For decades, people have been falling behind with retirement savings. According to the U.S. Bureau of Labor Statistics in 2018, only 55% of the adult population was participating in a workplace retirement plan. A recent study from Vanguard published in 2019 show that the average person 65 years old or older has just $58,035 in retirement savings. More and more people are relying on social security income in retirement and the government has recognized that we must do something about it.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was signed into law on December 20th by President Donald Trump.

Like any Act passed into law, there are pros and cons.

You and Your Family
The SECURE Act will push back the date when retirees must take “required minimum distributions” from age 70 ½ to age 72 (for those who are not 70 ½ by the end of 2019.) This may be very helpful for people who are well funded in retirement and might need to take out the full required distribution in their early 70’s – but for many law enforcement officers who have large pensions and allow their investments to grow, there’s a catch- how it will affect your heirs.

The Act is removing the ability to do what is called a “stretch IRA”. A stretch IRA allowed non-spouse beneficiaries to stretch the disbursements of the inherited retirement accounts over their lifetime, allowing for many years of additional tax-deferred growth. Now, non-spouse beneficiaries will have to distribute the entire account within 10 years of death of the original account holder. According to the Congressional Research Service, this provision of the Act has the potential to raise roughly $15.7 billion in additional tax revenue over the next decade.

Although we cannot avoid these taxes, there are some financial planning techniques that help lessen the blow to your beneficiaries.

Annuities?
The SECURE Act encourages plan sponsors to include annuities as an option in workplace plans by removing the fear of legal liability if the annuity provider fails to provide and not requiring the plan to choose the lowest-cost plan.

This is a big one. For years, primarily in the 403(b) and 457(b) space (non for profit and government retirement plans), insurance agents have placed annuities inside of the retirement plan. Let me translate- people who save into the plan must pay all sorts of fees for annuity guarantees regardless of whether or not that person wants an annuity.

Annuities can serve a purpose in a financial plan. They do, however, come at a cost.

Most employer retirement plans have fees that are taken out of your account for the administration of the plan and/or they will have fees embedded in the funds that you invest in. This is normal. But if your retirement plan through work is a variable annuity contract, not only do you have to pay the administrative fees for the plan and the fund fees, you also need to pay an additional fee called a “Mortality and Expense Fee” (there could be even more fees in addition to this one).

For most annuities, this fee guarantees that if you pass away, your beneficiaries will receive the higher of either a) the account value (what the account is worth) or b) how much you have put into the policy minus any withdrawals.

In other words, if you save $60,000 into an annuity policy with this type of guarantee, and it grows to $80,000 and you pass away, your beneficiaries would receive $80,000. If you save $60,000 into an annuity policy with this type of guarantee and because of poor market conditions, the account is only worth $40,000 and you pass away, your beneficiaries would receive $60,000.

This can be helpful for someone whose family needs this type of protection. But do you need this protection and is it worth the cost? Everyone’s answer to this question is different.

According to the SEC’s “Variable Annuities: What You Should Know”, the Mortality and Expense risk charge of an annuity is typically in the range of 1.25%. Some people feel strongly about having guarantees and understand the fees that come along with those guarantees. But let me put it into perspective for you.

Let’s say you start your career at age 25 and save $100 per month into a 403(b) or a 457(b) until you are 65 years old and you retire. If your investments average an 8% return, net of fees, over that time period, you will accumulate $349,100.

If, however, you are in an annuity product that charges an additional 1.25% for various guarantees, and now your investments earn a 6.75% return net of fees, you would only accumulate $244,757.

These extra annuity fees can really add up, especially if you don’t really need an annuity to begin with. In this example, the annuity costs $104,342 over the course of a 40-year career. That’s a lot money for guarantees if you don’t need them! But somehow the government is giving more leeway to these annuity products inside of retirement plans. It’s crazy!

Other Areas
• The SECURE Act will make it easier for small businesses to setup 401(k) retirement plans and even provide tax credits for doing so.

• • We think that more people having access to retirement account will result in more people saving for retirement. However, not only do people need to save for retirement, they need to be able to save ENOUGH to successfully retire.
  • The maximum someone under the age of 50 could contribute to a 401(k) or a 457(b) account in 2019 was $19,000 for the year. The maximum amount that person can contribute to the same account in 2020 only increased to $19,500. This is a very small increase given how underfunded American retirements are. (Another issue is the fact that most Americans cannot afford to save the maximum amount anyways, but that’s a conversation for another article.)
• One of the provisions of the act is that it will allow students to withdrawal up to $10,000 per year from 529 accounts to pay down qualified student loan.
• Thinking about adoption? The SECURE Act will also permit penalty-free withdrawals up to $5,000 from a 401(k) account to help with adoption costs.

Conclusion
So, is the SECURE Act a good or a bad thing? It depends. Overall, the act does allow more people access to retirement plans through their employer but makes it easier for high cost annuity products to enter the picture. The Act allows people to use their retirement accounts and 529 accounts in additional ways, but also affects how much money your family gets to keep after you pass. Of course, everyone’s personal situation is quite different, and the SECURE Act will affect people in many different ways. Your best course of action is to sit down with a CERTIFIED FINANCIAL PLANNER™ who specializes in working with Law Enforcement Officers to evaluate what to do in light of the “SECURE” Act.

Gregg Brant, CFP®, APMA®, MBA

Family Wealth Advisor | Contributor

Gregg is a financial planner who is passionate about helping first responders and their families navigate their financial lives with confidence. Having a spouse who is a professor in the State University System, Gregg has worked with the Florida Retirement System first-hand for his own personal financial planning.

Now Gregg is on a mission to take this knowledge and disseminate it to the people who deserve it most; our first responders.