Planning for retirement remains a challenge and statistics continue to show that many Americans are ill-equipped and unprepared. With that in mind, President Trump recently issued an executive order that directs the Department of Labor and the Treasury to review rules that impact a few specific aspects of retirement planning. The question is – what exactly might be changing and what does the Retirement Security Executive Order mean for you and your future financial planning?
Required Minimum Distributions
The order is focused on both the distribution and accumulation aspects of retirement planning. On the distribution side, the Retirement Security Executive Order initiates a review of Required Minimum Distribution (RMD) rules. Specifically, it targets a possible delay when they begin, a reduction in the percentages used or a combination of both. Current rules require retirees to begin RMDs from retirement accounts at age 70 ½. (Roth accounts are not subject to RMDs). With a 50 percent penalty in place, missing an RMD can have serious ramifications. The distribution amount is based upon the December 31 balance of the prior year and an IRS table that specifies the percentage. This distribution percentage starts at around 3.65% of the account balance and gradually increases to 8.77 percent at age 90. The purpose of RMDs was to prevent savers from sheltering their retirement accounts from taxes forever.
The beginning age for RMDs hasn’t changed since the 1980s and some experts have argued that a combination of extended working years and longer life expectancies mean that workers should be able to delay distributions past age 70 ½. If enacted, it is unclear how this would impact those already taking RMDs. For example, if the RMD age is pushed back to 75, would those between age 70 ½ and 75 be able to pause or reduce existing distributions? It is too early to tell at this point.
Small business retirement plans
On the accumulation side, the order considers ways to make it easier for small businesses to offer and administer retirement plans. According to the Trump administration, in 2017, roughly 89% of workers at private-sector companies with 500 or more workers were offered a retirement plan compared to only 53% of workers at private-sector companies with fewer than 100 workers. Why are so few small businesses offering plans? According to a survey of 1,600 small and medium sized businesses by Pew Charitable Trusts, expenses, limited administrative resources, and lack of employee interest were primary reasons cited for not offering retirement plans to employees.
In an attempt to address this, the order considers the creation of Multiple Employer Plans or MEPs which would allow 401(k)s plans to pool participants from unaffiliated employers instead of establishing and administering their own individual plan. The concept of MEPs or Shared 401(k) plans is not a new concept. Current offerings require businesses to share a common thread such as those that belong to a specific trade association or industry. This requirement would be eliminated in the new plan and the hope would be that less administrative burden and cost would implore more small businesses to offer retirement plans to their employees.
Many retirement experts agree that increasing the accessibility of retirement plans to more workers is ultimately a good thing – especially in the post-defined pension world that we live in today. The question is really centered on the best approach to reaching that goal and whether the plans being proposed will be effective. Small business owners will need to be educated on the pros and cons as there are many misconceptions today about the complexity associated with having a retirement plan. Questions regarding the fiduciary liability for business owners in MEPs would also have to be sorted out as well.
Availability of in-plan annuities
The executive order also seeks regulation that would potentially encourage plan sponsors to offer lifetime income products such as annuities in retirement plans. The proposal focuses on reducing the liability risks for businesses that want to offer this type of option. Currently, many employers have taken a cautious approach when considering in-plan annuities due to their liability if the annuity provider defaults on its commitment. According to a survey by the Society for Human Resource Managers, only 8 percent of organizations provided an in-plan annuity option this year, down from 9 percent in 2017.
The depth and timing of any changes remains uncertain and there many details that have to be worked out before determining how this may change how you approach your own finances. Since everyone’s situation is unique, consider speaking to your tax and financial advisers to determine the most appropriate approach for you.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.