Episode 12: The SECURE Act

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Hello and welcome to Revamping Retirement, a podcast brought to you by Cammack Retirement Group, where we tackle the retirement plan related issues plaguing fiduciaries and plan sponsors. Our host, Mike Webb, has more than 25 years of experience in the retirement plan industry and is a nationally recognized subject matter expert. We hope you enjoy Revamping Retirement.

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Thanks Kara, Kara McCauley our producer as always. Welcome everyone out there in podcast land for what promises to be another exciting episode of Revamping Retirement episode 12 for those of you keeping score at home. And again, we’re so glad you could be with us. For those of you checking out the first time, I strongly encourage you to check out our, especially our recent episodes of Revamping Retirement. We’ve had some exciting, exciting guests. The state of Oregon has joined us. Jay Money, the popular FIRE blog.

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For those of you not familiar, the Financial Independence Retire Early Movement. WMC Health, Westchester Medical Center System, joined us as well to talk about their retirement plan. And also recently, Gonzaga University. So some fine, fine guests we’ve had. I’m solo today because we’ve got a very exciting piece of retirement plan legislation that just got passed, rather surprisingly, at the end of the year. And I want to dedicate this entire podcast to this legislation known as the SECURE Act. But before we get there,

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going to start out with a trivia question. We haven’t done trivia questions because we had so many fine podcast guests over the last few months but we’re going to get back to doing our trivia questions and today’s trivia question is of course the Secure Act was just passed at the end of the year. When was the last piece of major retirement plan legislation passed?

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If you can give me the year and for extra credit, give me the name of that legislation. We will get back to that answer at the end of our podcast, but let’s dive right in. I’m very excited about the Secure Act. Usually the problem with retirement plan legislation is there’s always stuff in it that someone put in there to satisfy what they thought was some need and it turns out to be nonsense. it turns out to make things harder. There’s not a lot of that here. In addition, there’s not a lot that plan sponsors have to do right away.

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Plan sponsors had a lot more to do, for example, with the recently finalized hardship regulations than they will have to do with the entire Secure Act. So that’s really wonderful news. So Plan sponsors out there, don’t panic. I know you’ve received a million things about Secure Act, but my message to you today, you get anything out of this podcast is don’t panic. You don’t have to do anything right away. And any participants too, your world’s not going to change from the Secure Act. Most of the changes in here are positive and they’re not a lot of earth shattering changes. The biggest change and the one I’m probably the most happy about and one of them I rant about

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a lot is 70 and a half rule for minimum required distributions. For those of you not familiar, if you’re retired, you have to take a minimum required distribution, at least a little bit, which is an amount that has to be calculated by somebody else because it’s so complicated to calculate. Fortunately, retirees have someone do it for them. Usually they’re playing record keeper in a plan. They have to take a little bit out and they have to do it by April 1st following the year, not in which they turned 70, not in which they turned 69, not in which they turned 71, but the April 1st of the year in which they turned 70 and a half.

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It’s like we want to play Stump the Senior or something. I mean, it’s ridiculous that it was that way. It was created that way a long time ago in the 60s. Someone thought it was a great idea because that’s the way mortality tables are constructed. I can’t believe it’s been, it’s taken almost 60 years to get rid of it. But it has, and you know, I’m grateful. Thank you Congress.

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huge shout-out there, it’s gone. Thankfully it’s gone. It’s now age 72. So going forward, if you turn 72 in 2020, you’ll have to take your first minimum distribution by April 1st, 2021. And then you’ll have to take one every year by year and thereafter. Of course, you could take your first one in 2020, so you will have to remember to take two in 2021. But it’ll be much simpler. No grandfathering here, unfortunately. For those of you who turned 70 and a half last year, you’re going to have to use the old rules,

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Which means you’re gonna have to take your first distribution by April 1st, 2020 and you’ll have to take your second distribution in 2020 by 12-31-2020 even if you didn’t turn 72 in 2020. You’re subject to the old rules. But the good news is going forward, it’ll be great news for Plan sponsors and participants as well. Remember this only applies to retirees. If you’re still working, you know, work to your heart’s content, work till 90. I don’t care. Well, your employer might, but I don’t care. You don’t have to take your minimum distribution until after that. Of course you can take your money off.

