Doug Houser:
From Rea & Associates, a remote studio in Newark, Ohio, this is Unsuitable, a management and financial services podcast for entrepreneurs, tenured business leaders, and others who are ready to look beyond the suit and tie culture for meaningful measurable results. I'm Doug Houser. On this weekly podcast, thought leaders and business professionals break down complicated and mundane topics to give you the tips and insight you actually need to grow as a leader and help your organization grow and thrive. If you haven't already, hit the subscribe button so you don't miss future episodes. And if you want access to even more information, show notes, and exclusive content, visit our website at www.reacpa.com/podcast and sign up for updates.
Last year, lawmakers passed one of the most substantial updates to help business owners with new retirement plans. Today, we are going to take a look at the Secure Act and the impact it currently has on companies, beneficiaries, and individual retirement accounts.
Paul McEwan, principal, and director of Benefit Plan Services with Rae & Associates and Steve Frank, principal and financial advisor with Wealth Management Organization Investment Partners are here to help us break down the Secure Act and give us some insight on fiduciary best practices related to retirement planning.
Welcome to Unsuitable Paul and Steve.
Paul McEwan:
Thanks, Doug. Glad to be here.
Steve Frank:
Thank you.
Doug:
Good to have you both. Paul, you and I have been doing a lot of webcasts and other things recently related to PPP and the Cares Act, but we're here today to talk about the Secure Act. So give us an overview.
Paul:
When you invited me to talk on the Secure Act I had to go look that up again because the most recent thing was the PPP, like you said, and then prior to that, we were all focused on the Cares Act. So Secure Act, went out late last year.
Doug:
What does it mean? What were some of the incentives for companies and impact for individuals related to the Secure Act?
Paul:
Well, I can mention some of them. I know Steve Frank probably has a little bit different perspective on this as a wealth manager and an investment advisor, but it was kind of a potpourri of things. Congress likes to have these names for their legislation. And I don't know that we're all more secure with our retirement because of this legislation. Maybe Steve has some opinion on that but it was a mishmash of things that Congress and the administration they'd been thinking about doing some stuff and towards the end of last year, they decided they would throw it all together and throw a nice name on it.
And I think there are some good provisions within it. Some of them I think, had been advocated for by different lobbies, the insurance lobby, for example. For a long time, they'd been talking about trying to get, I guess for lack of a different term, annuity products into 401k plan lineups so that you could have some sort of fixed income, you could invest in it and you would know what your monthly income at a retirement...
A lot of issues related to annuity products, Steve can go into some of the details I'm sure. But there was resistance across the board from the industry and from plan sponsors to add them, portability is another issue. But one of the biggest issues was this concern about how do I do my due diligence as a fiduciary on selecting the annuities and the plan. And so that was one of the things that they addressed in the Secure Act was to put some limits around that due diligence process. And so hopefully we'll see.
With our clients, I wouldn't say they're knocking the doors down. I think the industry record keepers are still trying to come up with products to put on to the platforms that meet all the requirements in terms of portability. But there had already been some products out there on different record keepers that met that definition. And all of this kind of goes all the way back to 2008, 2009. When 401k became a 201(k) and everybody panicked, Congress got all concerned about we need to have something that people can invest in and it's not going to go down in value.
Like a CD but better than that, it's got some sort of guarantee associated with it. So that's kind of when we started through this whole journey and we just now are getting to the point where maybe we're going to add these, maybe, maybe not. I don't know.
Doug:
Be aware of the guarantee, right? The risk-
Paul:
Yeah, beware the guarantee.
Doug:
There's always a risk.
Paul:
And there are fees that are part of these annuities as well. I guess I'd like to invite Steve into the discussion to see what his Steve with clients.
Doug:
Yeah, Steve, what do you see? We have this big, I know I keep hearing this MEP acronym and I learned we can't just use acronyms. So talk to me about MEP and what's going on with that and how this is all part of the Secure Act.
