The retirement reform-focused SECURE Act (H.R. 1994) has an unusual level of bipartisan support, as evidenced by the bill’s 36 Democrats and 22 Republicans who are co-sponsors, and its overwhelming 417-3 vote in the House in May that sent it to the Senate for consideration with what can certainly be looked at as a mandate for action.
The bill includes several provisions that are already in a similar bill in the Senate—the Retirement Enhancement and Savings Act (RESA).
The Senate may take up the SECURE Act, but could also decide to take up RESA. If that happens, there will be a conference committee to reconcile differences, and the reconciled version will go back to both the House and Senate for votes before making it to President Trump’s desk.
If it becomes law, this year’s retirement reform legislation will mark the most important changes to retirement plan rules since the Pension Protection Act of 2006, when Congress made it easier for employers to enroll workers automatically in 401k plans.
While both the SECURE Act and RESA are fairly non-controversial and enjoy that rare bipartisan support in Congress, that doesn’t mean there isn’t opposition to some of the provisions included.
There’s certainly no big public outcry and a Google search won’t turn up much in the form of opposition to the SECURE Act, but there are some who argue the bill is basically a cave-in to the annuity industry, or will harm the families of IRA owners by eliminating the stretch IRA, a valuable estate planning tool.
Truckers might fight it because of a heavy use vehicle excise tax provision designed to help pay for the bill, but that’s hardly a roadblock for a bill with the momentum of the SECURE Act at this point.
Here’s a look at a couple of bill provisions where some opposition has surfaced—making it easier to offer annuities in 401k plans, and, further below, the elimination of the stretch IRA.
A cave-in to annuity providers?
Some critics are saying the SECURE Act amounts to a cave-in to the insurance lobby, which is among the biggest financial contributors to the campaigns of bill co-sponsors House Ways and Means Committee Chairman Rep. Richard Neal (D-MA), and the committee’s ranking member Rep. Kevin Brady (R-TX).
The insurance industry has long eyed an opportunity to get annuities into 401k offerings, and the SECURE Act’s Section 204, which would give fiduciary safe harbor to 401k plan sponsors who include annuities among offerings to plan participants, provides the avenue.
Many defined contribution plan sponsors have been reluctant to offer annuities in their plans due to the concern about fiduciary liability if the annuity provider becomes insolvent. Under Section 204, if an annuity provider chosen for a 401k plan were to go out of business or defraud plan participants, employees would not be able to sue the employer afterward.
David Moon, a columnist with the Knoxville News Sentinal, had some harsh words about the SECURE Act and who he thinks is really behind it in a May 30 post:
“The real purpose of the bill is to make it much easier to sell annuities within 401k plans. Period. It is a piece of insurance company legislation jokingly masquerading as something to help the little guy,” Moon writes. “In reality, it does the exact opposite. It makes the least sophisticated investors more susceptible to some of the most expensive, complex and illiquid financial products ever created.”
Moon also takes issue with a SECURE Act provision that would require 401k plan participants to receive annual “lifetime income disclosures,” which would have to show the amount of monthly income the participant would receive if his or her plan account were paid as an annuity.
“The insurance industry even managed to have the bill require (yes, require) plan sponsors to essentially include an annuity advertisement in annual participant statements,” Moon writes. “This ‘lifetime income disclosure’ would project how much money a person might receive if he moved all his 401k assets into an annuity. The bill also provides legal protection for employers if (Surprise! Surprise!) those projections prove to be overly optimistic.”
While the Consumer Federation of America has kept quiet on the SECURE Act, AARP is a supporter. AARP CEO Jo Ann Jenkins co-authored an op-ed on the Fortune website May 23 with Roger Ferguson Jr., president and CEO of TIAA and the former vice chairman of the Federal Reserve, urging the Senate to take up the House legislation swiftly and the Trump administration to sign it into law.
“The SECURE Act helps facilitate access to annuities in retirement plans so that more workers can have a source of guaranteed lifetime income, distributed monthly in retirement—which is what they want,” the op-ed states. “According to the TIAA Lifetime Income Survey, 62% of employees said they would rather receive $2,700 a month over a $500,000 lump sum at retirement, but only 32% said their retirement plan includes access to products that provide monthly income in retirement.”
Obviously the bill has broad support from the life insurance/annuities industry, with a veritable alphabet soup of industry advocacy groups including ACLI, AALU, NAIFA, IRI, and more actively lobbying for swift passage.
Stretch IRAs to be eliminated as a ‘pay-for’
Some opponents of the SECURE Act see it as a “new and improved inheritance tax,” dismayed that within its provisions is language that would effectively eliminate the “stretch IRA,” which has been a valuable estate planning tool for non-spouse heirs of an IRA owner who passes away.
When lawmakers put bills together, they need to know approximately how much tax revenue will be eliminated by the bill’s provisions. Then they look for ways to offset those losses, often referred to as “pay-fors.”
Often the “pay-fors” target things that lawmakers figure will result in little resistance. The SECURE Act’s sponsors think they’ve found one in closing a loophole that would curtail the stretch IRA, spelling massive income-tax acceleration for the families of IRA and retirement plan owners after the death of an IRA owner.
“The future of the stretch IRA is once again in question as our government looks under the sofa cushions for spare change or any possible revenue source they can find. The stretch IRA, unfortunately, is not supported by a powerful lobbying group, which increases its peril,” said Sarah Brenner, JD, IRA Analyst, in a recent edition of Ed Slott’s Monthly IRA Updates.
Slott, of course, is a vocal proponent of the tax advantages of the stretch IRA, and told ThinkAdvisor last fall he thinks lawmakers are making a mistake if they think eliminating it would raise tax revenue.
“The government would be the big loser, since this would immediately stop the gravy train of Roth conversion money flowing into Uncle Sam from older people converting large IRAs for their children and grandchildren,” Slott said.
Under existing law, non-spouse heirs of an IRA owner can “stretch” or extend the taxable distributions of an inherited IRA over their lifetime. The benefit of protracting the distributions of an inherited $1 million IRA could mean as much as a million dollars to the heirs of the IRA owner over their lifetime, according to Attorney/CPA James Lange of Lange Financial Group, LLC, in a May 28 op-ed posted on 401k Specialist.
Under the SECURE Act, the entire IRA or retirement plan would have to be distributed within 10 years of the death of the IRA owner.
“The consequences of this bill will be devastating to people who have worked hard their entire lives, played by the rules, and accumulated significant amounts of money in their IRAs and retirement plans,” Lange said. “It will be even more devastating for IRA owners whose IRA and/or retirement plan constitutes the biggest asset in their estate.”
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