Trump signed an executive order on retirement savings. Here’s what you need to know.
At the end of August, Donald Trump traveled to Charlotte, North Carolina, and signed an executive order asking the Labor and Treasury Departments to look into some changes that might affect your clients’ retirement income savings plans. It’s unclear how much the order will do without legislation from the U.S. Congress, but it’s best if you know what the order says and what it aims to do.
The Executive Order on Strengthening Retirement Security in America has two goals:
1.) Raising the cap on the age (70½) for retirees taking required minimum distributions (RMDs) for IRAs and 401(k)s
2.) Lifting rules prohibiting multiple-employer retirement plans, especially for small business owners.
Let’s take a look at each of these scenarios and see what the changes might mean for your clients.
Raising the RMDs age.
This first part of the order directs the appropriate regulatory agencies to reevaluate this rule. Right now, when a retiree reaches 70½, they’re required to take money out of their Roth IRA and their 401(k). The average life expectancy in the U.S. when this cap was set in 2002 was 77 years. Today, that number has risen to 78½—not a large increase. If you don’t take the RMD withdrawal, you could face penalties on top of the taxes you owe.
Raising the age cap, though, would benefit financial firms especially, because clients could choose to keep more money in their accounts for longer. The move has been supported by firms like BlackRock and Prudential. In a July 2018 report, quoted by Forbes, BlackRock said, “We recommend increasing the starting age requirement [possibly to 75] to encourage individuals to continue to save during their early retirement years, given that they are expected to live longer.”
Some retirement income specialists are skeptical raising the RMD age cap would change much, since most people will choose to withdrawal their money when they’re eligible. Most people, in other words, aren’t working and saving past age 70½. Still, the change could affect those who work past 70½, or those who choose to scrimp and save in their early retirement years.
Multiple-employer retirement plans and the small-business savings gap.
According to Forbes, the executive order also gives the Labor Department six months to evaluate restrictions on small-business retirement savings plans. It will direct the Labor Department to look for ways to extend retirement plans to part-time employees as well. According to the administration, 89 percent of private sector establishments with 500+ workers were offered a retirement plan; only 53 percent of workers at private-sector establishments with fewer than 100 workers got the same opportunities. This is a gap that most people in government and business agree needs to be closed.
Down the road, this change might help the federal government band together smaller firms to set up Multiple-Employer Retirement Plans (sometimes called Association Retirement Plans). The reasoning? Many small business owners find it too complicated and expensive to offer retirement plans for their workers. This could help change that by letting small firms work together to offer retirement plans.
According to Forbes: “The [MERPS] idea has broad support by financial services firms and many in the small business community who favored Trump’s proposal.”
What does it mean for your business?
Keep an eye out, because although nothing has happened yet, these actions signal the way the economy and country are moving. Forbes noted that legislation in the U.S. Congress matches up with Trump’s order, and is gaining some steam. Trump called the executive order a “historic action” and noted that “401(k)s have broken every record in the history of the 401(k) world, in terms of percentages up.” Still, nothing has happened, yet. The executive orders simply asks Labor and Treasury to look into implementing rules on MERPs and RMDs. The wheels of government turn slowly, if at all.
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