What The SECURE ACT Means For Your Retirement

Sydney Schaefer/NNY Business
SECURE Act paperwork sits on a conference table at Morgia Wealth Management in Watertown. 

By: Rachel Burt
With employees starting to save earlier and working past traditional retirement age, it’s never too early to start thinking about and planning for retirement.

    The provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act have been put in place to help both employers and employees navigate retirement plans and choose the best option for all involved. That being said, as with most things, the new act comes with both positive and negative aspects. 

    Signed into law on Dec. 20, 2019, the SECURE Act was finally passed after months of efforts by Congress; and went into effect on Jan. 1, 2020. The primary goals of the act are to expand retirement savings, preserve retirement income, simplify existing rules and improve qualified retirement plan administration. 

    The SECURE Act makes substantial changes to rules affecting traditional IRA contributions, retirement account distributions, 401(k) provisions, and other savings vehicles such as 529 plans. 

    According to PJ Banazek, managing director of Morgia Wealth Management in Watertown, 151 Mullin St., the SECURE Act was supported by both parties in both the House of Representatives and the Senate when it was first proposed in early 2019. 

    “Because of the political environment, they couldn’t get it passed and it ended up passing as part of the Budget Act in the fall,” he said. “The primary reason they wanted this through is they’re trying to make it easier for Americans to save for their own retirement.” 

Sydney Schaefer/NNY Business
PJ Banazek, managing director and partner at Morgia Wealth Management, left, and Rich Kane, senior director of human resources at New York Air Brake.

    According to Mr. Banazek, many of the provisions in the act are designed to do exactly that. One of the most important, on the 401k plan side, is there are now larger credits for those wishing to start new plans. 

    A large burden to starting a new plan is the administrative cost to establish the plan. Now, the Internal Revenue Service (IRS) will give credits to businesses to cover those costs, so basically the government is going to subsidize that plan for three years. 

    One step further, if a business were to add auto enrollment to that plan, meaning they automatically sign up employees, there’s an extra $500 credit associated. It doesn’t cost employers any more to add auto enrollment, but they will receive an extra credit. Why would they do that? Studies show that when auto enrolled in a plan, people are less likely to get out of it and will start saving for themselves, so it creates better success stories. 

    Morgia Wealth Management is a full-service wealth management firm that deals with financial planning and investment management for clients. Within the firm, Morgia has a division that focuses on retirement plans for businesses and manages around 50 different retirement plans locally for primarily smaller employers, according to Mr. Banazek. 

    As the SECURE Act’s changes to retirement become more widely known, the advisors at Morgia will meet with individual clients and go over the provisions that impact them. 

    On the individual retirement account side, probably the biggest change that was made to help savers, according to Mr. Banazek, is the elimination of the age at which one has to stop saving in a retirement plan. 

    In the past, at age 70, individuals could no longer take a deduction on their tax return for making an IRA contribution. Now this rule has been eliminated, so if someone is still working after age 70 and has earned income, they can put money in an individual retirement account and take a tax deduction. 

    Another change, again to help those people that are in that age 70 range, is a delay to the time period in which individuals are required to take money out of their retirement accounts. 

    Before this, the IRS always had a provision that when someone reaches a certain age, it’s time for them to start taking money out of their retirement accounts- primarily because they want to be able to collect the tax dollars. Now, they’ve delayed from age 70 ½ to 72 when a person needs to start taking their required minimum distributions. 

    There are a lot of other small provisions in the plan, but from the positive side, those are really the biggest provisions made that will most likely affect the greatest number of people, in Mr. Banazek’s opinion. Also included in the SECURE Act are provisions for things like taking money out for adopting or having a newborn and provisions to take money out of 529 plans to pay off student loan debt. While those things will affect some, they will not impact the masses as much as the larger retirement focused provisions will. 

    Along with the positives of the SECURE Act, there are negatives as well. 

    One negative, according to Mr. Banazek, is the elimination of what is called the Stretch IRA- something he believes was meant to be a positive, but will be looked back on with regret ten years from now. 

    When a person passes away and they have a retirement account, they’re allowed to leave that to someone, say their spouse. Their spouse then can treat it like it’s their own retirement account. When that spouse dies and the money then goes to the children, prior to this rule, the children could then treat it like it was their own retirement account and that retirement account could stay in existence for their lifetime. The new rule, because there needed to be a way to pay for the provisions in this plan, says by the end of ten years, if a non-spouse inherits that IRA, it has to be emptied and all the tax paid within ten years. 

    “To me, that is a devastating provision in this plan,” Mr. Banazek said. “I think the lawmakers overlooked how much damage that’s going to do and I think the reason for that is, if you look at the current savings deficits by age in this country, retirement savings deficits, the group of people that have the biggest gap are the ones that are probably going to inherit the most from their parents and their IRAs.” 

    According to Mr. Banazek, Morgia has a lot of clients who pass away and their children inherit their IRAs, which instantly become the biggest retirement accounts for their children. These children, adults in their late forties or early fifties, then find themselves with retirement nest eggs. 

    Now, these individuals will be forced to empty their nest eggs and pay taxes on then money. According to Mr. Banazek, studies also show that when a person inherits the money and it’s in an IRA, they’re more likely to leave it intact. When it’s in a taxable account, in other words the taxes have already been paid, they’re very likely to spend it. 

