Then-President Jimmy Carter signed a law in 1978 that changed retirement forever by introducing the 401(k), but one expert believes the benefit is “just now reaching full maturity.”
“We’re just now starting to see large numbers of people who may have been covered by a 401(k) over their entire working life,” says Dave Richardson, the head of the TIAA Institute, the research arm of one of the country’s leading providers of retirement plans.
The 401(k) has become ubiquitous with an estimated 59 million U.S. participants in the plans, which allow employers to make contributions on behalf of employees. However, Richardson argues that the 401(k) needs to be reformed if it’s going to be more than just an “accumulation vehicle” and turned into a true “retirement plan.” Specifically, he’s hoping for reforms that will make it easier for retirees to receive a fixed sum of money every year; he also wants to change rules around required distributions.
Lessons from ‘the not-for-profit space’
The laws around 401(k) plans have been updated and clarified many times since 1978, but Washington is still working to update the four-decade-old regulations. In late 2019, Congress passed the SECURE Act, the first major retirement legislation in years that included 401(k) provisions to help part-time workers save and improved access to annuities among other changes.
More recently, lawmakers have pushed two major retirement efforts: one informally called SECURE 2.0 and another batch of provisions included in early versions of the Build Back Better bill. While these efforts have come up short in Congress, lawmakers on both sides of the aisle are expected to keep pushing in 2022 for more reforms in how Americans save.
Congress should look toward “the not-for-profit space” for ideas for further reforms, specifically to annuities, a product that “has been around for over 100 years,” Richardson said.
Annuities like Social Security pay a fixed sum of money every year, typically for the rest of one’s life. The current laws still discourage employers from adding annuity features to the 401(k), Davidson said. However, he noted: “Fortunately, SECURE 1.0 did a good job of moving the ball in the right direction.”
He says SECURE 2.0, if it eventually passes, would go even further in allowing employers to “annuitize” a 401(k) plan instead of leaving retirees to manage a set final balance.
Experts have encouraged having older Americans convert a portion of their retirement savings into an annuity to provide more certainty in retirement. Some also note that guaranteed income through an annuity allows retirees more freedom to play the market with the rest of their savings.
Changing required minimum distributions
Richardson is also pushing for change from Washington in the world of required minimum distributions. The SECURE Act pushed up the age for mandatory retirement plan distributions from 70 to 72, which is when you are required to withdraw a certain amount of money from your retirement accounts each year and pay taxes on it. Richardson notes that many people work into their 70s, though.
“The first distribution they have to take is actually that required minimum distribution and unfortunately, it’s becoming somewhat of a de facto, default distribution option,” he said. “It really becomes their retirement income strategy [and] we don’t think that’s a really good idea.”
Lawmakers, like Rep. Kevin Brady of Texas, have voiced support for further changing or even abolishing required minimum distributions.
The proposed SECURE 2.0 bill would push the first required distribution up to age 75 and exempt those with more modest accounts of less than $100,000 from required distributions altogether.
Richardson says some further reforms are needed “to make sure that people have a full menu of these annuity distribution options so they can make informed choices in retirement.”