In the latest episode of Plan Talk, Retirement Director Ben Rizzuto covers some key areas of the SECURE Act that could impact the retirement plan landscape, including the Multiple Employer Plan provision and the elimination of the stretch IRA. This deep dive into the new legislation offers ideas plan sponsors can use to help participants better understand the benefits available to them.
Plan Talk: The Obligatory SECURE Act Podcast - Ben Rizzuto, CRPS®
Ben Rizzuto: Hello, I’m Ben Rizzuto, and you’re listening to the Knowledge Labs podcast channel from Janus Henderson Investors.
How many emails, articles, webinars or podcasts have you seen since the end of last year regarding the SECURE Act?
Heck, you’ve probably received an email or two from us at Janus Henderson regarding the presentations we’ve created, or the blogs posts we’ve written on this massive piece of legislation.
I wouldn’t be surprised if I’ve received at least one if not more daily over the past several weeks. Whatever the number is, they have been numerous.
In most cases, the information we’ve seen summarizes key points of the legislation. Others have discussed possible strategies. Still others may provide ideas on how it affects financial advisors.
Well, today you can add another podcast to the list. However, I’d like to cover a couple areas that I think will be interesting as they could affect the retirement plan landscape.
They are the MEP [Multiple Employer Plan] provision and state-run retirement plans, and the elimination of the stretch IRA and its effects on how we should be educating and guiding participants.
MEPs vs. State-Run Plans
Let’s start with the Multiple Employer Plan provision. Simply put, this should allow a lot more small businesses to band together into what will now be called a Pooled Employer Plan [PEP] as the “nexus” and “one bad apple” rules have both been eliminated.
The elimination of these rules means that businesses don’t need to have a significant common relationship, such as participating in the same trade association, a common business or be within the same geographic area to start a PEP. Also, participating businesses in the PEP don’t need to worry that a breach of fiduciary duty by one business will lead to the disqualification of the plan overall.
With those two hurdles out of the way, employers can now enjoy economies of scale and opportunities to customize as they provide retirement plans to their employees.
This is a good thing, but I’m interested in see how PEPs and state-run retirement plans coexist with each other.
Based on this legislation, as well an executive order from President Trump in 2019, we have seen that the federal government favors a private retirement plan option for small business, not the public type options we have seen through states like Oregon that have been mandated on small businesses that don’t offer retirement plans to their employees. In fact, we saw the DOL and other organizations take legal action against states like Oregon and California, questioning if these state-run retirement plan programs breach ERISA.
Even though there has been this negativity, California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New York, Oregon, Vermont and Washington have all passed legislation to open their own state-run retirement plan systems or voluntary marketplaces.
Along with that, we’ve seen several states and cities create task forces to investigate the viability of such programs, Colorado and New York City being the most recent.
Plus, the Oregon Saves program, which is the program that has the longest track record, has been relatively successful. The program reported after its two-year anniversary that just over 104,000 employees – or 71% of those eligible – had enrolled.
Now, some say it is too early to say for certain if Oregon Saves is a success as data shows that 20% of employees have already taken a pre-retirement withdrawal. So it may be that many folks could be using it as a rainy-day account versus a retirement account. But either way, it does seem to be a viable option over its short lifetime.
Furthermore, a recent EBRI [Employee Benefits Retirement Institute] study showed that nationalizing the OregonSaves program would be beneficial for participants and businesses.
More specifically, they found that if an Oregon Saves-like program was offered at the national level, it would provide a 16.3% reduction in retirement deficits as measured by average retirement savings shortfalls for those age 35 to 39 and a 3.1% reduction for those between 60 and 64 years old. Overall, this type of program could reduce retirement deficits by $456 billion.
What’s noteworthy for us – and may be another outcome of the SECURE Act for retirement plans – is that OregonSaves is an automatic Roth IRA program. So not only would this type of program decrease retirement deficits, but based on another study from the University of Michigan, the “rothification” of retirement contributions would lead to lower lifetime tax payments, delayed retirements and an overall reduction in consumption.
