The Setting Every Community Up for Retirement Enhancement Act of 2019 – the SECURE Act – was passed by Congress and signed into law on the days leading up to Christmas 2019.
Incorporated into a broader 2020 fiscal year appropriations bill, the SECURE Act was aimed at helping Americans more easily participate in tax-advantaged retirement accounts as well as helping ensure that older retirees do not outlive their assets.
While the SECURE Act contained 29 provisions aimed at helping us better save for retirement, here are a few of the highlights:
- It offered tax incentives to small businesses to set up automatic enrollment in retirement plans
- It allowed employers to join with other companies and offer joint-retirement plans, which should help keep costs down
- It allowed many part-time workers to participate in employer-sponsored retirement plans
- It created a new early withdrawal penalty tax exemption of up to $5,000 from an IRA to use for childcare costs
- It pushed back the Required Minimum Distribution Age from 70 ½ to 72
- It allowed for the inclusion of more lifetime-income options, including annuities
Earlier this year, the House of Representatives passed a follow-up bill to the SECURE ACT – the SECURE Act 2.0 – on a nearly unanimous vote. Then in June, the Senate advanced two different pieces of similar legislation that have not yet gained final Senate approval – and time is running out before Congress adjourns for the year.
If the current bill is not passed by the current session of Congress, lawmakers will have to start over on new legislation in 2023.
The Retirement Problem
The challenges faced by our retirement system are well documented, from worries about Social Security’s reliability to the fact that most people just don’t save enough for retirement.
Sadly, according to the U.S. Bureau of Labor Statistics, just more than half of American adults (55%) even participate in a workplace retirement plan, like a 401(k). And the ones who do participate are usually significantly underfunded.
To underscore the seriousness of how underfunded our 401(k)s are, financial-services firm Vanguard announced earlier this year that its research showed that those 65 years and older had median 401(k) balances of less than $60,000.
The SECURE Act and SECURE Act 2.0
The SECURE Act and the SECURE Act 2.0 were designed to address these concerns by encouraging more employers to offer retirement plans by lowering the costs in addition to reducing some of the risks.
But the SECURE Act 2.0 includes a variety of provisions that employers and employees will need to keep in mind if the bill is passed. The most important elements of the SECURE ACT 2.0 include:
- Requiring that all new employees be automatically enrolled in a 401(k) or 403(b) plan when starting with a company
- Employees would automatically have 3% of their pay invested into a plan, with a 1% increase every year, until they reach a 10% contribution rate
- Extending RMDs to later ages
- Increasing catch-up contributions
The SECURE Act 2.0 is likely to change a lot of the rules surrounding retirement plans and while many of them are simple, others are very complex. For now, it remains a work in progress, but don’t be surprised if you see a year-end headline announcing Congress’ passing of the SECURE Act 2.0.