CHICAGO (Reuters) – Federal policy on retirement security is one chaotic mess right now.
Just consider the contradictory state of affairs when it comes to pensions and retirement income.
On the one hand, a bill called the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 is headed for passage with broad bipartisan support by the U.S. Congress. The bill is a grab bag of retirement security initiatives. But notably, it includes a groundbreaking provision that will encourage employers to add annuities to their 401(k) plans that workers could select at the point of retirement.
But on the other hand, the Trump administration earlier this year made it easier for pension plan sponsors to get rid of their benefit obligations by offering lump-sum buyouts to retirees. This was a reversal by the Internal Revenue Service and U.S. Department of the Treasury of an Obama-era ban on lump-sum buyouts for people who already are retired.
The move likely will lead to a restarting of this so-called de-risking activity by plan sponsors, who have demonstrated eagerness to get pension liabilities off their books over the past decade. That is terrible news, because the lump sums usually are far less valuable to retirees than the lifetime income stream. And messing around with the income of people already in retirement, when there is less flexibility or time to make adjustments, is an especially dangerous idea.
Pensions and annuities both help retirees by providing a guaranteed lifetime income stream, reducing the risk that they will run out of money. But here we have federal legislation that will encourage pension-style annuity income – while regulators are encouraging exactly the opposite. Got that?
The need for action is clear. Fewer workers will have traditional defined benefit pensions in the years ahead. Rising healthcare costs are projected to consume a greater share of Social Security benefits. A severe shortage of age-appropriate housing is pushing us toward a crisis in shelter for older Americans. Meanwhile, one-third of private-sector workers had no access to an employer-sponsored retirement plan in 2016, according to the United States Government Accountability Office. The coverage shortfall is greatest among low-income workers and people working for small companies.
SMALL BUSINESS SAVING PLAN
But the SECURE Act responds with a series of small-bore initiatives, mostly focused on encouraging more saving for retirement. None are likely to move the needle in a big way.
A key provision makes it easier for small employers to offer retirement plans to workers by banding together in multiple-employer plans, or “open MEPS” for short. 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.
But the open MEP concept has been bouncing around in Congress for years, and more competitive low-cost options for small employers have surfaced since the open MEP idea was first hatched. Moreover, it is not clear how many plan providers will jump into this market.
The SECURE Act also recognizes that more people are working longer. So it would raise the age when required minimum distributions from tax-deferred savings accounts must begin to 72 from 70.5, and the maximum age for contributions to IRAs (also 70.5) would be eliminated. The bill also would require sponsors of 401(k) plans to include part-time workers who meet certain qualifications.
Meanwhile, the annuity provision creates a so-called safe harbor that protects 401(k) plan sponsors from the risks associated with the long-range nature of an annuity investment. The provision protects employers from liability if an annuity provider gets into trouble down the road and fails to make promised payments. That off-loading of risk has drawn criticism from consumer advocates – but there also are questions about how much appeal in-plan annuities will have for plan sponsors and participants.
Plan sponsors typically take a conservative approach to changing their investment menus. And inertia and plan complexity are powerful obstacles to getting participants to make changes.
The in-plan annuity plank could get a boost from recent changes in the industry, which has moved to introduce more flexible products and also less expensive offerings, such as deferred annuities. “It’s not just immediate annuities anymore, where you hand over a lump sum of money all at once,” said Melissa Kahn, managing director of retirement policy at State Street Global Advisors. “There are a lot of different options now that can meet different needs of plan participants and employers.”
Kahn notes that the SECURE Act also could encourage workers to choose at least partial annuitization via another provision requiring a disclosure of what participants can expect their savings to generate in monthly income.
“The lifetime income disclosure is critical for improving financial literacy,” she said. “Today’s 401(k) statement just tells you how much is in your account – and for most people it’s more than they’ve ever seen in their lifetime in one place, so they think they are rich. But when you see what that will generate in income, it’s a real wake-up call.”
Fair enough. But the SECURE Act will not lead to a huge wave of annuitization anytime soon.
So what policies would have a broader impact on retirement security?
Federal policy aimed at preserving the pensions that still exist – rather than encouraging extinction – would be a great start. Legislation that fixes Social Security’s looming shortfalls and expands benefits would be an enormous accomplishment. Another urgent, huge task for Congress is to address the solvency crisis facing multiemployer pension plans, which threatens the security of more than 1 million retired union workers.
We need to get to the big ideas on retirement, and quick.
To hear a longer conversation I had recently with Melissa Kahn of State Street Global Advisors about the SECURE Act, click here: (bit.ly/2RfJxrT).
Reporting and writing by Mark Miller in Chicago; Editing by Matthew Lewis