Several retirement security bills are now under consideration by Congress that would extend the age for required minimum distributions and allow greater catch-up contributions to qualified accounts, among other things, in the latest effort to overhaul the nation’s retirement system.
What the final legislation will look like remains to be seen, but there is strong bipartisan support for legislation that would broaden access to retirement savings plans and help savings last longer. The bills seek to build on the Setting Every Community Up for Retirement Enhancement, or Secure, Act, which was passed and signed into law in 2019 to increase access to retirement plans.
The efforts have support in the financial-services industry, but some industry watchers say that while the current legislation offers some good features it doesn’t go far enough.
“The big problem is that about half of the private-sector workforce is not covered by a retirement plan at work at any given time, and we need to close that gap,” says Alicia Munnell, director for the Center for Retirement Research at Boston College. “Everything else is sort of playing around the edges.”
Here are some of the highlights and differences in the proposals:
Required Minimum Distributions
Little more than a year after the 2019 Secure Act raised the age for required minimum distributions from tax-deferred retirement accounts to 72 from 70½, two of the bills would raise the RMD age further over time, to 75 from 72.
The Securing a Strong Retirement Act of 2021 in the House of Representatives would increase the age for RMDs from 401(k)s, 403(b)s and non-Roth individual retirement accounts to 73 starting in 2022, to 74 in 2029 and to 75 in 2032.
The Retirement Security and Savings Act in the Senate would increase the age to 75 in 2032. It would also create an exemption from lifetime required distributions for those who have $100,000 or less in retirement savings.
With many people now working longer, they may not need to take distributions, so increasing the age for RMDs is a positive step, says Heather Lavallee, CEO of Wealth Solutions for Voya Financial.
But Munnell objects to increasing the age for RMDs to 75. Employees are permitted to save pretax dollars so they can have a decent retirement, she says. Postponing RMDs to 75 would permit wealthy people to build up big cash piles that they don’t need to touch, she says.
Retirement Plan Auto-Enrollment
The House proposal would take a bold step—mandating that new defined-contribution plans, including 401(k)s and 403(b)s, automatically enroll eligible employees. Currently, autoenrollment is optional for employers.
Because the autoenrollment and autoesclatation won’t be retroactive, “it’s not going to help the millions and millions of workers who need to save more but already participate in an employer’s 401(k) or 403(b),” says Jeffrey Levine, chief planning officer at Buckingham Wealth Partners in St. Louis.
Under the bill, eligible employees would be enrolled at the pretax level of between 3% and 10% of pay with increases of 1% annually until their contribution reaches between 10% and 15%. Employees could opt out of enrollment, and there’s an exception for small businesses with 10 or fewer employees, businesses in existence for less than three years, and church and government plans.
In contrast, the Senate proposal doesn’t require companies to automatically enroll participants or to automatically escalate their contributions. Instead, it seeks to encourage companies to do so by exempting them from annual nondiscrimination tests that measure participation levels to ensure employees have equal access to benefit plans. Under the bill, a plan would be exempt if the minimum default level of contributions for new employees is set at 6% for the employee’s first year, up from the current 3%. That would increase to 10% over the subsequent four years.
To qualify for that exemption, employers would also be required to make matching contributions on behalf of all eligible non-highly compensated employees. The bill would provide for a tax credit to certain employers—generally those with 100 or fewer employees—for matching contributions under the exemption for the first five years of participation up to 2% of a eligible employees’ compensation.
Boosting autoenrollment will help drive the right behavior by plan participants, says Lavallee. “It’s so important to be able to set it and forget it and to start that behavior early,” she says.
Catch-Up Contributions
The primary House and Senate bills would raise the amount in catch-up contributions some older workers could make to their 401(k)s, though they would go about it differently.
Currently, employees 50 or older may make catch-up contributions of no more than $6,500 annually to their 401(k), and the amount is indexed annually for inflation.
The House measure would increase that to $10,000 for those ages 62 through 64. The Senate proposal would increase 401(k) limits for catch-up contributions to $10,000 for those over age 60.
Levine says it makes no sense to allow larger catch-up contributions only for those age 62 through 64. Those who are 65 and older may also need to save more, he says.
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