There have been a lot of posts about this act lately. But you likely don't know that, because this bill has not been named, and those posts have been about just a tiny corner of this act. The part that makes it easier for retirees to convert their 401(k) into a stream of lifetime payments (i.e. make it act like a traditional pension).
I'll discuss that in a later (and longer) post in this thread. What I want to do here is introduce you to that bill, because there are a couple of provisions that I think people will find much more relevant. They pertain to IRAs:
1. Eliminate the "stretch" provision of inherited IRAs (unless an IRA is inherited by a spouse who can convert it to his or her own IRA).
Currently, if the terms of the IRA permit it, a nonspouse inheriting an IRA (including a Roth) may opt to take RMDs over a lifetime, rather than take it all out within five years. This bill would do away with that option.
2. Allow traditional IRA contributions after age 70.5.
Currently, if you or your spouse has compensation, you can contribute to a Roth IRA at any age, but you are not allowed to contribute to a traditional IRA after age 70.5. This bill would remove that restriction.
Here's a clear summary I found of the changes the bill would make:
http://www.groom.com/media/publication/1755_Senate Finance Committee Approves Bipartisan Pension Bills.pdfSeveral of the changes are technical details.
For example, if you've got a loan outstanding on a 401(k) and terminate employment, the loan becomes due. If you're rolling over the 401(k) to another plan or to an IRA, you've got
the usual 60 day period to come up with the loan amount. If you don't, then the loan amount is treated as a distribution. This bill would extend the deadline from 60 days to the time your tax return is due, including extensions (like the deadline for recharacterizations).
Technical changes like these are just that, technical details, not broad changes like the IRA rule changes above.
Comments
Defined contribution plans may offer participants the option to annuitize their DC upon retirement. Obviously retirees can also do this on their own - take a lump sum and roll it over into an IRA which can purchase an annuity (or purchase the annuity directly with the lump sum).
But employers can facilitate annuitization by selecting an annuity and offering it as a distribution option. A Deloitte study for the DOL showed that on average, between 1994 and 2008 about 6.1% of participants took advantage of such an offering.
Obviously (at least I think it is obvious) that because we're talking about ERISA plans, the employers have a fiduciary duty to select a plan in the employees' best interests. In 2008, the DOL created a safe harbor rule for these annuities.
What that means is that if the rule is followed in selecting an annuity offering, then as a matter of law (i.e. by definition) the employer has met its fiduciary responsibility. An employer is not required to follow the safe harbor rule (it can meet its fiduciary duty in other ways), but it has that simple option.
Here's a description of the five steps required in that 2008 DOL safe harbor rule. I think you'll find it's all common sense. (I'm paraphrasing from the page cited below):
https://www.standard.com/finpros/newsletter/mainspring_partner/previous/2009-1/story3.html
1. Thoroughly research the annuity market.
2. Gather sufficient information on the ability of the insurance companies to make their promised annuity payments.
3. Analyze the costs vs. the benefits of the candidate annuities.
4. Select the annuity taking into consideration #2 (financial soundness) and #3 (cost/benefit)
5. Engage experts as needed.
Remember, this was a DOL rule promulgated under ERISA, not new legislation. Apparently $34M in contributions from the financial industry to Senate finance committee PACs and members wasn't enough to get legislation passed to change these steps when the DOL made this rule.
In 2016, what RESA (if passed into law) would do is make it easier to pass the "financial soundness" part of this procedure. Employers would still have to select a cost-effective annuity, but they wouldn't have to be (and wouldn't have to consult) experts on insurance company finances.
They would be allowed to rely instead on both the following two sources combined to pass this part of the procedure:
1. Affirmations by the insurance companies themselves - okay, stop laughing, and
2. The insurance company meeting state insurance requirements
I'm willing to put faith in the latter.; I expect a certain level of responsibility from state regulators. Not much, but if a state regulatory department can't even determine fiscal soundness, then that state's got a lot more serious insurance problems than risky employer annuities. The state's whole insurance industry becomes suspect.
Is this a great change? IMHO not really, but more of a non-event. Employers are offering annuities now, and offered annuities before the 2008 DOL safe harbor. And retirees can always purchase annuities on their own with their lump sum distributions (which 94% of them take).
