House, Senate Look To Fix Current Retirement Plan Issues Plaguing The Nation
I remember when I started my career at Rea, the concept of the 401(k) provision within retirement plans was just beginning to take root, and the employers who offered this option to their employees were highly regarded. To some, a 401(k) was viewed as an enhanced savings account from the perspective that you could save money on your own in an actual savings vehicle – but, in reality, a 401(k) is so much more.
A 401(k) plan allows participants many advantages over a ‘typical’ savings account, including the:
- Ability to make contributions on a pre-tax basis.
- Potential for the employer to also make contributions for the employees’ benefit.
- Capability to earn more return by nature of investments permitted.
- Economies of scale, both from an earnings perspective and from an expense perspective.
The Evolution Of Retirement Plans
Fast forward (ahem) 28 years, and it’s now unusual to find an employer who does not offer some form of retirement savings benefit. And the 401(k) plans of today don’t look like they did 28 years ago.
As with anything, you try and try again. You implement and then work to find ways to enhance it, all the while taking into consideration the changes occurring, or the need for changes, in the world around us. Retirement vehicles are no different. Whether we’re talking about the Social Security program, IRAs or 401(k) plans, these vehicles have evolved over time and will continue to do so.
Also Read: A Look At Pending Pension Legislation
For example, the House Ways and Means Committee recently passed a bill aimed at two main concerns we currently face as a nation – retirement income and education costs. The bill, known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act contains provisions making it easier to offer annuities in 401(k) and 403(b) plans and raises the age for taking required minimum distributions from age 70½ to 72. The act also includes provisions to increase tax credits for small businesses that opt to implement retirement plans as well as an auto-enrollment provision. In addition, the SECURE Act would allow employers that utilize the auto-escalation feature to increase the maximum to which they could escalate deferrals from 10 percent to 15 percent.
The Senate Finance Committee introduced the Retirement Enhancement and Savings Act (RESA), which is the Senate’s version that mirrors the SECURE Act. Even though the full House has not weighed in on the SECURE Act as of this writing, what this demonstrates is that both branches are acknowledging the retirement income crisis Americans are now facing.
More Than Just Saving For Retirement
Another feature of the SECURE Act is a provision to expand the Section 529 Plan program, which is a tax-advantaged savings plan designed to encourage saving for future education costs. You might wonder, what educational costs have to do with retirement savings. Well, the sad truth is that many individuals are leaving higher education institutions with the knowledge and degree that they had set out to obtain but with the addition of crippling debt. In fact, today, student loan debt exceeds almost any other debt in our country, including credit card debt and automobile loans. Student loan debt runs second only to mortgage debt. As a result for carriers of high student debt, their resources to save for retirement are limited, which means they tend to put less of an urgency on their responsibility to save for this next phase of life.
The expansion of the Section 529 Plan under the SECURE Act would allow these assets to be used to cover costs associated with registered apprenticeships, homeschooling, up to $10,000 of qualified student loan repayments and private or religious school tuitions. The SECURE Act would also permit the treatment of certain taxable non-tuition fellowship and stipend payments as compensation for IRA purposes to enable students to begin saving for retirement by recognizing these payments as compensation.
There are other initiatives outside of SECURE and RESA that are being considered that would incorporate student loan debt repayments into employment benefits including provisions for handling such debt within an employee’s retirement plan.
While the provisions under the SECURE and RESA Acts are not the silver bullet to solving our retirement financial crisis, they are an attempt to move in the right direction. Even if the provisions of these acts don’t speak to you personally, at least consider where you stand in the midst of this retirement crisis. Are you and/or your employees planning appropriately to avoid a retirement crisis on a personal level?
By Darlene Finzer, CPA, QKA, CSA (New Philadelphia)