Retirement wealth gap: Here’s who benefits from the proposed round of retirement rule changes

How you can save a million bucks for retirementUSA TODAY’s retirement columnist Rodney Brooks talks to Jeanne Thompson, a vice president at Fidelity Investments about what it takes to save a million dollars for retirement.(MONEY, USA TODAY)Another seemingly well-intentioned bill is making its way through Congress designed to help all Americans prepare better for retirement. It comes less than two years after a previous legislative package, the Secure Act, was passed with the same aim.The new Securing a Strong Retirement Act of 2021 has bipartisan support and appears to stand a good chance of enactment in some form, having passed through the House Ways and Means Committee on May 5.But will it really help all Americans, especially those on the wrong end of the widening retirement wealth gap?The many federal retirement incentives adopted in recent decades clearly have made a difference, with Americans now collectively holding more than $32 trillion in Individual Retirement Accounts, workplace 401(k)-style accounts and more.But the totals are highly skewed, with some people overseeing multimillion-dollar retirement balances and others with nothing.Don’t believe everything you hear: 3 Social Security myths that could ruin your retirementMillionaire?: How to Retire With $1 Million on a $50,000 SalaryMore: Take your retirement planning and savings to the next level with these IRA tipsMore than one-third of Americans, 36%, have neither IRAs nor workplace 401(k)-style accounts, and a large chunk of those with accounts don’t have much money in them, reports the Investment Company Institute. Confusion about rules, income ineligibility, a lack of access and insufficient income all play a role.Here’s a look at some of the key provisions of the Securing a Strong Retirement Act, sponsored by Rep. Richard Neal, D-Mass., and others, with a special focus on whether these rule changes would help those Americans with little or no current retirement savings.Raising the RMD ageOne provision of the act would let people build up their IRA and 401(k)-style accounts for a little longer before they’re required to withdraw money. The Secure Act passed in 2019 raised the age when RMDs or required minimum distributions kick in, from 70½ to 72.The Securing a Strong Retirement Act would boost that to 73 next year and, eventually, to 75 by 2032. Delaying the deadline for taking withdrawals, and paying taxes, would help ensure that investors don’t run out of money prematurely in their older years.But it doesn’t provide much assistance, at least anytime soon, for people with minimal or no retirement assets. Nor is it of much help to those who actually need to make withdrawals to meet spending needs — which is the basic idea of having retirement accounts in the first place. The rule would mainly help well-off investors.Increasing catch-up contributionsThe idea here is to allow people nearing retirement to sock away more money than younger investors can. Currently, for example, working individuals ages 50 and up may contribute an extra $6,500 beyond the $19,500 annual limit that normally applies for 401(k) plans. For people ages 62, 63 and 64, the proposed legislation would boost the additional catch-up maximum to $10,000 and index it to inflation. Other maximums would apply to certain other accounts.This provision would help affluent people but not those who don’t max out on their retirement opportunities to begin with. In other words, retirement have-not investors wouldn’t likely benefit much, if at all. As it is, catch-up contributions aren’t that common.For example, just 5% of households with at least one member 50 or older contributed any money to a traditional or Roth IRA, according to an Investment Company Institute study that assessed investing patterns as of mid-2020. Another 4% made regular contributions and took advantage of catch-up provisions. IRA balances have grown, but most new funding is coming as rollovers from workplace retirement plans.Further endorsing auto enrollmentMany Americans won’t invest in 401(k) and similar workplace plans unless they’re forced to do so. That’s the idea behind enrolling people automatically and frequently raising their contribution levels over time. Once enrolled, workers have the ability to opt out but most don’t. The auto-enroll and auto-invest concepts rely on investor inertia, first getting them into a retirement program and then having them invest more over time.The proposed legislation would generally mandate auto enrollment in newly created workplace plans, while keeping it voluntary for existing plans. It also would boost employee contributions, starting them at 3% of pay and boosting that by 1% annually to a maximum of 10% (again, with an opt-out feature).Your 401(k) is not perfect: You’ll owe taxes on most distributions, among other drawbacks, but it’s worth itThis provision and a proposed $1,000 credit per employee to encourage small businesses to set up retirement plans would help those people lacking assets.“Mandating of auto enrollment is, in our view, the most significant (provision) since it will likely have the greatest impact on getting employees into plans and enhancing their retirement benefit over time,” said law firm Faegre Drinker in a commentary.Enhancing the saver’s creditThe legislation also would, finally, boost the retirement saver’s tax credit, a somewhat obscure source of matching funds provided by the federal government that’s available to lower-income workers. The maximum credit for years has been set at 50% of contributions of up to $2,000, making for a $1,000 net benefit (some people eligible at higher income levels receive lower credit amounts of 10% or 20%).The new proposal would set a single 50% tax credit and raise the maximum dollar benefit to $1,500. It also would increase the income-eligibility threshold, meaning more people could take advantage.The saver’s credit provides retirement matching funds, in the form of a tax credit, to low-income workers. Sometimes the hardest part of getting started with an investment program is taking the first step. This credit can help people in the have-not group do so.Bringing student loans into the pictureAnother provision in the legislation would allow workers to receive employer retirement matching funds while paying down student-loan debts. This proposal aims to “assist employees who may not be able to save for retirement because they are overwhelmed with student debt and missing out on available matching contributions,” according to ThinkAdvisor, a news source for financial professionals.This proposal would benefit many retirement have-not investors.In addition to the provisions addressed above, there are many other potentially helpful changes in the legislation. For example, employers could be able to offer modest financial incentives such as gift cards to drum up enthusiasm among workers for their retirement programs. Such incentives currently aren’t allowed.So on balance, many of the rule changes in the Securing a Strong Retirement Act would help people with little or no current retirement assets. But other proposals would mainly benefit investors who already have secured a strong retirement account.Reach the reporter at russ.wiles@arizonarepublic.com.


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