Ohio Senator Rob Portman had more reason to celebrate than just about anyone when the SECURE Act, the most significant retirement reform legislation in 15 years, became law as of Jan. 1, 2020.
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“I’ve been trying to get this done; not just since last May when we started working on it at the Senate, but even before that, going back to 2016, [when] we had a report down in committee, but never got it to the floor,” Portman told 401(k) Specialist in an exclusive interview in January.
Indeed, the Republican lawmaker was not only an architect of the more substantive provisions that ended up in the “Setting Every Community Up for Retirement Enhancement Act of 2019,” he was also perhaps its most passionate advocate, providing some compelling speeches on the Senate floor as the bill spent more than six months collecting dust on the desk of Senate Majority Leader Mitch McConnell (R-KY).
This was after the bill, thanks to a push from House Ways & Means Committee Chairman Richard Neal (D-MA) along with Rep. Ron Kind (D-WI), Ways & Means Committee Ranking Member Rep. Kevin Brady (R-TX), and Rep. Mike Kelly (R-PA), was approved back on May 23 by the House of Representatives in a 417-3 vote.
Due to its overwhelming bipartisan support in the House, there was plenty of optimism that the Senate would fast-track the SECURE Act’s road to President Trump’s desk via unanimous consent.
At the time, Senator Chuck Grassley (R-IA), chairman of the Senate Finance Committee, predicted quick passage for the most important federal retirement legislation since the Pension Protection Act of 2006—including a variety of provisions specifically designed to make it easier for Americans to save for retirement through the use of 401(k) plans.
But things don’t often happen fast in Washington D.C., and the SECURE Act stalled after several Senators decided to place “holds” on the bill due to a variety of concerns mostly non-related to the retirement savings issue.
The holds, the most high-profile of which being from Texas Senator Ted Cruz over House Democrats’ last-minute removal of a provision that would have allowed 529 plan funds to be used for homeschooling, were never resolved. Numerous efforts by supporters to bring the SECURE Act up for a vote in the Senate seemed to fall on deaf ears, as McConnell reserved “valuable floor time” for matters mainly involving the appointment of federal judges.
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That left just one last realistic hope, or the bill would expire at the end of last year and its reforms would have to start the legislative road all over again—a particularly dicey proposition in a presidential election year, not to mention a divisive impeachment trial.
That last hope was getting the SECURE Act attached to a broader “must-pass” federal spending bill for fiscal year 2020—something that happened when Congressional staffers included it in the Further Consolidated Appropriations Act 2020, a $1.4 trillion package passed by the House and Senate before President Trump signed it into law on Dec. 20.
With that, the SECURE Act became law, bringing with it a number of consequential changes designed to broaden access to 401(k) plans for small businesses and their employees, while also making it easier for plan sponsors to include lifetime income options within them.
“Passing the SECURE Act is a big victory that will help ensure that all hard-working Americans have a chance to build a nest egg for their retirement,” Portman said in a statement as the bill finally crossed the finish line.
SECURE Act a “Down Payment
While obviously excited the SECURE Act passed, he was quick to point out that he views it as more of a good start, noting that he sees it as a “down payment” that opens the door to additional, badly-needed reforms—some of which he has already proposed along with Maryland Democratic Senator Ben Cardin.
“There is still more that we can do to help more Americans save for their retirement. I believe that passage of the SECURE Act can help pave the way for bolder reforms in legislation I have introduced with Senator Cardin called the Retirement Security & Savings Act (also referred to as Portman-Cardin). I believe the Senate Finance Committee should hold hearings and a markup on this legislation, and I will work closely with Senator Cardin to move it forward,” Portman said.
Portman and Cardin have a long history of bipartisan success in enacting sweeping reforms to enhance the retirement system, dating back to 1996 as members of the House of Representatives. Of note, a 2001 Portman-Cardin measure (the Economic Growth and Tax Relief Reconciliation Act of 2001) more than doubled contribution limits to IRAs, allowed portability between different types of qualified retirement plans, and created the ability for older workers to make catch-up contributions to 401(k)s and IRAs.
The Pension Protection Act of 2006 included 25 provisions from Portman-Cardin bills, including the one providing incentives for employer to offer automatic enrollment. While several provisions from their Retirement Security & Savings Act (S. 1431) made it into the SECURE Act, including provisions to (1) expand the eligibility of 401(k)s to include part-time workers that complete between 500 and 1,000 hours of service for multiple years; and (2) increase the age for required minimum distributions (RMDs) from age 70½ to age 72, Portman-Cardin seeks to take things a few steps further.
For example, it would raise the age for RMDs to age 75 by 2030 and includes a broader set of reforms—57 specific provisions—designed to help more Americans save for their retirement.
If the SECURE Act would have come up for discussion on the floor of the Senate last year, some of the additional provisions Portman-Cardin may well have been added to the SECURE Act.
“I would have preferred to have the opportunity to take it through committee and expand it. But then that would have been very, very difficult—I would say impossible—to get the broader bill done this last year,” Portman said. “My conclusion was this [the SECURE Act] is great for expanding retirement savings—not that we shouldn’t do more. And that’s what Portman-Cardin’s about. But this was a great foundation. And we just we couldn’t let the opportunity pass.”
Portman-Cardin in 2020
No, it’s not a presidential ticket, but there will be some “campaigning” to get the further reforms in the Portman-Cardin bill passed in 2020, which Portman said “addresses really what I think are the four critical issues in retirement today.”
He outlines those issues like this:
1) Boomers need to be saving more for retirement. “We have a catch-up contribution for that, as an example.”