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all at once when you when you retire I don’t recommend it taxes are much higher but 70 half is dead so we’re done with that yay okay so that’s a really really good thing I’m gonna get to a not so great thing about the Secure Act and really this is one of the only not so great things in it to be honest with you 401k plan sponsors stay tuned to this podcast this only applies to 401k plans but basically they’re gonna make 401k plans more like 403(b) plans in one particular area which is the right of employees to make voluntary contributions or elective deferrals so 403(b)

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plans for those you’re not familiar, we’ve always had the right, generally called universal availability, all employees, no matter who you are, part-timer, full-timer, or whatever, you’ve always had the right to make elective deferrals to a 403B plan with limited exceptions. And exceptions are basically unworkable, so if your 403B plan spots are out there and you’re not allowing every single person on your payroll to make the right to make elective deferrals, you should. Well, over the years, they’ve made 401k plans.

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a lot more friendly to this notion of letting everybody in as well. They changed the testing rules a few years back so that you could let people in who were shorter services employees. And now they’re going to require that you let part timers in. Basically it’s gonna be an A part timer who works three more years consecutively, 500 hours. You’re gonna have to allow them to write to make a elective deferrals now.

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So that’s bad news. That’s pretty much a administrative nightmare, lot of hour counting, because you have to count three consecutive years and 500 hours for everybody. But you might look at it and say, you know what? That’s not worth the hassle. Let me let everybody in the plan. And that’s what I would suggest you do.

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because it doesn’t cost any money. We’re not talking about employer contributions here. You don’t have to give these people a match. You don’t have to give them a discretionary base contribution. You just have to allow them the right to save. And that’s a good thing. So let them in, was what I would say. But if you don’t want to let your part-timers in for whatever reason, you’re to have to let them in if they work three years or more in a row at 500 hours. The good news is you have a lot of time to prepare for it because it’s a practical matter. You’re not going to have to do this until 2024. So you got a little time on that one. The other two big things that come out of the Secure Act, the most hyped things,

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I’m gonna tell you I maybe don’t believe the hype a little bit, and they have to do with annuities and MEPs. First of all, let’s talk about annuities.

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A lot of annuity providers are going to look at this SECURE Act and go, wow, this was a real gift to us. This is the greatest instance life spread. We’re going to sell every retirement plan participant out there an annuity. Yeah, I don’t think that’s going to happen. Yes, this SECURE Act is a lot more annuity friendly. For one thing, there’s going to be lifetime income, i.e. annuity disclosures, on everybody’s statements. It’s going to show them what their big, lump sum benefit would look like if they turned it into an annuity or a stream of payments. So that’s going be on everyone’s statement going forward.

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That’s going to be a big change. Not so much for people to look at websites because almost every website has an income projection anyway. But now it’s going to be added to people’s statements. It’s not going to be added, by the way, until 12 months after the Department of Labor issues guidance. And it’s only going to be for ERISA plans or subject to ERISA because obviously the all plans are only subject to ERISA. Although probably a lot of non-ERISA plans are going to follow suit. So that’s going to be one big thing where it’s going to be on the statements. Another thing, it’s going be easier to select an annuity provider or…

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to provide a lifetime income benefit. So the rules are very annuity friendly. However, annuities as you know, they tend to be very high cost, they tend to be hieroglyphics for participants to understand, meaning impossible to understand. So they haven’t been very popular.

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Is this going to change the annuity industry? I don’t think so. But you know, it could. I could be proven wrong. So that’s one big thing. I think more promising is MEPs, or multiple employer plans. Multiple employer plans have always been around. They’re a way for employers, typically small employers, who are not part of the same employer, basically, not part of what we call a control group, to band together and get a large, nice, big retirement plan.