    The other provision Mr. Banazek thinks is negative is more and more people, in their retirement, have to save for themselves. The generation of people who are retired today, and some that are coming up on it, were able to rely on a corporate pension when they retired, so they retired and they got a monthly stipend from the corporation they used to work for for the rest of their life. The generations coming up on retirement now don’t have that anymore, and they’re strictly reliant on primarily their 401k accounts and Social Security. 

    To take the risk out of retirement, what more and more people are starting to look is taking some of their 401k money and buying an annuity from an insurance company that provides them a lifetime income stream, so they know that if they take a certain dollar amount and buy an income stream, they don’t ever have to worry about that income stream anymore- as long as they’re alive, that income stream is going to come to them. So, lawmakers made it easier for 401k plans to add that annuity option right within the 401k so a retiree, as they’re approaching retirement, can get that income stream directly through their 401k plan. 

    According to Mr. Banazek, the concept behind that should be good because big 401k plans should have purchasing power, so the annuities that they buy should be valuable because of the purchasing power of a big plan. The problem is they also granted immunity from bad fiduciary acts by those insurance companies. 

    “If you look at the financial industry as a whole, the industry that has the greatest amount of conflicts when it comes to being a fiduciary, are insurance companies,” he said. “They also tend to be the most expensive products in the financial services industry, and if you all of a sudden grant an insurance company fiduciary immunity, and you take away the competition- in other words they’re the only provider in there- I think it’s going to lead to bad outcomes with people within a plan because there will be very little oversight.” 

    National Grid, an electricity, natural gas, and clean energy delivery company with approximately 16,500 employees in the U.S., serves more than 20 million people through networks in New York, Massachusetts, and Rhode Island. 

    Contrary to smaller employers that may not have retirement plans, the company is well aware of the SECURE Act and the changes to retirement plans. Virginia Limmiatis, U.S. strategic communications for National Grid, believes some of the changes required by the SECURE Act will have an impact on company plans and may be beneficial to employees by aiding them in savings for retirement and helping with finances. 

    According to Ms. Limmiatis, National Grid provides a competitive benefit package to employees and amendments or changes to the retirement plans will be made as required by the legislation. Final guidance from the Department of Labor and the IRS is still pending and has not yet been received. The company is reviewing the provisions of the SECURE Act, working with legal counsel and advisors, and determining the impact on its plans and any required changes to plan provisions. Any required plan changes will be communicated to the company’s employees through normal channels, according to Ms. Limmiatis. 

    For the north country, Mr. Banazek believes the biggest benefit will be the provision where the IRS is allowing a credit for the establishment of new plans because there are a lot of small employers in the area that do not offer plans yet. This will give them an opportunity to get a plan up and running and have the cost subsidized in the first few years by the IRS. The way most plans work is the costs are usually borne by the employees anyway, so they get spread out amongst all the participants in a plan. 

    This can be problematic with a new plan because there usually isn’t any money in the plan, so the employer has to come up with that money upfront- if they don’t come up with it upfront, they can’t establish a plan. 

    “So now the IRS is going to subsidize that, so to me, the biggest opportunity I think in the north country is going to be for all the small employers that have not had a plan in the past because its been cost prohibitive,” Mr. Banazek said. “Now they’re going to have the ability to establish a plan and have the IRS subsidize that plan for the first three years.” 

    According to Mr. Banazek, advisors at Morgia will be talking to each and every client about the Stretch IRA provision to make sure they understand what the right thing to do now is in terms of beneficiaries. What clients thought was right in the past may, in fact, not be right anymore. Everything they’ve built their estate planning on may be wrong. 

    For many, there won’t be any changes because the money is going to go to their kids and that’s it because there are no other options for them, but Morgia has a lot of clients that are charitable or have charitable intentions, so now the smarter move for them might be to name a charitable organization as the beneficiary of their IRA and give all the other money directly to the kids because it’s going to have less of a tax impact. 

    The same amount of money will still go where they wanted it before, it’s just going to go in a different way. It used to be the more valuable asset was the IRA because of the tax deferred growth, but that’s gone so maybe that’s not the case anymore, according to Mr. Banazek. 

    In terms of clients coming in themselves and asking about the SECURE Act, Morgia hasn’t seem very many. 

    “It’s kind of really flown under the radar screen so we’ve had a few, but very limited; we’ve done a lot more outreach so far to our clients to talk about it,” Mr. Banazek said. “I’d be willing to bet that 98 to 99 percent of the businesses aren’t even aware of this yet because most of the stuff that’s in there they either don’t have a plan yet, or the ones that have a plan, most of the stuff that’s in here doesn’t really impact them from the standpoint of ‘we have to do something right away.’” 

    A large employer in the north country, New York Air Brake has just under 800 employees across its strategic business unit, and just under 400 in Watertown alone. 

    According to Rich Kane, senior director of human resources at New York Air Brake, the company is working very closely with its provider, Fidelity Investments, to learn the changes and what it can offer employees that will allow them to take advantage of the positive aspects of the SECURE Act. 

    After that, the company will set up meetings with employees to make sure they’ll be allowed to put more towards retirement and save earlier in their careers. According to Mr. Kane, the company hopes to present to employees in a town hall meeting by the end of the first quarter or early in the second. 

    Mr. Kane doesn’t believe anyone is all too familiar with the SECURE Act and the changes it brings to retirement at this time, but thinks that anything that affords employees the opportunity to start saving earlier and saving more is positive. 

    “It’s a learning opportunity for everyone,” he said. “We’re going to be cautious moving forward before we change offerings to make sure it’s truly to the benefit of our employees, but I personally believe it’s a step in the right direction for everyone involved.”