Don't confuse this with the new DOL fiduciary rule. This has got little to do with that. Employers already had a fiduciary duty under ERISA. The 2008 safe harbor rule clarified what that meant (reduced litigation potential) by providing a safe harbor procedure to follow. RESA simplifies that procedure. The new DOL rule is substantially unaffected by this bill.
My opinion...I have worked for several Corporations in my career and found with certainty that there is a wide difference in quality of benefit offerings in general between the very largest global corporations and everybody else. In discussions with many of my co-workers I am also 100% convinced most employees do not fully understand (and therefore do not maximize) their benefit package options. Hence, since 401k plans at present do not offer any income stream options (pre election), I will disagree with you that this in fact will be a great change. IMO, some employers will do their homework and provide a solid annuity choice option for 401k's (previously unavailable) which will make employees more comfortable choosing this option. The average working class employee is not knowledgeable enough to shop for their own annuity once in a lump sum post election. It is also important to recognize that the pension (lump sum or annuity choice) and 401k are two separate accounts therefore two choices to make providing flexibility and increases the chance one of those might be annuitized (utilizing the law change). Many employees are forced to choose lump sums (from pensions) because they are unexpectedly retired by employers and have to reduce debt in retirement.
I think you misunderstand the change. For decades under ERISA, employers have been able to offer an annuitization option. This was not previously unavailable, just the opposite.
However, under ERISA, the employer had and still has a fiduciary duty in selecting a annuity. The employer must make sure that the offering is a good match for employees' needs, that it is a good value, and that the insurer will be around to make good on the promised payments, i.e. is financially sound.
In 2008, the DOL made it easier for employers to satisfy their fiduciary duty by laying out steps to follow. The 2008 rule did not relieve employers of their duty, it told them how they could satisfy that duty. Some of the steps described in fuzzy terms how employers should go about making sure that the insurer who was selling the annuity was financially sound.
The current bill gets rid of the fuzziness by saying that the employer can rely on state regulators. So long as the insurer has met certain state requirements, it's considered a sound company.
One can argue that this represents a potential weakening of protection for the employees. That's because employers are somewhat able to shift this aspect of their fiduciary duty away from themselves and onto the state.
On the other hand, one can argue as you seem to that more employers will offer annuitization as an option because it will be easier for them to do so. (Just easier - it was already allowed.)
I'm skeptical about both. I already explained why I don't see a great increase in risk to employees (while conceding that this change hardly improves safety). Nor do I see lots of new employers offering annuitization as a result of this bill. That's because this bill touches upon only one aspect of the safe harbor steps (insurer soundness) while leaving a lot of fiduciary responsibility squarely in the laps of the employers.
So I stand by my statement - not a great change, but substantially a non-event.
The RESA change affects how the financial soundness of an insurer is determined but says nothing about how to evaluate an annuity's cost/benefit. Consequently, RESA does not appear to weaken the new DOL rule with respect to annuities.
Perhaps so for some of the changes. But RESA's proposed elimination of the (non-spousal) stretch IRA (non-spouse) removes the possibility of annuitization, since it forces the IRA to be completely distributed within five years.
The RESA change under discussion deals with DC plans. Those people you say would have gladly bifurcated their benefits could have done so on their own with DC plans (or with DB plans that offered a lump sum payout). I remarked on that in my first paragraph about the safe harbor change.
All these changes are merely playing around the edges in making things a little easier, a littler harder, a little different. If you want a major change, address the annuity puzzle. These changes don't do that in any substantial way.
Thanks for the links on this subject.
One RESA provision goes as follows:
"RESA would provide that the new 5-year distribution requirement only applies to the extent that the amount of an individual’s aggregate account balances under all IRAs and defined contributions plans, determined as of the date of death, exceeds $450,000 (indexed for inflation)."
If I'm understanding this correctly, non-spousal beneficiaries would only be responsible to follow the 5 year distribution rule for the amount in excess of the aggregate account balance above $450K?
So is the "inherited stretch IRA provision" continuing for amounts under $450K?
http://www.finance.senate.gov/imo/media/doc/Mod Mark JCX-87-16 SFC Pensions Modification.pdf
It's a pretty easy read (just a couple of pages), so you might want to take a look instead of relying on my transcription. The first paragraph gives a clear example: I also noticed that the proposed effective date of the law is Jan 1, 2017. It is not retroactive, so existing stretch IRAs aren't affected. Just IRAs that are inherited from people who die after this year (2016).