Steve:
I think the MEP is a great tool or benefit that the Secure Act is offering, but I'll really briefly touch about what Paul was getting to and summarize the annuity benefits within 401ks also because we have had a couple of plans where we've added some guaranteed income benefits and the employees of participants, there are some that truly need to have that comfort that there's going to be a guaranteed income option available to them because our goal has always been to focus on the income benefit that the retirement plan is going to provide, not that huge lump sum value because people just don't fully understand what that impact has to them. So I'm excited to see what options could potentially be added.
It's going to have to step up your fiduciary responsibilities. You're going to want to make sure you do your due diligence on the companies for the financial stability and soundness and competitiveness. So again, I'm looking forward to what the annuities can potentially bring for the employees to feel comfortable about retiring and potentially and segue into where the MVPs come into play, where we could get more people to contribute into the retirement plan. Really just an enhanced version of a multiple employer program, which has been around for a number of years. The biggest difference that is coming out of the Secure Act is that you don't have to have commonality for your multiple employer groups. You don't have to have all chamber of commerce, you don't have all trucking industry. You could have the hairstylist down the road and the restaurant up the street and the law firm around the corner and they could join this multiple employer groups, or as it's called a Paul you could probably help me with it, a polled employee program and-
Doug:
That's a PEP, not an MEP, PEP.
Steve:
A PEP
Paul:
What's the benefit of that type of setup for a business owner?
Steve:
Where I see a huge benefit is, not to categorize groups, but I think for the smaller size or the companies that haven't wanted to add a retirement plan that we're concerned about costs and fiduciary responsibilities, I think these MEPs and PEPs are going to be phenomenal because we're trying to work out our own MEP PEP program, where we could go and package it up as one program for all these different organizations. And I can potentially get pricing for a much larger size plan, a 20, 30, $40 million plan for all these small groups combined together. Where if you try to go get 10 plans that are $2 million each, they're going to have different pricing all over the place and the conclusion is they're not to have the most competitive pricing.
And I see that as a huge benefit of where the MEPs and PEPs are going to be able to provide some simplicity to the programs, provide companies that weren't considering options to get in to potentially get in, and there are some other caveats to it. You got to have some similarities to them, you got to have some tax incentives such as the auto-enrollment, and again, try to get features that are consistent across the board. But I see them as a great benefit for getting more companies and more employers to consider offering a retirement plan on a lot more efficiencies for their group.
Doug:
That's awesome. So it's basically an economy of scale thing, it sounds like. You get all these businesses together and it makes sense.
Paul:
Yeah, it's a reduction of costs. And especially at the small employer level, the small plan level. Big plans have always enjoyed lower fees relative to small plans. So it's getting small plans into the same fee ballpark as larger plans. And it's also mitigation of fiduciary obligations and responsibilities, pairing those with professional plan administrators, professional service providers, offloading some of that. You can't get out from under all of your fiduciary obligations, but a lot of the day-to-day stuff you can.
Doug:
So Paul talks to us a little bit about what some of the changes that were made as it relates to IRAs. Most folks have an IRA that they've, or rolled, say an old 401k into an individual retirement account. So what did the Secure Act do with regard to IRAs?
Paul:
I think you had a Wendy Shick on earlier talking about some of these provisions of the Secure Act, but probably the biggest thing, as far as the IRAs go, is the elimination of the stretch IRA provision. You used available to leave your IRA to somebody other than your spouse, a non-spouse beneficiary, and that person could then stretch the distributions over their lifetime. It was really powerful in the case of Roth IRAs, with no minimum required distribution requirements. So they eliminated that, it still exists. The spouse doesn't have to pull money out over 10 years, but they shortened up the distribution timeframe from lifetime to 10 year. And that was probably the biggest impact when it comes to financial planning. I don't know Steve if you have any additional comments on that. I know that was a pretty big change from a retirement planning perspective.
Steve:
It is a game-changer for a lot of different people. Because as Paul made reference the stretch provision we have utilized a lot for clients unfortunately whose parents have passed away and their children are still working, they got younger children themselves, they're high wage earners at this point. And the last thing you want to do is have them be required to take an additional distribution from a parent's retirement account that has to be liquidated during some of their highest wage-earning periods, where the stretch provision allowed them to take out the minimum amount that was necessary. They didn't need more than that. There was something to help supplement their potential retirement and/or inheritance for their children down the road. But now that it has to be liquidated over a 10 year period of time, I think that's going to be some difficult decisions for parents to consider what they want to do with their beneficiary designation and understand where it's going and why it's going.
