereby delaying when RMDs must commence.

 

  • Eliminate pre-death RMDs from in-plan Roth accounts. Roth IRAs are not subject to the RMD rules if the IRA holder dies before the required beginning date (RBD). This provision would apply this same rule to Roth accounts in 401(k), 403(b) and governmental 457(b) plans.

  • Clarify definition of a multi-beneficiary trust. The bills provide that a trust established for a chronically ill or disabled eligible designated beneficiary shall not be considered a multi-beneficiary trust, for purposes of post-death distributions, solely because the trust includes a charity as a beneficiary in addition to the spouse.

 

Other Proposed DC Plan Changes

The bills include many other provisions that would affect DC plans, including these:

 

  • Permit self-certification of hardship to simplify administration.

    • The bills would allow plans to let participants self-certify that they had a hardship event. Participants can already certify the other component of hardship eligibility: financial need. The Treasury Department may provide that a plan cannot accept self-certification if the plan has actual knowledge of the falsehood of the certification.

 

  • Limit notices that unenrolled participants must receive.

    • The bills would allow a DC plan to eliminate all notices to “unenrolled” participants (i.e., participants who do not elect to participate for a year and have no existing account balances) other than the basic election notice and other standard notices, such as the SPD. The bills would instruct the federal agencies to issue a regulation within two years.

 

  • Limit qualified birth or adoption distribution repayments to three years.

    • The bills would limit the repayment period to three years; it is currently unlimited.

 

  • Withdrawals related to domestic abuse could be made without a penalty.

    • No distribution restriction or 10 percent premature distribution penalty would apply to a distribution taken from a DC plan because of domestic abuse. The limit would be $10,000 or 50 percent of the account, if less. The amount could be repaid within three years.

    • There does not appear to be a requirement that a plan include a specific provision allowing such distributions. However, participants could take advantage of the premature distribution relief if they satisfy the domestic abuse standard and are eligible to take a distribution for another reason.

 

  • Increase the cash-out amount. The bills would increase the non-consent cash-out limit, now $5,000.

    • Two of the bills would raise the limit to $7,000.

    • The other bill would increase it only to $6,000.

 

  • Legislate automatic disaster relief. The CARES Act made emergency changes to in-service distribution rules and loans.

    • These bills include automatic changes in the disaster distribution and loan rules similar to the changes made under the CARES Act, so that no Congressional action would be needed for future disasters.

 

  • Allow retroactive amendments until tax filing date. This provision would allow retroactive amendments increasing benefits (except matching contributions) to be made up to the plan’s tax-filing date. Currently, the requirement is that these retroactive amendments must be made by the end of the plan year.

 

  • Permit mixed-performance benchmarks for investments.

    • The DOL has rules limiting permissible benchmarks for disclosure of mixed-asset investments, such as target date funds.

    • The provision would require the DOL to allow mixed benchmarks.

 

  • Require an annual paper benefit statement. Existing DOL regulations carve out several exceptions allowing benefit statements to be delivered electronically.

    • One bill narrows these exceptions to require at least one paper notice before electronic notices can be provided unless certain conditions are met. For active participants, the plan would be required to provide a one-time written notice advising participants of their right to request paper statements. For separated participants, the plan would be required to furnish the participant at least one paper statement each year unless the participant asks to receive statements electronically.

 

While the effective dates of most provisions would be earlier (some as early as 2023), the bills would not require plan sponsors to make amendments that conform with plan operation until later — generally the end of the 2024 plan year. The bills also provide extended anti-cutback relief tied to the amendment date. Similar changes would be made amendments to the SECURE Act, the CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (so that there is a coordinated amendment date). Because SECURE 2.0 is likely to be enacted late in 2022, employer groups are asking the Treasury to extend the amendment date by notice or other type of guidance.

CONCERNED ABOUT INFLATION AND MARKET VOLATILITY?

Many investors are looking for high yielding yet safe investments in these difficult market conditions - Series I Saving Bonds are very attractive now.

With inflation at a 40-year high and the markets in bear market conditions a lot of investors are hording cash in very low yielding bank accounts while purchasing power of their savings is being eroded by inflation.  $10,000 a year ago has the purchasing power of around $9,090 today.

