As a reader of this blog, you know that we hold to the position that the Bible teaches that it’s good to wisely save and invest for the future, including a time in “retirement” (Prov. 6-11, Prov. 21:20), and also to be “rich toward God” by “storing up treasures in heaven” (Luke 12:21; Matt. 6:19–21).
Tax-deferred retirement savings accounts, such as 401(k)s and IRAs, which are available to many due to God’s common grace expressed through the government and employers (James 1:16-17), are an excellent way to plan for retirement.
In most cases, these accounts offer automatic contributions, employer matching, tax-deferral, multiple investment options, and compounding of interest. All of these help workers to save and grow their savings throughout their lifetime so that they can be reasonably well prepared for retirement when the time comes.
For the most part, the federal laws and regulations governing these plans have been relatively static, at least for the last decade or so.
I know it’s a shocker, but amidst all the political tumult in Washington D.C. these days, there is some legislation related to retirement accounts that has been quietly moving through the Congress.
In fact, as I write this, the Wall Street Journal is reporting that the House has passed their bill and it is headed to the Senate. (By the time you read this article, it may be on its way to the President.)
A recent article in Forbes highlighted the various bills that are under consideration, including a couple that cover individual retirement plans, that may soon be combined and sent to the President.
It’s the first significant retirement legislation since 2006 and is being touted as a “major bipartisan accomplishment,” which is indeed something in these contentious times.
There are lots of new provisions in the bills, but 5 key things that will probably be included that might impact on your retirement stewardship, depending on your stage of life, employment situation, and plans, are as follows:
Small Business employees might get access to a 401(k)
Only about 53% of small business employees currently have access to employer-sponsored retirement plans. Consequently, many have to rely exclusively on Individual Retirement Accounts (IRAs).
A 2018 executive order signed by the President instructed the Department of Labor to make it possible for small businesses to associate together to form “multiple-employer plans” (MEPs). The current legislation would go further and allow companies in different industries to associate—what is being called “open” MEPs.
This seems like a no-brainer to me as providing better, cost-efficient access to retirement plans for an under-served group (small business employees) will encourage them to save for retirement. It will also help the small business owners by making it easier to set-up and administer these plans to their employees.
But, to really make an impact, these businesses will need to “step up” and also offer generous employer matching contributions as larger companies do. This will further incentivize saving and accelerate the growth of the accounts. However, some small businesses, especially those just starting out, may not be able to do that. But over time, as earnings increase, this is a great way for them to share the profits with their employees in a way that will pay off big in the future.
The government is offering incentives, mainly in the form of tax credits, to help them with that.
Small business employees can continue to contribute to an IRA, but if their employer offers a 401(k) or 403(b), they should definitely take advantage of it. And if possible, they should contribute at least enough to get the full employer match.
Long-time part-time workers may get increased access to retirement savings plans
Most part-time workers receive very few employee benefits if any. But under the new law, long-serving part-time workers, defined as those who work over 500 hours for two consecutive years, would have access to their companies’ plans.
Again, I think this is a great idea. The challenge, of course, is that part-time workers earn less income and therefore may not be able to take full advantage of what their employers offer. Even so, saving something is better than saving nothing, and even a little can become a sizeable amount over a lifetime.
Employers may, understandably, be reluctant to provide matching contributions to part-time workers as that is one of the main ways companies retain high performing, full-time employees. But employers should consider doing it anyway; its a great way to motivate part-timers and possibly turn them into full-timers down the road.
Plus, being generous with employees when it comes to these kinds of benefits, regardless of their status, can also pay big dividends in loyalty, moral, and performance.
Employees may be able to save for retirement while also paying off their student loans
It’s no secret that student loan debt is doing a number on the financial lives of many college graduates. Many aren’t able to save or make major purchases such as a house or car.
