Potential Winners of the SECURE Act (other than the American People)
May 30, 2019 By Sage Advisory
by Andy Poreda
Last week, the House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. It was a clear win for the American People, many of whom are in desperate need of ways to enhance their dreary retirement savings prospects. The act will provide desperately needed changes to retirement legislation, an area that has been largely ignored since the Pension Protection Act of 2006 was signed into law. And although the American people stand to benefit immensely once the SECURE Act is signed into law by the President, so too do quite a few players within the $27 trillion retirement industry. Let us take a look at some of the groups that stand to gain the most from this act.
401(k) service providers just hit the jackpot with the SECURE Act. One of the key provisions of the act further facilitates the formation of open multi-employer retirement plans, allowing groups of small employers to band together to offer a common 401(k) plan. This pooling of unrelated employers (previous rules allowed for some related employer groups to band together) will ideally lead to lower fees and less fiduciary burden for small businesses. Consequently, employee access will also improve, and participants may receive a more robust set of investment options. Since somewhere between a third and a half of employers do not currently sponsor any type of retirement plan, 401(k) service providers will have tens of millions of potential new clients that may be more willing than ever to finally establish a plan.
With current all-in fees (includes administration, record-keeping, and financial advising) running upwards of 3% on some plans, the actual benefit of setting up a 401(k) is severely eroded. So expect providers to quickly respond with a push to capture the wide-open small business market with comprehensive plan management options offering low fees and basic financial advising as part of multi-employer group deals. Small businesses that are already sponsoring retirement plans but that are unhappy with their current fee structure will also be targets to change providers, as lower fees or better services may become available. Ultimately, a seismic shift is about to occur in the 401(k)-provider landscape over the next few years.
Some retirees view annuities with disdain, while others are fearful of the details, worrying about whether they made the right financial decision with their limited retirement savings. Regardless of one’s perspective on annuities, it is undeniable that for many retirees a properly selected annuity could provide added utility to their portfolio, especially for those fearful they might outlive their savings. Since the Safe Harbor provisions of the SECURE Act shift most of the burden of annuity choices from the employers to the insurance companies, it is likely that many more employers will soon start offering more annuity options to their employees. The insurance companies will clearly look to capitalize on the enhanced access to millions more retirees in search of investment options.
A specific product to look out for is the Qualified Longevity Annuity Contract (QLAC), a deferred income annuity where payments can be delayed up to the age of 85. One big benefit of the QLAC is that a portion of one’s 401(k) (up to 25% or $130,000) can be used to purchase one, and it is exempt from required minimum distribution calculations, a factor to consider for some retirees. The other huge benefit is the significant increase in the monthly payout values that are a result of delaying payments until a much later date. As many retirees may have to deal with the distinct possibility that they live well into their late 90s, while also facing significant medical care costs, a QLAC could provide these individuals the peace of mind that they are not going to outlive their savings. When coupled with a traditional retirement account, one could drawdown from funds remaining in a traditional IRA, and once depleted the QLAC would kick in, in essence acting as an insurance policy against longer life expectancy. Currently many employers are reluctant to offer QLACs and annuities in general, but we predict that will soon change.
Insurance companies might also stand to gain from the elimination of the “IRA stretch” strategy. The “IRA stretch” was an effective estate planning tool that allowed for heirs of IRA plans to make minimal withdrawals, thereby allowing the account to continue to accrue tax-deferred benefits for years. The SECURE Act now forces withdrawals to be made fully within 10 years of an individual’s death, and it is possible that the timeline will be further compressed, as the Senate’s retirement act lowers the timeline to five years. Either way, the benefit of passing down IRAs to heirs will be diminished as a transfer-of-wealth option. Could this open up a shift to other investment choices, such as life insurance policies? Death benefits are not income-taxable, so purchasing a life insurance policy structured with a large death benefit may become a viable option for some investors seeking to transfer wealth. Obviously, it will take some time to fully analyze the ramifications of some of these provisions, but it is interesting to think about the impact on future estate planning.
Although the retirement industry aims to profit from the sweeping reform taking place in Washington, as we mentioned before, American workers are the true winners. Here at Sage, we are excited to see the new focus that politicians are placing on retirement issues. In a time where most issues have become heavily divisive, it is pleasant to see an area where there is so much agreement. Hopefully retirement reform will enjoy continued momentum, and more complex issues such as Social Security and automatic IRA enrollment will be addressed in the future. Any help the American People get on retirement is a plus. Sage and its team of professionals build dynamic liability and cash-flow-oriented investment strategies for pension and cash balance plans, in addition to providing asset allocation strategies for 401(k) plans. For more information, visit: https://www.sageadvisory.com/retirement-plans/
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