President Donald Trump wants to increase access to retirement plans, reduce costs to offer them and change required withdrawals from them to ensure retirees don’t run out of savings in their later years.
Trump recently issued an executive order to study changes to the plans, and federal agencies should complete the work over the next six months. In a year, the agencies are expected to determine how to improve the understanding of and reduce regulatory burdens related to retirement plan disclosures.
“Regulatory burdens and complexity can be costly and discourage employers, especially small businesses, from offering workplace retirement plans to their employees,” Trump wrote in the order. “Federal agencies should revise or eliminate rules and regulations that impose unnecessary costs and burdens on businesses, especially small businesses, and that hinder formation of workplace retirement plans.”
Increasing access to multiple employer plans (MEPs) can reduce administrative costs to establish and maintain retirement plans and encourage the creation of more retirement plans and increase their availability, especially among small employers, according to Trump’s order. A MEP allows employees of different private-sector employers to participate in a single retirement plan, such as a 401(k).
“The MEP is simply us and the next door neighbors over here and those people across the street, all of us banding together and putting our money so that we can experience economies of scale and have lower fees inside of this plan,” said John Paul, senior partner of research and strategy at Sphere Wealth Management in Fayetteville. “The more assets that are in a plan, typically, the lower the plan costs are, and that has to do with the execution of some of the functions of 401(k) plans: recordkeeping, administration, education, [and] advising. It’s not a big cost difference whether I offer it to one person or 10 people. I’m still putting the same amount of work in, and so if I spread it out over 10 people, they pay less, as opposed to just one person.”
MEPs can remove some conflicts of interest, and companies that use them will operate with a fiduciary responsibility favoring the plan participants or employees over the companies. Trump’s executive order is expected to make it easier for existing plan sponsors to operate MEPs more efficiently; however, MEPs have been allowed under federal law for decades, going back to the Employee Retirement Income Security Act of 1974.
“The tailwind for the MEP is already here,” Paul said, adding that “Trump is late to the party. … Everybody’s going to hear the term MEP over the next two to three years, maybe five years. He’s going to have very little to do with that. He might make it easier for everybody, but this is in no way his idea. This is an established concept.”
Most Americans accumulate a majority of their retirement savings in employer-sponsored plans, such as 401(k) accounts. But more than 40% of full-time employees don’t have access to one, according to the Pew Charitable Trusts. The main reasons employers didn’t offer such plans were the startup costs, lack of administrative resources and low employee interest, according to a Pew survey, which included more than 1,600 small- and medium-sized businesses.
It also asked employers without retirement plans about MEPs, and they either strongly supported or supported the following features: ability for employers and employees to make contributions, offer choices in investing contributions and reduce legal liability compared to operating their own plans. The employers also supported a plan run by the state treasurer’s office and for the state to handle administrative functions, but the support was less strong than the previous features related to MEPs.
Historically, Labor Department officials discouraged unrelated businesses to open MEPs because of the potential for abuse, according to Plan Adviser. But changes in industry compensation and reporting best practices have led to greater transparency to the retirement plan industry.
Joshua Montanez, financial adviser for Northwestern Mutual Wealth Management Company in Fayetteville, expects MEPs to improve access to retirement plans.
“With less pensions and concerns of Social Security payouts, it will be important for people to get themselves to retirement,” Montanez said. “A lot of small companies do not offer 401(k)s to their employees due to the high cost of maintaining the plan. Instead they offer plans like Simple IRAs, which limit an employee’s contribution to $12,500 annually compared to a 401(k)’s $18,500 annually. The Simple IRA also will not allow a Roth option, loan provision, vesting schedules, etc., which can be used as recruiting and retention tools for their business.”
If employers were to split up the cost across an MEP, it could allow companies to save thousands of dollars, said Erik Berry of WealthPath Investment Advisors in Rogers. Also, the ability to join an MEP would allow employers more variety and options for those who don’t know how to start a plan.
“It’s not always just about lower fees,” Paul said. “Sometimes it’s about participant education. Sometimes it’s about participants understanding what it means to participate in a 401(k), understanding what certain contribution amounts would allow them to do, and they would be able to retire based on certain contribution amounts.”
Retirees of a traditional individual retirement account (IRA) or 401(k) are required to start withdrawing from them no later than six months after they turn 70, but Trump wants to determine whether the requirements should be changed as they might decrease the effectiveness of retirement accounts and force retirees to withdraw large amounts from their accounts, possibly leaving them without enough money in their later years.
About 68% of retirees are only taking the required minimum distributions (RMDs), according to an Ameriprise Financial survey of more than 1,000 people with at least $100,000 in assets. RMDs are the amount one is required to withdraw from their retirement account annually and are determined by taking the retirement account value and dividing it by the distribution period value, which is based on an accountholder’s age.
Under existing rules, a 70-year-old with an IRA or 401(k) having a $1 million balance would have an RMD of $36,496. At 80, the RMD would jump to $53,476 for the same balance. Accountholders are required to take out about 3% of the balance at 70, and by the time they reach 80, they are removing as much as 7%, Paul said.
“That’s an unsustainable withdraw rate out of an account,” he said. “The account will eventually deplete to zero. The IRS only wants you to take it out because they want the taxes. They’ve allowed you to defer taxes, and they just want you to pay taxes on it.”
Clay Kendall of WealthPath said people are living longer, and a possible change to existing rules is a great idea to allow them to keep money sheltered in their retirement account.
A majority of retirees Montanez works with only use their Social Security and RMDs to cover their retirement. “Many of [whom] are being forced to pull out more than they need, which has them paying additional taxes on unneeded money,” he said. “It almost feels like getting penalized for being too good of a saver because the more you have built up in tax deductible accounts, the more the IRS will have you withdraw.”
Retirees with a traditional IRA or 401(k) must pay taxes when they withdraw money from their accounts, said Paul,v adding that “somebody with a $1 million IRA, what they really have is about a $750,000 account because they haven’t paid taxes on that money yet.”
Trump ordered the Secretary of the Treasury to study the life expectancy and distribution period tables related to the RMDs and determine whether they should be updated to reflect existing mortality rates and if the updates should take place annually. The tables have not be updated since 2002. Between 2002 and 2016, the average life expectancy in the United States has risen more than a year from 77.3 years to 78.6 years, according to the Centers for Disease Control and Prevention. However, life expectancy in 2016 narrowly declined from 78.7 in 2015.
If RMDs were to change, it would either require rule changes by the Treasury or legislation, Kendall said.