Broker Check

BFG News & Notes

January 6, 2020: Happy New Year!

As we enter into 2020 at BFG, we are exploring the planning opportunities and challenges created by the SECURE Act which became law on January 1st. The Act has a number of provisions which will impact some of our financial planning clients and their families in different ways, and as appropriate we will discuss them together during our annual strategy meetings between now and June 30th. If you are a financial planning client of BFG and have not yet scheduled your strategy meeting, please contact our client relations team – Amanda Pancake and Jennifer Palumbo – at 410-252-4555 as soon as possible to find a convenient date and time for you.

Here are a few highlights of the SECURE Act which will we will addressing with you, as appropriate, along with our initial thoughts on each provision:

  • Pooled employer plans: Small employers will now be allowed to “pool” together to create larger qualified retirement plans for their employees. This will impact some of our business owner clients, and some of our clients who are employees of smaller organizations. Changes related to this provision will take place after plan year 2020 has ended for those employers choosing to make a change. Our take: GOOD IDEA. This is designed to help small companies afford to provide plans for their employees and to create potentially lower costs for employers and employees due to size and scope of plans.

  • Automatic enrollment escalation: When new employees are enrolled in their company’s qualified retirement plan, the plan sponsor is now allowed to escalate the default employee contributions from 10% to 15%. Employees may all override this default setting, but the premise is that many employees don’t bother to enroll or to update their plans, so this creates an automatic enrollment and annual escalation of contributions unless an employee elects otherwise. Our take: GOOD IDEA. While this won’t impact most of our clients who are proactive about managing contribution amounts and allocations, this will be of meaningful benefit to others who do not have financial advisors guiding them to make proactive decisions.

  • Tax credit for small employers: Provides a tax credit to small employers (100 employees or less) to offset plan start-up costs. Our take: GOOD IDEA. Any provision to encourage more employers to provide plans for their employees is a good thing.

  • Tax credit for automatic employee enrollment: Provides a tax credit for employers who auto-enroll their employees in plans. Our take: GOOD IDEA. The tax credit is very modest, but if it encourages more employers to auto-enroll employees, the employees who might otherwise have failed to enroll will benefit.

  • Graduate school compensation: Now deems that student aid paid to graduate or postdoctoral students as “compensation” for the purposes of determining IRA contribution amounts. Our take: GOOD IDEA. The premise is that graduate students will benefit from starting their retirement savings earlier, which is certainly true, as long as it doesn’t create the reliance on larger student loans to do so.

  • IRA Contributions past age 70 ½: Workers over age 70 ½ will no longer be prohibited from contribution to traditional IRA accounts. Our take: GOOD IDEA. People are working longer than ever and in many cases are presumably doing so because they haven’t reached financial independence. Allowing IRA contributions past that age will be an incentive to keep saving for retirement beyond 70 ½.

  • Credit card loans on defined contribution plans: These loans are no longer legal. Our take: GOOD IDEA. While this won’t impact most of our clients or their families, these loans can be onerous and predatory and prohibiting them will help keep some plan participants out of debt trouble

  • Portability of annuity contracts: This allows annuity contracts to be moved from one qualified retirement plan to another if the original plan no longer authorizes the specific contract. Our take: GOOD IDEA. This will help some plan participants to avoid high fees or penalties created when a plan sponsor changes underlying investment options. 

  • Plan eligibility for part-time workers: This will allow employees working between 500-1,000 hours a year for three consecutive years to enroll in their employers’ retirement plans, albeit without the requirement of an employer matching contribution. This provision begins with the 2021 plan year. Our take: GOOD IDEA. This will benefit long-term part-time workers by granting them access to tax-favored retirement savings comparable to their full-time colleagues, and won’t be expensive or operationally burdensome for employers.

