What You Should Know About Secure Act

What You Should Know About Secure Act

A small miracle occurred in Washington. With overwhelming bipartisan support, the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (or SECURE) Act, amidst all the political infighting and chaos. The bill has been praised by the financial industry and retirement experts since it expands access to work-place pension accounts and makes it easier to offer annuities. It aims to right the major policy misstep that's why this is good legislation. 

Correcting the mistake in the past

A small provision in the 1978 Revenue Act created the 401(k) which kicked off the rise in defined contribution pension plans more than 40 years ago. It is where employees invest and save for themselves and face all the associated risks (previously, employees were paid out predictable sums after retirement and they were more likely to receive defined benefit plans). Nearly all countries that followed all made the same policy error which is: For the people's money after they retire, there was no guidance for what they should do. 

Knowing how much to spend and how much to invest in retirement while the savings part is fairly straightforward has been called as the nastiest, hardest problem in finance by Bill Sharpe, a Nobel Prize-winning economist. Most retirees must make their money last buy they don't know how long they'll live or what their health expenses will be. With little help or direction, it is a problem placed on savers all over the world. 

Less progress was made on what people should do after they retire even if states have required companies to adopt policies to help people during their saving years, including defaulting people into plans with a sensible investment strategy. Spending 4% of your assets each year is one of the guidelines suggested by some financial industry. But, the indexes are not spending to the ups and downs of the needs of retirees who risk out-living their assets but of the stock market. 

Annuities are the solution preferred by many economists. This is when an insurance company pays you a predetermined income every year after you hand your savings to them. Not knowing how long you will live, you can spend more than if you financed retirement yourself and budgeted conservatively, and this also ensures you don't run out of money. Retirees who live a long time will be subsidized by those who die relatively young, that's why the system works. Since you get regular payments from the insurance company, you don't need to worry about investment risk but that depends on how the annuity is structured. 

It is not easy to buy an annuity at the moment. Many of the products are complex so it is often unclear what you are paying for and information on pricing tends to be opaque that's why you must go through an agent. Another level of fees when involving an agent and also incentives for them to push more complex and expensive products. 

Employers who sponsor 401(k) plan will be allowed to offer annuities without taking any legal liability that is why it will be easier to buy an annuity with the SECURE Act. Currently, a 401(k) sponsor will be sued if they offer an annuity and a consumer regrets it. The suit can be expensive and costly even if it is without merit. The risk will be the individual will be left on their own since many retirement plans won't offer annuities. The risk should be removed by the new legislation although the plan's sponsors are legally obliged to work in their customers best interests. 

The SECURE Act also requires 401(k) statements to project how much their income is expected to buy, this is to spur workers into thinking about annuities. To help people know how much they can spend in retirement, keeps them focused on their goals, and primes them to think about putting their savings to annuities while they are young, income-based performance will measure those. 

Since people tend to hate annuities, it is not yet clear that the SECURE Act, if it becomes a law, will actually change retirement while economists and policymakers are for once in full agreement.

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