Consider Series I Savings Bonds – following is a summary of the attributes of these bonds:

The Upside

  • Issued and backed by the Federal Government

  • These bonds earn interest for up to 30-years.

  • Interest rate has two components

    • Base rate, fixed for the life of the bond

    • Variable rate, pegged to the inflation rate which changes in 6-month intervals

  • Most of the current yield is coming from the variable component

  • Current total yield is 9.62%

  • Next adjustment period begins in November of 2022

  • Interest is added to your principle, so it compounds over the holding period

  • Interest earned is exempt from State and Local taxes

  • Once your account is established at TreasuryDirect.gov your initial and subsequent purchases are easy to make and have zero fees

 

The Downside

  • Minimum holding period is 1-year

  • If you redeem the bond between 1 and 5 years, you forfeit the previous 3-months of interest

  • Interest earned is added to your principle, not paid to you until the bond is redeemed.

  • The interest earned is considered Federal taxable income in the year earned, even though you did not receive the cash payment.  

  • Maximum annual electronic purchase of is capped at $10,000 per year, per person (not per family), can purchase an additional $5,000 in paper bonds with your Federal Tax refund. this brings the cap to $15,000 per year, per Social Security number.

  • Need to set up an account at TreasuryDirect.gov to buy the electronic bonds, this is a legacy system that has some quirks.

  • Follow the exact account set up directions or watch the video provided, customer service is slim to none 

  • If not computer savvy, its best to have a trusted resource available

  • Do not exceed the electronic annual purchase cap, getting a refund can take several months.

 

While Series I Savings Bonds are not an ideal fit for everyone, they do currently offer safety, high yields, with zero fees - other than about 15-minutes of your time to set up an account.

HOW TO DEAL WITH MARKET VOLATILITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We all have different risk tolerances; some of our risk aversions are similar to other peoples’ although not identical. Our investment risk tolerances are based on our unique perceptions. So how do we move through these current market conditions?

One way is to think of market volatility is that it is the fee we pay for long-term investing.  We all know the market is not going to go straight up, although that jagged line has trended up tremendously over long time periods. For many, when we look at our portfolio account balance in 2022, we instantly go to ‘Wow, its down X amount since the last time I looked at it.” Your next thought should be well, this is the part of the jagged line I don’t like, but I know every company I own part of (equities) or that I lent money to (bonds) is not going to go out of business and (hopefully) I don’t need to sell them now to cover my living expenses. 

For many, the psychology of owning securities is different than it is to owning real estate. For example, if the market value of your house went down, your initial reaction wouldn’t be I need to sell my house in case it goes down in value further. This is because your house has utility value to you today, so that prevents this reaction. The knee jerk reaction to securities is different because you do not feel the utility value of this asset class today. Securities mostly have a future utility value to us, therefore it is imperative that you think of your future needs, such as your future living expenses when the paycheck stops, charitable gifts, and bequests. 

Many savvy investors expect this unpleasant part of the market cycle. What do they know, and more importantly what are they doing?  They are sticking to their plan of make systematic investments by continuing to buy securities in all market cycles. For the same amount of cash, they are now able to buy more securities than they could a year ago because generally share prices are lower now. This is like catching a good sale on something you know you want and need. 

Remember, unless you sell a security for less than you purchased it, you have not recognized an actual loss. You may have what is called a “paper loss” on the books now, not an actual loss. No one intended to buy high and sell low. The fear that causes the impulse to engage in market timing creates two implementation problems, selling in a bull market and worse yet, missing the largest part of the recovery. Basically, you must get something very complex right, two times in a row! For most of us it’s best to ride it out down markets while remembering this is a long-term strategy.

Its different if you are already in retirement and need to cover daily living expenses with your portfolio. In this case, now is when you use the cash reserves component of your portfolio. This part of the market cycle is what your cash reserves are intended to cover. For further refinement, now is a good time for retirees to review discretionary expenses and possibly defer these until the market recovers and some ripe equities can be sold to first replenish the cash reserves and then resume reasonable discretionary spending.  

 

Changing our perceptions of market volatility can make a big difference in successfully achieving our long-term financial goals.

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