One of the caveats, I will bring up to this and I'm not an attorney, I won't drop the legal documents, but we have told a lot of our clients who have trusted as beneficiaries to really go back and revisit with your estate attorney to confirm it is conforming to the new regulations, new roles so that you're not getting false expectations that there are enough stretch provisions available because see-through trust basically is going to be the same as any other beneficiary. There has to be liquidation within a 10 year period of time over a lifetime.
Doug:
So no grandfathering or anything like that allowed. You've go to deal with-
Steve:
The only grandfathering that is out there in, it's kind of a morbid way to say, is that if you passed away January 1st, 2020, you have no stretch provisions going forward. If you passed away prior to that, you had stretch provisions available to you.
Doug:
Interesting. Well, if I passed away, I frankly wouldn't care. But no, I kid because obviously these are important conversations that family members need to be thinking about and as you said, talk to your professionals like you and Paul and your attorney and all that. So Steve, talk to me a little bit about required minimum distributions. That's always something that we hear about and anything changes there? What is that, what's the latest there?
Steve:
Yeah, that was again, one of the bigger changes within the Secure Act and it did impact a lot of people because their required minimum distribution, otherwise known as your RMD, stipulated that once you turn 70 and a half, you had to take a distribution out of your qualified retirement account if it was still in a 401k, or if you had it in a traditional IRA, the government said, time's up. You have to start taking some distribution because they want the income tax off of that. And the big provision that changed on it was it effectively moved the RMD to 72 years of age. So you gained an extra year and a half, basically, of forgiveness of having to pay tax on your distribution.
And again, this is just dealing with the minimum requirement. Anybody can take any amount that you want, whenever you want, however you want, when you are in retirement, especially in your 70s, if that's the case. But if you didn't need the money or weren't expecting to use the money that the RMD did come into play, and again, that got pushed out from 70 and a half to 72.
Paul:
So it was really just an acknowledgment that people are living longer and they're going to need their funds longer, so let's start those distributions a little bit later than we were, a year and a half, but it's better. 72 is better than 70 and a half.
Doug:
It all helps. It all helps.
Paul:
The other thing with the IRAs, one last comment is it eliminated the age restriction in terms of making contributions. So again, I think acknowledgment that people are living longer, they need to continue to put money into an IRA, continue to add assets, accumulate assets for retirement, since we're living longer.
Doug:
Now Paul, from a planning perspective, we're certainly seeing a lot more Roth options within plans as well. Can you talk a little bit about what those are for business owners out there? What does that do? What does that mean? What are the options there?
Paul:
You're just talking about a Roth option in general in a 401k plan?
Doug:
Yeah, yeah, absolutely.
Paul:
That wasn't necessarily part of the Secure Act, but we do oftentimes talk with clients about adding a Roth provision to their 401k plan. And what it does is a lot of high-income earners are phased out of the ability to do a Roth IRA in the traditional sense through an individual retirement account, particularly if they're a participant in a retirement plan, which most people are. But if you contribute to your 401k, you can put in up to... rather than making the traditional tax-deductible contributions through salary deferral to your 401k, you can direct that same money, not in addition to but instead of the traditional pretax, you can do Roth contributions.
And what you'll notice right away when you make the decision to do that, obviously is your paycheck goes down because you're paying more taxes when you do that. But the trade-off obviously is no tax when the money comes out and certainly no taxation on the earnings that accumulate within the Roth account. And hopefully, you get to the point where you retire, leave employment, and then you can roll that Roth account inside your 401k to an IRA.
Doug:
We can all dream that we can retire someday.
Paul:
Yeah, but it is a nice opportunity to really accumulate significant dollars in an after-tax way. They'll never be taxed. And you bite the tax bullet when you're putting it in but after that it's... I'm sure Steve has important thoughts on this but we talked to clients about adding multiple buckets, some pretax, some-after tax, so that you can have a mix of income streams in retirement. No one can predict the future and so you don't know what tax rates are going to do and what your income's going to be in retirement. So if you have a mix of different types of income in addition to social security, then that's a good thing from a tax standpoint. Steve …
Doug:
Yeah, particularly given today's low right, Steve?
