SECURE Acts fail troubled 401(k) plans
The 2019 SECURE Act and its follow-up, SECURE 2.0, were the largest changes to the U.S. retirement system since the late 1990s. We have a retirement crisis in this country. One study thinks 80% of households with older adults will struggle with financial security. In another study of OECD countries, we rank 17th and earn a C+ on retirement systems.
I reviewed both bills and compiled 57 notable retirement changes in the bills, all ranging from small to moderate in scope. What I see is that Congress continues to tweak a poorly designed system to support five primary social goals:
Encourage savings for retirement: Tax savings is the primary incentive, but many rules have made it easier or mandatory to sign employees up for their 401(k).
No legal tax-shelter for the wealthy: There are income phase-outs for the rich, and “required minimum distribution” rules that force paying taxes in retirement.
Keep retirement account employer managed: They like to add varieties of simpler 401(k)s for small businesses, because the regular one is complex and expensive.
Treasury gets the taxes sooner: Congress loves Roth-style accounts where the individual avoids paying taxes in the future by paying them now, which is the opposite of the traditional 401(k).
·Allow hardship withdrawals: There are now over 25 reasons one can withdraw money from a 401(k), when it’s really needed. These are usually small amounts.
Nothing addresses the inherent flaws in the system that go back to the 1970s when our modern retirement system transitioned dramatically. Social Security and troubled employer managed pensions needed bailouts and reform and seemed unprepared to support America’s retirement.
With the IRA In 1974, Congress began a multidecade process to add small individual saving accounts that could supplement pensions and Social Security. The idea was to offer the incentive of individual tax savings in return for locking up the money until retirement.
In 1978, the 401(k) was created, not as a retirement account, but as an executive benefit tax shelter. It was later adopted as a retirement account after refined by 18 major acts of Congress. 401(k)s (and similar accounts) now have a combined worth around 20 trillion dollars. That’s double the current total of US pension plans and 40% of the current value of the entire US stock market .
Income disparity is the primary retirement crisis issue. 13% of Americans 60 years old have zero retirement savings and rely only on Social Security, which is not enough. 401(k) retirement savings are unsurprisingly skewed toward the privileged. This is given lip service in the SECURE 1.0 and 2.0 with the low-income saver credit and some new auto-enrollment rules.
Wealth inequality aside, the second issue is that the 401(k) can only be offered by an employer. Like health insurance before the Affordable Care Act, only about 60% of Americans (without an employer pension) have access to a 401(k) or equivalent.
401(k)s are too expensive for small employers. They require unnecessarily complex non-discrimination testing that penalizes highly paid employees if lower paid ones don’t save enough. The rules are very executive friendly because, some discrimination is allowed, just not “too much”. Wall Street loves complexity! The fees are high and they pass them on to employees as I wrote here.
Rather than fixing 401(k) itself, Congress has been steadily adding 401(k)-like alternatives that are supposedly simpler and cheaper to manage. Some like the SEP IRA are simple and good. But the universe of retirement accounts has become far too complex. There are at least a dozen different plans. What small business owner has time to navigate that? Big human resources departments don’t even get it right most of the time. (I consult on nonprofit 401(k) plans, contact me.)
Third, 401(k) plans have fiduciary requirements from (oddly) the Department of Labor. Fiduciary is good right? Sadly, no. The fiduciaries are usually your human resources department, or a committee of the board, not the 401(k) custodian! Since most HR departments don’t know much about investing, they allow the plan provider (TIAA, Fidelity, etc.) to suggest investments, which end up being expensive. I had to fight Fidelity at my last nonprofit organization to eliminate lousy options.
On balance I like the changes in the SECURE Acts, but compared to the big problem, these are minor tweaks, not the transformative reform 401(k)s need and deserve.
