The days of relying on Social Security and defined benefit plans for a secure and comfortable retirement are swiftly coming to an end. The next waves of retirees should have substantial personal savings in order to create a detailed and long-lasting plan, better than those of the previous generations.
As the process of retirement is altered by politics, legislation and economics, including the recent passing of the Secure Act, it is important for Americans to use their assets to modify their retirement planning approach to be prepared for whatever the future may bring.
5 Big Upcoming Changes To Retirement
There are five major pieces of legislation to be aware of heading into 2020 that could majorly affect retirement and retirement planning for Americans; and one of them was just passed this past Monday, December 16th. Here is what’s in play in Congress that all Americans should be aware of.
1) The Secure Act
As a result of the demand for changes to the strict guidelines controlling how accessible retirement savings are, The Secure Act was born. The recent vote to pass this act comes along with major changes to how retirement plans are taxed.
This act includes a surplus of alterations to existing retirement rules, such as rules that allow small employers to come together to offer 401(k) plans (SEE MEPS below); give part-time workers access to retirement plans; take away the 70½ age limit for individual retirement account contributions and raise the age for required minimum distributions to 72, from 70½.
Additionally, it expands the inclusion of annuities in 401(k) plans and puts a 10-year time limit on how long non-spouse beneficiaries can stretch out an inherited IRA.
As of Monday, The Secure Act is officially the biggest change to retirement laws since the Pension Protection Act of 2006.
2) The Social Security 2100 Act
The government expects the Social Security trust fund to run dry around 2035. This doesn’t mean benefits will stop; it means reserves will be depleted so that Social Security’s resources will be limited to the income it takes in each year. At current 2035 projections, Social Security would take in enough to pay only 80% of benefits.
Many members of Congress see the importance of heading off this dire scenario with new legislation. For instance, the Social Security 2100 Act seeks to ensure the solvency of Social Security through 2100 by gradually hiking the payroll tax to 7.4% by 2043. Benefits would increase by 2%, giving retirees more funds, but still less than they received in the 1980s.
This Act has received popular support. Congress is expected to pass it or another similar bill to ensure Social Security’s solvency. To make Social Security solvent, Congress must eliminate the shortfall, making retiring on Social Security alone a thing of the past for most workers. With pensions also on the verge of extinction, future generations must conceive a new method in order to retire comfortably.
3) MEPS (Multiple Employer Plans) part of the Secure Act
A provision in the Secure Act broadens an executive order President Donald Trump signed on August 31, 2018 that outlines the problem of too many workers lacking access to a company-sponsored retirement plan. This also noted that small businesses in particular face high costs and regulatory burdens that deter them from offering workplace retirement plans.
To overcome this key problem, the executive order directed officials at the departments of Labor and Treasury to revise or eliminate rules and regulations that impose unnecessary costs and burdens on businesses, especially small businesses, and that hinder formation of workplace retirement plans.
Since then, much has happened to move forward on MEPS, including a new DOL guidance published in July 31, 2019 expanding the previously restrictive unrelated employer provision
The new guidance is expected to help small businesses—associations, trade groups, chambers of commerce, PEOs and others—provide employees with a retirement plan by lowering fees (thanks to more dollars under management in a plan), and simplifying administration (a MEP files a single 5500 with a single audit and has only one ERISA bond for the entire MEP).
MEPs work by pooling expense, labor and responsibility, yet retaining the ability of each participating employer to tailor plan features to its own needs.
4) Securities & Exchange Commission’s Regulation Best Interest (SEC Reg BI)
What most consumer advocate groups would consider a feeble attempt by the regulator to replace the now repealed DOL Fiduciary Rule will be effective June 30th 2020.
The rule is meant to close the gap between Brokers (Broker / Dealers) and RIA’s (Registered Investment Advisors) and provide a more uniform requirement for “Standard of Care”. Currently, Brokers are held to a “Suitability” standard of care, where RIA’s are held to a “Fiduciary (or best interests) standard of care.
This entails that a Broker is currently only required to recommend or sell a “suitable” product, not necessarily the best product. The advice has been to avoid buying from a Broker because they are paid by commissions which cloud their objectivity and presents inherent conflicts of interest.
The new rule attempts to reduce the confusion between the two and remove or disclose the conflicts of interest. However, it falls far short of the more restrictive DOL Fiduciary Rule repealed in 2018. Some of the basic provisions of Reg BI are:
- Disclosure Obligation: Broker-dealers must disclose material facts about the relationship and recommendations, including specific disclosures about the capacity in which the broker is acting, fees, the type and scope of services provided, conflicts, limitations on services and products and whether the broker-dealer provides monitoring services.
- Care Obligation: A broker-dealer must exercise reasonable diligence, care, and skill when making a recommendation to a retail customer. The broker-dealer must understand potential risks, rewards and costs associated with the recommendation. The broker-dealer must then consider these factors in light of the retail customer’s investment profile and make a recommendation in the retail customer’s best interest. The final regulation, which is an enhancement from the proposal, explicitly requires the broker-dealer to consider the costs of the recommendation.
- Conflict-of-Interest Obligation: The broker-dealer must establish, maintain and enforce written policies and procedures reasonably designed to identify and at a minimum disclose or eliminate conflicts of interest. This obligation, which is an enhancement from the proposal, specifically requires policies and procedures to:
- Compliance Obligation: In an enhancement from the proposal, broker-dealers must establish, maintain and enforce policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole (by June 30, 2020).
While it has its faults, it should still provide an environment for investors to get “better” advice.
5) The Health Savings For Seniors Act
Many senior citizens in America do not prioritize setting aside money for medical expenses. The Health Savings For Seniors Act looks to reward those who do by giving them a tax break.
Under current law, once a person signs up for Medicare, they must stop putting money in those tax-advantaged accounts. This bill, however, would allow for Medicare beneficiaries to preemptively put money into their health savings accounts.
The downside to this bill is that it would take away an individual’s ability to use HSA withdrawals to pay for Medicare premiums. Additionally, it intends to eliminate penalty-free withdrawals for non-medical expenses for those 65-and-older.
It is essential to stay educated on these changing laws to know how the constantly evolving government can affect the course of retirement planning.
Creating a retirement plan can be challenging. The working American is busy, with little time to contemplate their golden years. By consulting a trusted financial professional long before retirement, they can receive personalized advice that utilizes their assets to retire comfortably and securely, despite the drastic changes in the retirement system.