Paul:
Yeah, exactly.
Steve:
Absolutely. We're always looking for the most tax-efficient program when we looking at retirement income distribution and it's trying to integrate as many tax advantage programs as possible in the Roth 401k, Roth IRA. And one big conversation we're having in today's environments with current market conditions is Roth conversions giving the flexibility that people to maybe convert value instead of dropping value in an IRA to a Roth account, pay the tax with anticipation of hopefully the stock or the investments or markets continue to appreciate in the future. And you just converted a value a little bit lower to get tax-free income and distributions later. But yeah, going back to Paul's comment, I absolutely support the tax efficiencies, building a retirement income plan for anybody. And 401ks give that. There wasn't anything in the Secure Act that emphasized Roth provisions, but it is definitely a planning tool that most people should at least review to see if it fits well into their plan or not.
Doug:
Absolutely. I think ultimately the best advice here is to sit down with your professionals like Steve and Paul here and make sure that you're planning and thinking through all of these things. I think now is a good time to reset and do a lot of that for everybody. So before we let you guys go, I want to hear each year comments on what do you think's ahead, not only with regard to the Secure Act but any other potential changes that seem to be gaining steam anywhere in the market that you think have a chance to impact us in the next year or so.
Paul:
Getting back to Steve's comments regarding the MEP, we're still waiting on regulations. The legislation Secure Act kind of paved the way to allow for these unrelated employers to join together and create a plan. The devil's in the details on that. So I know that proposed regulations from the Department of Labor recently gone to OMB for review. So we're expecting those to come out at some point between now and the end of the year. Given everything that's going on right now with the economy, I wouldn't predict when those will come out. But when those do, I think you're going to see a lot of discussion among employers in the marketplace regarding the MEP opportunity, and is it a good fit, and does it make sense for me as an employer to take my plan and join it with somebody else? What do I give up by doing that? Other than that I don't see a whole lot coming down the pipe as we've kind of had, with COVID and everything, everything's kind of stalled at this point. People are just kind of in survival mode.
But I do think that there will continue to be an emphasis on getting more people into plans, and that was one of the big goals of the Secure Act. We didn't talk about a lot of the other provisions, individual provisions that really are aimed at increasing coverage, but that will continue to be a goal of the government. We'll continue to see that. Steve?
Steve:
Yeah, I'll emphasize Paul's last comment. There were a number of other provisions within the Act itself that is really trying to get more people and more companies to offer retirement plans. The government has recognized that social security was never, and it is designed not to be only a retirement plan for anybody, it's supposed to be a supplement. That's how it was initially established. And how do you get more companies to participate in the retirement plan marketplace? Again, I think some of those are changing and until the MEP program really gets some foundation tax-wise, yeah, I think that's the biggest adjustments that we'll still see a year from now, probably. A number of other provisions from the Act that are very beneficial for personal planning. So like I gave preference on the beneficiary designation on your IRAs if it's a trust or even if it's a non-spouse. Make sure you reviewed those and understand how they fit.
Doug:
Absolutely. It's a good time to certainly revisit and rethink all of those things as we should be. As we preach on the insurance and tax side of our business at Rea, these are living and breathing documents and plans and all of that. Don't just do it one time, throw it on the shelf and forget about it. Not good for anybody, but that's great insight from both of you. Thank you, Paul, and thank you, Steve, for being on today. I really appreciate that.
Paul:
Appreciate the invite.
Doug:
Absolutely. And Steve, I'll overlook that Steelers banner that's hanging over your shoulder there, but otherwise enjoyed it. Paul's got the right set-up there with the Buckeye theme. I like that. But anyway, if you want more business tips and insight, or to hear previous episodes of Unsuitable, visit our podcast page at www.reacpa.com/podcast. And while you're there, sign up for exclusive content and show notes. Thanks for listening to this week's show. Be sure to subscribe to Unsuitable on Apple podcasts, Google podcasts, or wherever you're listening to us right now, including YouTube. I'm Doug Houser. Join us next week for another Unsuitable interview from an industry professional.
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