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that would have lower fees and better services, all the stuff they wouldn’t get if they’re just buying a plan as a small firm. Historically, in order to form a map or multiplayer plan had to be related. Now we’re gonna have, thanks to the SECURE Act, gonna have the PEP.

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which is the pooled employer plan where it doesn’t have to be related. Is this going to mean that every small employer out there is going to be able to participate in a much bigger plan and get lower fees and better services and everybody’s going to be happy? I don’t know. The MEP industry has not been a tremendously successful one, but maybe this will be the spark that gets it together because it would be nice for small plans to be able to benefit from lower fees and better services like large plans do. I don’t know if that’s going to happen, but least the SECURE Act opens the door for these types of arrangements.

09:03

time and to get you a lot of the less significant provisions of the Secure Act. Don’t be late with your 5500s ever again or your Form 8955-SSA, which is where you report terminated participants who have a vested benefit. The penalties for those are increasing tenfold. Yes, you heard it.

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tenfold. So don’t be late with those. If you have multiple 5500 filings if you’re an employer and the plans look a lot alike but they might be just a 401A 403B different name only and have the same investments you might starting in 2022 be able to file those as 1 5500 that would be great. Auto enrollment there’s a popular all-enrollment plan called the QACA and the problem with the QACA is if you automatically increase people’s deferrals it capped them at 10 percent. They’ve raised that to 15 beginning this year.

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So that’s that’s a that’s wonderful news other less significant things plan sponsors out there You can now add a provision of your plan You don’t have to that allows people to take out their money up to five thousand dollars for birth or adoption Expenses and they’ll be able to take that money out penalty free. So obviously most of those individuals are not retirees So they would know how to pay a pre-return distribution penalty of under 59 and a half So they want to pay that penalty So if you allow that that’s gonna be good news for those folks governmental 457(b)

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plans. If you’re still working, you can’t take out your money till 70 and a half at the earliest. They’ve lowered that age to 59 and a half. They’ve also lowered it to 59 and a half for money purchase and DB plans, but their old age was 62. So not much of a change there. Stretch IRA, for those of who’ve ever heard of it, has been gutted. It’s pretty much gone. For those of who haven’t heard it, it’s a way for people with large account balances as a refinement plan who don’t want to have a large tax burden for their beneficiaries to stretch out payments over the beneficiary’s lifetime.

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That’s why they call it a stretch, minimizing the tax burden for the beneficiary. They basically got rid of that. They’ve limited the period to 10 years except for certain beneficiaries, so that’s pretty much gone. There’s going to be more fable rules for participants affected by natural disasters. That’s just continuation of what we’ve been going through so far. Going to make it easier for those individuals to withdraw and borrow. Again, very limited applicationally affected by certain natural disasters. And 4.3E plans are going to be easier to terminate because they’ve come out with clarification of how to terminate them when there’s mutual funds.

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That’s about it for this episode, the answer to this month’s trivia question, what was the last major piece of retirement plan legislation passed prior to the SECURE Act? You have to go all the way back to 2006 with the passage of the Pension Protection Act. Amazing, it’s almost 15 years since major retirement plan legislation. For Karen McCauley and our entire production team, I’m Mike Webb and this has been Revamping Retirement.

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The content in this podcast is for institutional investors and plan sponsors. The information is intended to be educational and is not tailored to the investment needs of any specific investor. All examples of investor gains and losses are hypothetical and intended to illustrate the importance of early saving and consistent retirement contributions over time. Investment decisions should be based on an individual’s own goals, time horizon, and risk tolerance. Nothing in this content should be considered as legal or tax advice and listeners are encouraged to consult their own lawyer, accountant, or other advisor

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before making any financial decision. Thank you for listening to Revamping Retirement.