The House of Representatives passed the Secure Act, a bill backed by both Republicans and Democrats that aims to improve the nation’s retirement system.
If it passes the Senate, it will be sent to President Trump’s desk. “The Trump administration hasn’t taken a formal position on the bill, but lobbyists who support it say they expect the president to sign it into law,” the Wall Street Journal reports.
The changes would be the most significant to retirement plans since 2006, when the Pension Protection Act made it easier for companies to automatically enroll their employees in 401(k) plans.
Here are some of the provisions included in the Secure Act:
Repeal the maximum age for traditional IRA contributions, which is currently 70½
Increase the required minimum distribution age for retirement accounts to 72 (up from 70½)
Allow long-term part-time workers to participate in 401(k) plans
Allow more annuities to be offered in 401(k) plans
Parents can withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses
Parents can withdraw up to $10,000 from 529 plans to repay student loans
What the bill is addressing
Many Americans are not prepared for their golden years: Just 36% of non-retired adults think that their retirement saving is on track, the Federal Reserve found in its annual study on household well-being. And 25% of Americans have no retirement savings or pension.
Part of the problem is that many workers don’t have access to 401(k) plans, says Parks: “The reality is that almost half of all working Americans don’t have the ability to save for their retirement at their job. That’s primarily because small businesses are hesitant or intimidated by offering either a 401(k) or some sort of payroll-deduct IRA program. ”
A goal of the Secure Act is “to incentivize businesses to put [plans] in place,” Parks explains.
One of the ways it’s doing that is by making it easier for small businesses to band together to offer 401(k) plans.
“Companies that have no commonality could all join the same plan,” Amy Oullette, director of retirement services at Betterment, tells CNBC Make It. This could potentially give small businesses access to lower cost plans with better investment options and lower administrative fees.
What the bill could mean for you
By making it easier and cheaper for small businesses to offer 401(k) plans, if the bill becomes law, “millions more people, hypothetically, should have access to the ability to save at work,” says Parks.
The bill would also allow more part-time workers to participate in 401(k) plans. Currently, employers generally can exclude people who work less than 1,000 hours per year from its defined contribution plan. But with the new bill, “any employee who has worked for you for at least three years and at least 500 hours a year is now able to participate in your retirement plan,” says Parks.
This is key, says Parks, because investing in a 401(k) is “the most effective way to get people to save for retirement.”
It’s a particularly effective savings vehicle for a few reasons:
It offers significant tax advantages. Contributions are made pre-tax so, the more you put in, the more you reduce your taxable income.
The money is automatically taken from your paycheck before you have the chance to spend it. That makes it a painless way to save for the future. The idea is that, over time, your money will grow and compound until you can start withdrawing it at age 59½. If you withdraw before then, you usually have to pay a penalty.
Often, companies offer a 401(k) match, which is essentially free money. Employers will match whatever contribution you put towards your 401(k) up to a certain amount. For example, if you choose to put four percent of your salary into your account, your employer will put that same amount in as well, in effect doubling your contribution.
The Senate still has to pass the bill and then the president would have to sign it into law. Still, when it comes to changes in the retirement system, “this is truly the biggest thing we’ve seen in many years,” says Oullette.