U.S. retirement legislation aims to improve workplace saving, income options

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Mark Miller

CHICAGO (Reuters) – News flash: Members of Congress managed to walk and chew gum at the same time this week.

In the midst of the impeachment furor, U.S. lawmakers advanced the first significant retirement legislation in 13 years. They included the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 in a larger package of spending legislation headed for approval this week that will keep the federal government operating next year.

The SECURE Act will have a significant impact on the retirement landscape, and it enjoys broad bipartisan support. The bill passed the U.S. House of Representatives in May, but it has been hung up since then in the Senate due to pet issues of a handful of senators. As recently as last week, Washington insiders were predicting that SECURE would be pushed into 2020.

But SECURE enjoys big-time lobbying muscle from the insurance industry, which is now getting a huge Christmas gift: a safe harbor provision in the bill that makes it much easier for employers to offer annuity products through their retirement plans. 

Annuities – which provide a steady stream of income over a specified time or for life – do not sell very well, but getting them in front of 401(k) participants at the point of retirement could be a very profitable game-changer for the industry. And a legitimate case for annuities can be made for some retirees. With fewer workers expecting a traditional defined benefit pension, annuities offer a way to guarantee some amount of income in retirement, mitigating longevity risk.

“When you ask people about their key fears in retirement, the worry that they will outlive their money is always near the top of the list,” said Melissa Kahn, managing director for retirement policy at State Street Global Advisors.

Just 10% of plans offered in-plan annuities in 2018, according to research released by the Plan Sponsor Council of America on Wednesday. Employers usually take a cautious approach to changing their retirement plans, so adoption of in-plan annuities likely will be slow. Meanwhile, the safe harbor provision of the bill has set off alarm bells among consumer advocates who worry the language does not go far enough to protect plan participants. 

   The provision allows plan sponsors to rely on certifications by state insurance regulators that an insurance provider is financially sound.

“The state regulators put insurance companies through very rigorous tests on all of their capital requirements,” said Kahn. “And if they have been audited within five years, they cannot meet these certification requirements.”

Consumer advocates urged lawmakers to limit the safe harbor to cover only simple income annuities, arguing that products such as fixed-income and variable annuities are too complex and confusing for regulators to police, and for participants to understand.

“There’s a reason the insurance industry has been lobbying nonstop to get this bill passed – it benefits them,” said Micah Hauptman, financial services counsel at the Consumer Federation of America. “But investors will end up paying the price.”

IMPROVING 401(k) COVERAGE

SECURE includes a number of other provisions that could improve the outlook for retirement saving over the coming decade and beyond.

And make no mistake, federal legislation of this type can make a big difference. The last important retirement legislation was the Pension Protection Act of 2006. That law ushered in some major improvements in retirement plans. One has been the widespread adoption of target date funds, which add a measure of professional investment management for investors by automatically rebalancing the mix of equities and fixed income as retirement approaches. Another is automatic enrollment of new workers, which has sharply boosted participation rates.

But 10 years after the Great Recession, improvements in retirement security have been distributed very unevenly. Wealthier households have gained, but middle-class and lower-income households are treading water or are even less well-off,

according to research by the Employee Benefit Research Institute.

The organization has a simulation model that estimates the percentage of households likely to have adequate resources to meet retirement expenses. The model – which takes into account savings, pensions, Social Security and even home equity – shows that among households aged 55-64, the top half of earners have very high odds of success in retirement (ranging from 79% to 93%). Meanwhile, the second-lowest income quartile has only 50-50 odds – and the lowest income group just 11% chance of success.

Moreover, just 52% of U.S. households owned retirement accounts in 2016, according to Federal Reserve data, and the figures were much worse for black and Latino households, whose ownership rates were 33.6% and 27.8%, respectively. 

The SECURE Act addresses the coverage problem by making it easier for small employers to offer retirement plans to workers by banding together in multiple-employer plans. Plans would be offered by private plan custodians; the idea is to entice employers with low costs and streamlined paperwork, and an increased tax credit to cover their setup costs.

“Most of the coverage gap is among smaller employers, and that is the fastest-growing segment of the business community,” notes Kahn. “And they’re the ones who struggle to provide any kind of retirement plan for their employees.”

The SECURE Act also includes several provisions aimed at recognizing the changing demographics of retirement – namely, that people are working and living longer. The law will lift the starting age for required minimum distributions from retirement accounts to 72 (from 70-1/2) It also repeals the age cap for traditional IRA contributions (currently 70-1/2).

The law also revises the rules for distributions from inherited IRA accounts; my colleague Beth Pinsker has more on that part of the story. (reut.rs/2S9x3Em)