So with all that said, with the fact the PEPs will be easier to create and with the idea that the state-run retirement plan program provides an easy, low-cost and beneficial option for small business owners and employees, the question is which option wins out. It may hinge on how easy PEPs are to open and work within, the amount of customization that is available, or it could just come down to the easy, low cost that the states are providing. We shall have to wait and see.
Stretch IRAs and the Move toward Rothification and HSAs
One of the most significant changes made by the SECURE Act was the elimination of the Stretch IRA. This provision has many financial planners concerned, especially those who have done estate planning.
The Stretch IRA has been a popular retirement and estate-planning strategy since it allowed non-spouse beneficiaries of defined contribution plans and IRA accounts to stretch the life of the account over several years – if not decades – based on the recipient’s life expectancy.
Now, under the SECURE Act, the entire inherited retirement account must be emptied by the end of the 10 years following the year of inheritance. This significantly changes the tax ramifications of being a beneficiary for one of these accounts, but I think it may provide the retirement plan industry a couple areas of opportunity.
One way to decrease the tax hit for recipients would be to pass on after-tax or Roth assets. For years, we have been pushing Roth 401(k) as an option for retirement plans. That push has led to a high percentage of plans offering a Roth 401(k) option but unfortunately, we know that only 15-20% of participants take advantage of these accounts.
The elimination of the Stretch IRA may be a way to get more participants to use this side of the plan. In fact, it may make most sense for mid- and late-career participants who already have a sizable traditional 401(k) balance and want to diversify the tax treatment of their assets to more aggressively fund their Roth 401(k)s. Plus, having those after-tax assets may be helpful for participants as they enter retirement and are faced with increased health expenses.
Healthcare expenses and the elimination of the Stretch IRA could also be a way to get more participants to use their Health Savings Account [HAS] options. HSAs can be incredibly useful for folks in retirement since assets are able to build and grow tax deferred and, if used for qualified medical expenses, come out tax free. Plus, from an estate planning standpoint, it’s important to remember that HSA accounts can be funded by anyone: It doesn’t have to be the account holder who makes the contributions. In fact, those who fund the account don’t even need to be eligible for an HSA account.
So, on an annual basis, parents could fund their child’s HSA account up to the limit. Those assets can grow tax deferred into the future and can be used to pay for current or future medical expenses. And since there is no time limit on HSA assets, this can create what some have called a “medical nest egg” for children. Finally, as an HSA account holder gets older, they can treat the account as a traditional IRA. But remember, they’ve been able to let assets grow tax deferred for several years.
Now, this does require some planning and coordination up front. An advisor would need to discuss this strategy with parents and children prior to the parent’s death. But I think this is a wonderful way to help parents provide a tax-savvy inheritance for children and get a tax deduction in the process, and a great way for plan sponsors to talk about HSA benefits with participants.
So there you have it. I’ve done my duty as a financial services professional and put out a SECURE Act podcast.
Hopefully this is a little different spin than you heard elsewhere. And if nothing else, my hope is that this provides plan sponsors with some ideas that they can use to help participants better understand the benefits that are available to them, whether it’s the HSA account, the Roth 401(k) or their employer’s 401(k) verus the state’s retirement plan options.
Of course, there will be more to discuss, so be sure to subscribe to the Plan Talk podcast or check out our thoughts on the Janus Henderson Blog. And if you’d like to continue the discussion, feel free to reach out to me. I’d love to know what you think or how I can be of service.
Until then, I’m Ben Rizzuto and this has been Plan Talk from Janus Henderson Investors.
MEPs vs. State Run Plans: https://www.napa-net.org/news-info/daily-news/too-early-assess-oregonsaves-program-crr-study-finds
EBRI Study: https://www.ebri.org/docs/default-source/fast-facts/ff-342-oregonsaves-5dec19.pdf?sfvrsn=363e3d2f_5
Stretch IRA: Various stats on the usage of Roth 401k’s within plan which is why I used the range of 15-20%. https://www.cnbc.com/2018/11/16/roth-401k-plans-are-an-often-missed-retirement-savings-opportunity.html