Workplace retirement plans could be headed for a makeover in Congress.
As part of a push for additional tax law changes, GOP lawmakers in the House are expected this month to float legislation that includes modifications to 401(k) savings plans.
Broadly, those could include: reducing costs for small businesses to offer such accounts, making it less risky for employers to offer guaranteed income annuities and requiring plans to annually tell workers how long their nest egg is projected to last.
“There’s a lot of concern about folks who don’t have enough saved for retirement,” said Diane Thompson, a partner in the Los Angeles office of law firm Ballard Spahr.
“The idea is that helping both employers and employees hopefully would encourage more people to save,” said Thompson, whose expertise includes employee benefits.
Meanwhile, President Trump on Friday signed an executive order that also aims to help workers save and spend in retirement.
He’s calling on regulators to explore reducing required minimum distributions from 401(k)s and IRAs, and making it easier for small businesses to offer retirement plans to their employees. At this point, it’s unclear how regulatory and congressional efforts that overlap will be reconciled.
While 401(k) plans have proliferated, all but replacing traditional pensions, about a third of employees have no access to any workplace retirement plan, according to data from the Bureau of Labor Statistics.
Even among those who do participate, research indicates their savings rate generally could use some help.
For example, Vanguard data show that for savers nearing traditional retirement age (those age 55-64) the median account balance — half are above, half are below — is $71,105. Health-care costs alone in retirement are an estimated $280,000 per couple, according to Fidelity Investments.
While it’s uncertain exactly what the new legislation will include or the exact timing of its release, the House Ways and Means Committee pointed CNBC to a statement by Chairman Kevin Brady before House members headed home for their August break. In it, the Texas Republican said he expected to bring a bill to his committee in September, and that already-proposed legislation — the bipartisan-backed Retirement Enhancement and Security Act — would be a starting point for developing provisions.
In that bill, one proposal aims to make it easier for 401(k) plans to offer annuities in their lineup. Although annuities tend to be more expensive than other investment options, they also can appeal to savers who want guaranteed income in retirement.
“One of the questions [for workers] is how do they make sure their withdrawal strategies make their retirement savings last,” said Bradford Campbell, a partner in the Washington office of law firm Drinker Biddle and a former federal regulator.
While annuities are already permitted in 401(k) plans, there’s been concern among sponsors that they could open themselves up to lawsuits if they choose an annuity whose underwriter (i.e., an insurance company) becomes insolvent down the road.
Basically, the existing regulatory “safe harbor” comes with fuzzy requirements that have made companies leery about their future legal protections.
“It hasn’t worked the way it was intended,” Campbell said. “This legislation would put in place objective tests to know whether they’re in compliance.”
A related provision would make it easier to transfer annuities to another plan or IRA.
Meanwhile, other proposals aim to reduce the higher costs that small businesses generally face to set up and maintain 401(k) plans. While access to workplace savings is prevalent among large employers, smaller companies often eschew retirement plans as a benefit due to the cost, complication and time involved in setting one up.
One proposal would allow those smaller firms to more easily band together to offer their employees a 401(k) plan, thereby sharing the cost and administration. As it stands, so-called multiple employer plans restrict exactly which businesses can team up.
Additionally, another provision would require 401(k) plans to provide an annual snapshot of how much income an account holder would have in retirement, based on their current balance. That provision could help workers know whether they’re on track to have enough in retirement.
“That could be a very useful disclosure, provided it’s done well,” Campbell said.
Another proposal in the existing retirement bill would remove the age cap of 70½ for contributions to traditional IRAs.
The measure also would change the rules governing minimum distribution rules when a 401(k) or IRA account holder dies.
Right now, beneficiaries can stretch those RMDs over many years, based on their life expectancy. Under the bill, any balance (or aggregate balance if there’s more than one account) above $450,000 would need to be distributed within five years of the account holder’s death unless the beneficiary is a spouse or meets another qualification.
Aside from possible changes to retirement accounts, the tax legislation also is expected to include other savings proposals, including tax-advantaged universal savings accounts and changes to how 529 education savings plans can be spent.
It also seeks to make the recent tax cuts for individuals and pass-through businesses permanent. Those cuts are set to expire at the end of 2025.
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If any legislation gets approved by the House Ways and Means committee, whether the full chamber would vote on it before the midterm elections is questionable.
“They don’t have a lot of time to decide what will go into any version that gets [considered] by the committee,” Campbell said. “Even if it makes it out of committee, they probably won’t bring it up until at least after the elections.”
If changes do get made to 401(k) plans, it would be the first major congressional modifications since 2006, when the Pension Protection Act was passed.
That measure — which is largely credited for increasing 401(k) participation rates — included provisions that made it easier for companies to automatically enroll workers in their retirement plan and then automatically increase their contribution rate on an annual basis.