So, another part of the bills in both parts of Congress is the idea of allowing employers to make matching contributions to an employee’s retirement account in the amount equal to their student loan payment. For example, if you are making a $300 a month loan payment (presumably in lieu saving it in your 401k), your employer will be permitted (not required) to make a matching contribution (up to 100%) to your retirement account.
I really like this idea because it jump-starts early saving, which is so critical to future success, while also encouraging employees to work at paying off their student debt. Once the debts are paid, that money can be redirected to increased saving.
This emphasis on saving earlier shows up in another measure that would reduce the minimum age for owning an IRA to 16. It would allow them to open an account and hold the money in their own names.
A challenge with that would be resisting the temptation to tap into such accounts too soon, which would come with significant penalties. But young people with the patience and discipline to leave it alone (so that tax deferral and compound interest can work their “magic”) will reap huge rewards decades later.
Workers may be able to contribute for longer (as they live longer)
Currently, the maximum age for making contributions to traditional IRAs is 70 ½, which, not coincidently, happens to be the age when traditional retirement account holders have to start taking Required Minimum Distributions (RMDs). There are currently no age limits on contributions to 401(k)/403(b) or Roth IRA plans.
As people continue to live longer, many are choosing to remain in the workforce longer, either because they have to or because they want to. Therefore, they may want (or need) to continue to contribute to their retirement accounts past age 70 ½ when they would normally be required to start taking RMDs. The House bill would increase the age limit to 72, and the Senate bill would take up it to age 75 by 2030.
Because of savings shortfalls, many people will get into their 60s without having enough, even with Social Security, to be able to “retire with dignity.” Working longer, delaying Social Security, and continuing to contribute to a retirement account, are by far the best ways to improve the likelihood that they can fund a long retirement.
Other provisions would help “late-savers” do more to catch up by increasing their contributions as they get closer to retirement. This goes hand-in-hand with working and saving longer.
It may be easier to enroll in retirement plans
Finally, some things in the legislation would make it easier to enroll.
Many studies have shown that among employees who have access to defined contribution plans, 28% are not participating.
The legislation would remove some of the restrictions on automatic enrollment. Additionally, several state-level initiatives are promoting automatic IRA enrollment for employees who lack access to an employer-sponsored plan.
I am generally in favor of anything that makes it easier to save for retirement. Although “automatic enrollment” gives me some pause (as I think there are times when people should not contribute to retirement savings plans and use the money for other purposes, such as paying off debt), given the generally sad state of retirement readiness in this country, it may not be a bad idea.
Plus, I assume you could be enrolled and then choose to contribute very little or even nothing. But that would seem to defeat the whole purpose of automatic enrollment in the first place.
What isn’t being addressed
As you may have heard, a recent report from the Social Security Trust Fund said that the program’s reserves could be depleted in 16 years. This is because benefit payments now exceed income from FICA and SECA taxes, and the gap is getting larger each year as more and more “boomers” retire.
There is some legislative activity in this area, but prospects for a comprehensive solution in the near term seem slim. One current bill increases benefits and deals with the funding deficit by raising taxes. It will probably go through some significant changes before gaining bi-partisan approval.
No doubt there will be legislative activity in this area in the coming years. Even though Social Security has long been a “sacred cow” for both political parties, everyone agrees that changes will need to be made if it is going to remain solvent and pay benefits to future generations, especially to the neediest among us.
That being said, young people would be wise to plan as though it won’t exist (although it probably will, albeit in an altered form). If it does, then all the better!
Be encouraged and watchful
I think the most encouraging thing here is that the Congress, 1) recognizes the seriousness of the retirement saving challenges that Americans face, and, 2) is trying to work together to find a solution (at least I think they may be; I certainly hope so).
Although some of the provisions of any bills that eventually become law may not sit well with everyone, I think we could all agree that almost anything that makes retirement plans more available and accessible to the average person is a good thing—for them and their families, their employers, and the country as a whole.
We all need to keep an eye on this as many, many of us may benefit.