Sep 4, 2018, 05:09pm
President Trump last week issued an executive order aimed
at increasing retirement security for Americans, telling an audience in North
Carolina that “we believe all Americans should be able to retire with the
confidence, dignity and economic security that you want.” And financial firms
such as BlackRock and Prudential offered general support. But what exactly is
the Trump administration proposing and what would it mean for your retirement
security?
What President Trump Wants to Do for
Retirement Security
Essentially, the president called for his
Department of Labor and Department of Treasury to look into two things: 1)
raising the age when people with traditional Individual Retirement Accounts
(IRAs) and 401(k)s must start making Required Minimum Distributions (RMD),
which is currently age 70 ½, and 2) ways to make it easier for small businesses
to offer retirement plans to employees.
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The latter is sorely needed: As the Trump
administration noted, in 2017, roughly 89% of workers at private-sector
establishments with 500 or more workers were offered a retirement plan compared
to only 53% of workers at private-sector establishments with fewer than 100
workers.
Here are details on both ideas:
Changing the Required Minimum Distribution
(RMD) Rules
If you have a
traditional IRA or 401(k) — but not a Roth IRA or 401(k) — you must begin
taking money out of it starting at age 70 ½, based on Internal Revenue Service
life expectancy tables. If you don’t, you’ll generally get socked with a
penalty equal to 50% of the RMD amount, plus taxes you owe. Ouch.
President Trump has
given the Department of Treasury, however, six months to consider pushing back
that age to something older — because Americans are living longer than in the
past. “This [change] could allow retirees to spread retirement savings over a
longer period of time,” the Trump administration said.
The Treasury
Department last updated its life expectancy tables in 2002, when the average
life expectancy was 77. These days, the average life expectancy is roughly 78
½.
BlackRock's July
2018 report, Roadmap
for Improving U.S. Retirement Savings: Making It Easier, called for pushing
back the RMD start date (possibly to 75, as the U.S. Chamber of Commerce has
suggested), saying: "We recommend increasing the starting age requirement
to encourage individuals to continue to save during their early retirement
years, given that they are expected to live longer."
The RMD starting date
pushback, not incidentally, would also be good for financial firms. As Chip
Castile, former Chief Retirement Strategist at BlackRock wrote, it could
potentially extend “exposure to professional management and market growth by
keeping assets in retirement accounts and 401(k) plans.”
Alicia Munnell,
director of the Center for Retirement Research at Boston College calls Trump's
RMD idea “a very low priority proposal” because most people are not working at
70 ½. Also, she notes, if you are working at that age, you
aren’t required to take a distribution from the retirement plan where you
currently work.
Some retirement
analysts are not keen on the idea of delaying the RMD age, though.
Robert Meyer, CEO and
chief investment officer of the wealth management firm Truuwater Capital,wrote
on Marketwatch.com in 2017 that such a change “could lead to a lower quality of
life for some retirees” because they’d delay withdrawals until the required
date and scrimp until then. Meyer also thought a later RMD date could force the
government to raise taxes in other ways to compensate for the lost revenue.
Broadening Retirement
Plans to Small Business Employees
President Trump also
gave the Labor Department six months to see if the government could ease
regulations that would allow more small businesses to offer retirement plans to
their 42 million employees. The agency, the administration said, would also
look for ways to expand access to workplace retirement plans for part-time
workers, sole proprietors and "other entrepreneurial workers with
non-traditional employer-employee relationships.”
This would all happen
from the federal government helping firms band together to set up what are
called Multiple-Employer Plans or MEPS, sometimes referred to as Association
Retirement Plans or ARPs. (Similar programs are already allowed by a few
states.) As Next Avenue recently noted,
legislation gathering steam in Washington would do the same thing.
The thinking behind
Multiple-Employer Plans is that many small business owners say they find it too
costly and complicated to offer retirement plans on their own.
Said Trump: “The
complexity of current federal regulations makes it extremely difficult for
small businesses to afford retirement savings accounts for their great
employees. While large companies can afford to deal with these burdensome
regulations — and of course, they’ve been reduced very substantially for large
companies also — but smaller companies just can’t do it; they can’t handle it.”
The MEPS idea has
broad support by financial services firms and many in the small business
community who favored Trump’s proposal.
Prudential, for
example, issued a statement saying “we have long supported policies that would
increase sponsorship and participation in Multiple-Employer Plans and are
encouraged by today’s action.” And BlackRock said it “continues to support
initiatives to expand access, increase participation and improve retirement
outcomes, including open multiple employer plans.”
Small Business
Majority, which represents more than 58,000 small businesses, called Trump’s
MEPs proposal “a first step to discussing what officials can do to help small
firms struggling to offer retirement benefits to their employees,” though the
group also called for more “Secure Choice” public-private partnerships cropping
up in states like Oregon, Illinois and California. The National Association for
the Self-Employed said “multiple employer plans are one option in helping pave
the way for America’s small business community to enjoy the same retirement
security available to the rest of our nation’s great workforce.”
Munnell, of the Center
for Retirement Research, said she favors the MEPs idea, too, though she wonders
how many small businesses will actually begin offering retirement plans if
these plans become easier to offer.
Munnell said she’s
uncertain MEPs will “solve the [small business employee] coverage
problem," but added that "it won’t hurt to try it.”
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