In an effort to encourage Americans to save more for retirement, Congress passed the Setting Every Community Up for Retirement Enhancement, or Secure, Act on December 19. The legislation contains the most significant changes to retirement savings system in more than a decade and hopes to address the 41% of Americans who are at risk of outliving their savings. According to the nonprofit Employee Benefit Research Institute, Americans between the ages of 35 and 64 face $3.83 trillion in shortfalls.

A prominent feature of the legislation makes it easier for employers to offer annuities within 401(k)-type retirement plans with the goal of providing more guaranteed income options. Critics, however, fear that consumers will be tempted into high cost, low quality annuities. Annuities can cost as much as ten times more than typical 401(k) investments in fees and management, leaving 401(k) managers, in turn, concerned about lawsuits charging breach of fiduciary responsibility if those fees are not adequately justified. While the new legislation does protect employers from being sued if they select an insurer that later fails to pay claims if they follow specified procedures, large employers are expected to be cautious.

Currently, annuities are included in less than 10% of 401(k)s.

Other changes in the legislation include:

  • A change to the rules regulating inherited tax-advantaged retirement accounts, known as Stretch IRAs. The new rules require the beneficiary to liquidate the accounts and pay any taxes due within 10 years instead of their lifetime.
  • Age cap is removed for contributing to traditional IRAs and allows people to delay collecting minimum withdrawals until after turning 72.
  • Employers can automatically raise employees’ savings rates to 15% of annual earnings over time, up from 10%.
  • Employers are required to allow certain part-time workers to participate in 401(k) plans.
  • Owners of 529 education savings accounts can withdraw as much as $10,000 for repayment of some student loans.

The legislation also expands access to Multiple Employer Plans (MEPs) to more employers. This is intended to make it easier for small companies to join together and share administrative costs of offering 401(k) plans to their employees addressing the estimated 30% of private-sector employees that work for employers that don’t offer any retirement savings benefits.