  • Withdrawals for birth or adoption of child: Plan participants in defined contribution plans will be allowed to make penalty-free withdrawals with optional repayment of up to $5,000. Our take: BAD IDEA. In general, any provision to allow early non-hardship access to retirement funds harms retirement savings, usually for the people who will need additional retirement savings the most. Since these distributions will still be taxable income and only the penalty is being waived, the benefit to participants is very small, but the potential loss of tax-deferred compounding could be sizeable. This is not something we’ll want to see used except for families in truly dire circumstances.

  • Increase in age for required minimum distributions (RMDs): The age at which holders of traditional IRAs and qualified retirement plans will be forced to start taking annual distributions has been increased from 70 ½ to 72, but only for people turning age 70 ½ after December 31, 2019. Our take: GOOD IDEA, with a caveat. This is a small step in the right direction, considering the longevity risk today. The caveat is in the implementation, as there are very complicated rules (and a few exceptions) which will make mistakes on this process much easier to make.

  • Disclosure of account balance as a annuity stream: This creates a new obligation for plan sponsors to provide estimates and illustrations for participants assuming they were to convert their defined contribution account balances into a lifetime annuity payment. Our take: BAD IDEA. This provision was well-intentioned as a way to provide additional guidance and information to participants. The problems however are numerous, including a fixed set of assumptions which will be irrelevant or misleading to most participants, and significant new disclosures and illustrations which will be cumbersome and very difficult for most participants to understand. 

  • Safe Harbor for selection of annuity provider: Plan sponsors (employers) will now be required to engage in (and periodically repeat) an “objective, thorough, and analytical search” including the annuity provider’s capability of making payments to participants, plan features and costs, licensure status of insurers, and state insurance commissioner requirements. Our take: BAD IDEA. This provision is a huge victory for the large insurance lobby, but will be wildly onerous for employers and much more expensive for participants. This will create a very small number of huge winners (giant insurance companies) and a path of participants making confusing and irrevocable elections with little or no guidance. Of all the provisions in the SECURE Act, this is one of the two worst.

  • Expansion of 529 Plan to apprenticeships and loan repayments: This will allow 529 plans to be used for apprenticeship programs registered with the Department of Labor and to make loan repayments up to $10,000. Our take: GOOD IDEA. With so many families starting to explore alternatives to traditional college for their children, this is a fantastic way to help make sure that 529 plans are useful for as many people as possible. Student loans are such a huge problem for young graduates that allowing 529 funds to be used for repayment is long overdue and will hopefully increase from $10,000 to a larger amount in the future.

  • Modifications to “Stretch IRAs”: This provision eliminates the ability for non-spousal beneficiaries of IRAs and retirement plans to “stretch” the required distributions over their lifetimes and will instead require all funds to be withdrawn within 10 years of the death of the participant. Our take: BAD IDEA. All of the planning which had been done for decades around retirement plans and IRAs from a financial perspective, a tax perspective, and an estate planning perspective must now be fully reevaluated. This amounts to a very large cash grab from the government, and makes IRAs, Roth IRAs, and other retirement accounts far less valuable than in the past. This is absolutely the worst provision in the SECURE Act and one which will impact virtually 100% of our clients adversely. We will be spending significant time analyzing each client’s current retirement plan balances, and the income tax brackets of the plan participants AND each of their beneficiaries to come up with suitable recommendations to reduce what is an enormously increased income tax bill for families.

 As always, links to our “Weekly Market Review,” our most recent podcast episode, and our company website are below.

Have a sensational week and please know that we’ll be on top of this new legislation and ready to discuss it with you during our annual strategy meetings together.

Team BFG

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October 28, 2019: Weekly Updates

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October 7, 2019: Weekly Updates

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August 5, 2019: Back to College

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July 29, 2019: Retiring & Relocation Planning

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June 3, 2019 - 2019 Bowl-A-Thon

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May 28, 2019 - Kickoff to Summer

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News & Notes - May 13, 2019

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February 19, 2019 - Wisdom from Winston Churchill

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February 4, 2019 - Open House Video

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