2) “Let’s be sure that we really are doing everything we can to increase access to employer-sponsored plans in small businesses. And that that’s where that’s where the issue is. Fifty-eight percent of private sector workers have access to an employer-sponsored plan, and it’s only 49% if you work for a small business.”
3) Low-income Americans and part-time workers who are particularly missing out on the ability to save for retirement. While the SECURE Act expands access to 401(k) plans for part-time workers, Portman-Cardin goes a little further than that. “But also with the legislation we have to expand the saver’s credit, substantially, it as they are living longer, healthier lives. “And that’s a good thing. But Social Security, while it’s an incredibly important safety net, it’s really tough to live on,” Portman said. “So you need to supplement it with private savings. And that’s what Portman-Cardin would do.”
QLACs and RMDs
A specific product now in the spotlight as a result of the SECURE Act and Portman-Cardin is the aforementioned Qualified Longevity Annuity Contract (QLAC), a deferred income annuity where payments can be delayed up to the age of 85.
As Sage Advisory Research Analyst Andrew Poreda pointed out in a blog post after the SECURE Act was passed by the House last year, that will help with regard to low-income Americans to be able to save, because we see that as a huge issue,” Portman said, citing a statistic that just 22% of low-income workers are now participating in a retirement plan. “It’s an incredibly low, low number.”
4) “The final one, I would say, is this lifetime savings issue—making sure the retirees don’t outlive their savings.
“We provide incentives for QLACs and encourage the ability for people to be able to spread out their retirement savings in a responsible way.” Citing a Northwestern Mutual survey that says two-thirds of Americans think they’re going to outlive their retirement savings, he says people are rightly nervous about a big benefit of the QLAC is that a portion of one’s 401(k)—up to 25% or $130,000—can be used to purchase one, and it is exempt from RMD calculations, a factor to consider for some retirees.
The other huge benefit, Poreda noted, is the significant increase in the monthly payout values that are a result of delaying payments until a much later date. As many retirees may have to deal with the distinct possibility that they live well into their late 90s, while also facing significant medical care costs, a QLAC could provide these individuals the peace of mind that they are not going to outlive their savings.
When coupled with a traditional retirement account, one could drawdown from funds remaining in a traditional IRA, and once depleted the QLAC would kick in, in essence acting as an insurance policy against longer life expectancy.
Poreda said many employers have been reluctant to offer QLACs and annuities in general, but predicted that will soon change in light of the new and proposed legislation. Portman thinks so, too.
“I think there’s more demand for annuities as people again, look at longer life. But you need to have a pretty substantial nest egg to make an annuity work. And one reason we like these QLACs is that they tend to be something more practical for people who don’t have a huge nest egg already,” Portman said.
He adds that another common-sense reform in Portman-Cardin is to change the way the minimum distribution rules work. “What we say is that if you have $100,000 or less in aggregate retirement savings, you don’t have to worry about the required distribution at all. And that will really help with a lot of individuals who, they’re still working at age 70½ and, you know, for some age 72 and 75 and on up. And they just don’t want to worry about having to pull money out and pay taxes on it. They want to continue to accrue more retirement savings.”
While the SECURE Act immediately raises the age for taking RMDs from 70½ to 72, Portman-Cardin would increase it to age 75 by 2030.
“We also reduce the penalty for failing to take the required distributions from the 50% of the shortfall amount to 25%, in most cases as low as 10% if you self-correct,” Portman said. “So that along with the QLACs we think would really help older Americans be able to ensure that they’re not going to outlast their savings.”
Advisors the “Gateway” to Open MEPs
While the “pay-for” elimination of the Stretch IRA and a provision providing fiduciary safe harbor to 401(k) plan sponsors who include annuities to plan participants have commanded plenty of SECURE Act headlines, perhaps the most impactful change comes from the Open Multiple Employers Plan (MEPs) provision that makes it easier and more economical for smaller employers to offer retirement plans by allowing for the creation of pooled retirement plan providers without a common nexus.
Andrew Kligerman, an analyst who follows the life insurance industry at Credit Suisse, told The Wall Street Journal last December he expects the change “to expand the $5.84 trillion 401(k) market by $1 trillion within about five years.”
Combined with the SECURE Act’s accompanying tax credit changes, with Open MEPs advisors will be able to offer small employers the ability to provide a retirement plan in a much more cost and administratively efficient manner.
“Financial advisors will be the gateway to open MEPs, as much education will need to be done for these small employers,” State Street Global Advisors Managing Director for Retirement Policy, Melissa Kahn, told 401(k) Specialist. “Advisors will also be the ones to guide employers in choosing the MEP that is best for them. And the increased start-up tax credits, coupled with the automatic enrollment tax credits, will make providing these benefits very attractive.” Portman said he sees Open MEPs as the most significant provision just because of its potential to get so many more (small business) workers access to an employer-sponsored retirement plan that will go on to make a big difference in their retirement preparedness.
“I think this Open MEPs idea makes sense,” Portman said. “This is why we pushed that way back in 2016 with RESA [Retirement Enhancement and Savings Act] because it lets small businesses know you can get into these plans without taking a huge risk—both in terms of your liability, but also just your administrative costs in figuring out all the complications of retirement policy—if you can join together with other small businesses and provide a retirement [plan].”
Portman said he’s seen estimates suggesting another 700,000 Americans will have a retirement plan due to the SECURE Act’s Open MEPs provision. “I think it will go even higher, from what I’ve learned from small businesses and know what they’re thinking about in person, whether we do a plan or not,” he said. “I think it’ll be more significant than that.”
Although it will not happen overnight, and further regulations are needed to outline administrative duties and a model plan design, State Street’s Kahn says she does expect to see many small companies moving into Open MEPS over the next 3-5 years.
Brian Anderson is the managing editor of 401(k) Specialist.