Morningstar - Q1 2021 - 16

Dispatches

So, what's the catch?
Unlike the case of mutual funds being regulated
by the SEC, CITs are governed by a patchwork
of regulations and not by a consistent framework.
Most CITs are governed by the Office of the
Comptroller of the Currency or state law. And there
is little federal nexus or reporting required for
these pooled investments.
Nonetheless, we think CITs will be a welcome
addition to 403(b) plans. Administrators
could consider selecting CITs that are already
available in an ERISA-covered plan, which
would ensure they were vetted and that their
trustees could be subject to litigation for
violating their fiduciary duties, at least to the
ERISA-covered plans.
Increasing Saving Rates in DefinedContribution Plans

The bill has a few provisions aimed at increasing
the number of people contributing to a
retirement plan and increasing their contributions.

offer a plan. It enhances the startup credit for small
employers setting up a retirement plan so it can
cover as much as 100% of the administrative
costs of starting a plan (up to a cap of $5,000). The
bill would also provide a tax credit of up to
$1,000 per employee for employer contributions.
All of these incentives phase out over four years,
however, and there is some risk that they
simply reward employers that would have started
a plan anyway. Nonetheless, in the absence
of a mandate, these incentives need to be
meaningful for employers, and this bill provides
some valuable incentives.
Delaying Required Minimum Distributions
Until Age 75

Retirees who are lucky enough to have more than
enough saved for retirement hate required
minimum distributions, and it's easy to understand
why. No one likes a requirement to take money
they do not need out of their 401(k) and IRA
accounts. That's particularly true for retirees who
are bumped into higher marginal tax rates because
of these withdrawals, especially when the
distributions increase the percentage of Social
Security benefits that are subject to taxation.

The most interesting provision would allow
workers with student loans to receive an employer
match in their 401(k) plan for making payments
on their student loans. A few companies have
tried such programs in recent years after getting
private letter rulings from the IRS, but this
provision would open the practice to any employer
that wished to adopt such a plan design. Of
course, it is not clear how many employers would
add such a feature to their retirement plans.
Still, it is a good attempt to help younger people
tackle debt and build for their future at the
same time.

The first Secure Act increased the age of required
minimum distributions to 72. The sequel
legislation would increase it to age 75. That will
cost the government tax revenue and will
probably require the bill to add a new revenueraiser. We will see if officials can find something
palatable. The first Secure Act was largely
paid for by eliminating the so-called stretch IRA,
which allowed nonspouse beneficiaries to
extend tax-deferred benefits.

Other provisions look like incremental
improvements, enhancing good ideas that have
already been in place for some time. For example,
the bill would require new retirement plans
(with some exceptions) to auto-enroll eligible
employees and auto-escalate their contributions
up to 10% of salary. The bill also simplifies
and expands the savers credit for low-income
workers so they could collect up to $1,500 in tax
savings for contributing to a retirement plan
or IRA. Finally, the bill substantially increases the
current incentives for small employers to

Finally, the bill has three provisions that could
make it easier for retirees to annuitize their
IRAs or 401(k)s to attain some level of guaranteed
lifetime income. Mostly, this section amounts
to technical fixes that will make it easier
for insurers to offer inflation-adjusted annuities
or more-generous pop-up death benefits.
Most critically, the bill makes it much easier to
offer qualified longevity annuity contracts,
which are essentially insurance against the risk
of living an unusually long time.

Morningstar Q1 2021

Improving Lifetime Income Options

Qualified longevity annuities have never been
very popular, but perhaps if the bill passes and
eases regulation for them, they will become
more desirable. Retirement researchers tend to like
these kinds of products a whole lot because
they make it much easier to plan for withdrawals
from defined-contribution accounts. Because
a retiree's death age is unknown, and unless
he or she can live off Social Security or other fixedincome payments or is spending an unusually
small percentage of savings, the retiree must
self-insure for the risk of living a long life.
With a deferred annuity, the retiree can plan
without such concerns, knowing that a payment
stream will start upon attaining age 80 or
85 (or whatever he or she chooses). The longer
in the future the payment start date, the
cheaper the annuity, but the lower the prudent
withdrawal rate.
Secure Act Outtakes

This is a laundry-list-type bill, without clear
thematic intersections, and it looks a little like
the outtakes from the first Secure Act. But
like its predecessor, it contains several good ideas.
Further, it already has bipartisan support in
an age when few things do, so retirees, advisors,
insurers, and asset managers can look
forward to some of the modest changes the act
would make. K
Aron Szapiro is director of policy research with Morningstar.

Morningstar - Q1 2021

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