Big changes may be coming to the retirement planning process, thanks to an Executive Order signed by President Donald Trump in August 2018. The Order is designed to help Americans save for retirement by allowing them to keep their accumulated savings in tax-deferred accounts for a longer period of time, and by allowing smaller business entities to pool their efforts into joint 401(k) plans. The ultimate goal of the Executive Order is to lower costs associated with managing retirement plans, making them a more affordable option for businesses of any size.
The Executive Order: Three Critical Retirement Savings Components
Signed at a campaign rally in Charlotte, North Carolina, Trump’s Executive Order directs the U.S. Treasury Department and the U.S. Department of Labor to review several rules, some of which haven’t been revised since the early 2000s. There are three major components to the Executive Order:
- Expanding access to workplace-based retirement plans
- Reducing retirement plan costs for small business owners
- Strengthening workers’ financial futures
Each of these components has the potential to positively change the retirement landscape. In numerous studies, it has been shown that on average, Americans are woefully unprepared for their retirement years. The average American has saved only about $84,000 for retirement, far short of recommended figures by retirement planning professionals. To make the retirement savings crisis even clearer, 21% of Americans polled in a 2018 study indicated they had no retirement savings at all, and almost 33% have less than $5000 socked away for the golden years. Many people expect to depend on government benefits like Social Security, and it is clear that these benefits – with an average monthly payout of about $2000 — will hardly be enough to survive on after retirement.
In the following sections, we will take a closer look at the three major components of Trump’s Executive Order and how they will affect retirement options for America’s workforce.
It is important to note that the Order only directs the Treasury and Labor Departments to consider changes to the current rules; nothing contained in the Order is guaranteed, nor does it automatically improve retirement savings prospects for the average worker. It does, however, point toward a government-wide shift that addresses retirement savings shortfalls, and that is a positive step forward.
Expanding Access to Workplace Retirement Plans
The U.S. Departments of the Treasury and Labor have regulations in place that govern retirement plan options. In the Order, Trump has directed officials to consider revising current regulations and to develop new regulations with the goal of making it easier for smaller business organizations to offer some form of retirement plan to their employees. The need for law revision is profound: while nearly 90% of employers with 500 or more workers offer sponsored retirement plans, only about 50% of employers with less than 100 workers offer the same option. A staggering number of smaller business entities do not offer any retirement plans – while the specific figures are difficult to pin down, financial analysts suggest the percentage is around 25%.
One such option is the Association Retirement Plan (ARP), sometimes referred to as a Multiple Employer Plan. Typically, these plans take the form of a 401(k) or 403(b), depending on the makeup of the sponsoring organization. Under current guidelines, small businesses may wish to band together to offer an ARP, but are prohibited from doing so while remaining in compliance with the laws governing the plans. In the past, legislators have attempted to relax the rules and guidelines of ARP options, but have so far been unsuccessful. The Executive Order may finally be the solution smaller businesses are looking for, allowing them to offer valuable retirement benefits to their employees.
Reducing Retirement Plan Costs for Small Business Owners
Many smaller businesses simply do not have enough money to offer retirement plans to their employees, even if they wanted to. Economy of scale comes into play here; larger businesses can afford to establish employer-sponsored plans like 401(k) and 403(b) options. Some of the costs of employer-sponsored plans include administrative and overhead expenses, which are out of reach for smaller business entities. A Pew survey conducted last year pointed to the potentially high expenses as a major factor in the decisions of small business owners, effectively discouraging many of them – to the tune of over 70% of all small- and medium-sized businesses polled in the survey — from offering a retirement plan.
The Trump Executive Order directs the Departments of Treasury and Labor to develop ways of streamlining the administrative process and to improve notice requirements, helping to relieve the burden of expenses on smaller business entities that wish to offer retirement plans to their workers. By reducing overhead and administrative costs, it is estimated that the vast majority of small businesses that currently do not offer plans will be able to do so once the costs are eased. Again, this Order does not change the picture overnight; it merely sets the stage for positive improvements in regulatory standings.
Strengthening Workers’ Financial Futures
Under current retirement plan regulations, specifically, those governing 401(k) plans and certain Individual Retirement Accounts (IRAs), even those who have managed to save enough for retirement may be penalized by the concept of Required Minimum Distributions or RMDs. These are monetary distributions that an account owner must begin to withdraw starting in the year he or she reaches the age of 70 ½ years. If the account owner is over the age of 70 ½, the RMDs begin in the year he or she retires. These rules apply to ALL employer-sponsored plans, including:
- Profit-sharing setups
- 401(k) plans
- 403(b) plans
- 457(b) plans
- IRA account owners with Traditional IRAs and IRA-based retirement plans like SIMPLE, SEP, and SARSEP IRA.
- Roth-based 401(k) plans
Roth IRA account owners are excluded from RMD regulations; Roth IRAs require no distribution of any type at any time, and account holders may keep their contributions growing in the account as long as they wish.
What if a retiree doesn’t need to withdraw money from a retirement account, such as if he or she already receives income from other sources? RMDs do not take that into account, and thus the Executive Order directs the Department of the Treasury to review the RMD rules. The goal of the Order seeks to allow:
- Retirees to spread retirement savings over longer periods of time.
- Those nearing retirement age to keep retirement savings in accounts where they may continue to gain value through compounding interest.
By directing government agencies to consider overhauling current regulations regarding retirement savings in the United States, the Trump administration’s Executive Order stands to create a brighter financial future for those who have not had the opportunity or the success in setting aside money for retirement purposes. Financial analysts and retirement planning professionals across the country applaud the administration’s efforts, and hope that regulations will shift to allow a greater number of America’s workers to have employer-sponsored retirement benefits at lower costs and with fewer penalties.