Congress wants to make more changes to the U.S. retirement system. Here's what's in play
- Although the bills are in the early stages of the legislative process, observers expect there to be some movement on them in the coming months.
- Among the areas of interest: required minimum distributions, student loan debt impeding retirement savings, part-time worker eligibility for 401(k) plans and expanded "catch-up" contributions for older savers.
- The House bill would, in part, offset any revenue loss by requiring all catch-up contributions to be made post-tax.
Less than two years after the Secure Act ushered in significant changes to the nation's retirement system, more modifications may be on the horizon.
Two similar, bipartisan bills — one each in the House and Senate — aim to build on that 2019 legislation as a way to bolster the ranks of savers and increase retirement security. While the measures are in the early stages of the legislative process, observers expect there to be some movement on them in the coming months.
"The outlook is positive," said Timothy Lynch, senior director at the law firm of Morgan Lewis. "There's bipartisan support, so there's likely to be action sooner rather than later."
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However, he said, the differences between the bills would need to get worked out. And, exactly how to offset any resulting revenue losses could be a sticking point.
"The House bill has some 'pay-fors,'" said Paul Richman, chief government and political affairs officer at the Insured Retirement Institute. "The Senate bill has none at all, but that could change."
Called the Securing a Strong Retirement Act — and nicknamed "Secure 2.0" — the House bill received unanimous approval last month from the Ways and Means Committee. Its sponsors are the panel's chairman, Richard Neal, D-Mass., and ranking member Kevin Brady, R-Texas.
The Senate bill — called the Retirement Security and Savings Act and sponsored by Sens. Ben Cardin, D-Md., and Rob Portman, R-Ohio — has not yet received committee attention but is expected to next month, according to a person familiar with the bill's path forward.
Here are some of the main provisions in the two measures, with their differences noted, that would impact retirement savers and retirees.
Student loan debt and retirement savings
Most companies that offer 401(k) plans will match your contributions up to a certain amount — e.g., a 100% match for the first 3% you contribute, with a 50% match for the next 2%. For workers whose student loan debt keeps them from putting money into their retirement accounts, it means missing out on that company money.
Both the House and Senate measures would enable employers to make contributions to 401(k) plans (and similar workplace plans) on behalf of employees who are making student loan payments instead of contributing to their retirement plan.
"The larger issue of how to address student loan debt doesn't have a lot of bipartisan agreement," Lynch said. "This would be one step to try to help."
Current law allows retirement savers age 50 or older to make so-called catch-up contributions to their retirement savings. On top of the standard annual contribution limits — $19,500 for 401(k) plans and $6,000 for individual retirement accounts in 2021 — those who qualify can put an extra $6,500 in their 401(k) or $1,000 in their IRA.
Both the House and Senate bills aim to expand those amounts, although the specifics differ a bit.
The House bill would adjust annual catch-up amounts based on inflation, and would expand the 401(k) catch-up to $10,000 for individuals who are age 62, 63 or 64. Workers enrolled in so-called SIMPLE plans would be allowed $5,000 in catch-up contributions, up from the current $3,000.
The Senate bill also would index the IRA amount to inflation, but is more generous with the 401(k) catch-up contribution of $10,000: It would apply to people age 60 or older.
The House bill also would change the tax aspect of catch-up amounts as a way to offset any revenue losses from other provisions.
That is, all catch-up contributions to 401(k) plans and the like would be treated as Roth contributions — i.e., after tax — starting next year. Current law allows workers to choose whether to make those contributions on a pretax or Roth basis (assuming their company gives them the choice).
Additionally, matching contributions from employers currently can only be made to pretax accounts. A provision in the House bill would allow them to be post-tax (Roth) contributions if the employee wanted to go that route.
Required minimum distributions
The Secure Act already changed when required minimum distributions, or RMDs, from retirement accounts must begin to age 72, from 70½. Under the new House bill, those mandated annual withdrawals wouldn't have to start until age 73 in 2022, and then age 74 in 2029 and age 75 by 2032.
Similarly, the Senate bill would raise the RMD age to 75 by 2032. It also would waive RMDs for individuals with less than $100,000 in aggregate retirement savings, as well as reduce the penalty for failing to take RMDs to 25% from the current 50%.
One option to provide an income stream later in life is a qualified longevity annuity contract, or QLAC. Once you purchase the annuity, you specify when you want the income to start.
However, the maximum that can go into a QLAC is either $135,000 or 25% of the value of your retirement accounts, whichever is less.
Both bills would remove the 25% cap. The Senate measure would also increase the maximum amount allowed in a QLAC to $200,000.
"That would let people save more in a tax-deferred environment [for use] later in their retirement years," Richman said.
Additionally, both bills would direct the Treasury Department to create regulations allowing exchange-traded funds, or ETFs, to be investment options in variable annuity contracts. Right now, it's not an option due to regulations that were written before ETFs were created, Richman said.
"It would allow an ETF-structured annuity, which would provide consumers with a lower-cost investment option," he said.
ETFs generally cost less than mutual funds, which are the typical investment offering in variable annuities.
Auto-enrollment in 401(k) plans
The House bill would require employers to automatically enroll employees in their 401(k) plan at a rate of at least 3% and then increase it each year until the worker is contributing 10% of their pay. Businesses with 10 or fewer employees and new companies (under 3 years old) are among those that would be excluded from the mandate.
The Senate bill does not require auto-enrollment, although it includes incentives to encourage companies to implement that feature.
Both measures would create a national online lost-and-found database for retirement plans that workers may lose track of after they leave a job.
Additionally, while the House bill pushes for greater public awareness of the so-called saver's credit — a tax credit available to retirement savers at the lower end of the income spectrum — the Senate bill would boost the income limit for individuals claiming the credit and would allow it to be refundable into a retirement account.
Also, under both bills, part-time employees who work at least 500 hours for two consecutive years would be eligible to participate in their company's 401(k) plan.