Inside: What Trump’s 401(k) Executive Order Could Mean for Investors
In 2018, former President Donald Trump signed an executive order aimed at expanding access to retirement plans and modernizing the U.S. retirement system. While the order did not immediately change laws, it directed federal agencies to review regulations and propose reforms. Here’s how these potential changes could impact investors and retirement savers.
Expanding Access to Association Retirement Plans (ARPs)
The executive order encouraged the creation of Association Retirement Plans (ARPs), which allow small businesses to band together to offer 401(k) plans. Previously, small businesses faced high administrative costs and regulatory hurdles when setting up retirement plans. ARPs could lower these barriers by pooling resources across industries or regions.
- For Investors: Employees at small businesses may gain access to employer-sponsored retirement plans for the first time, enabling them to save more efficiently. However, participants should review investment options and fees, as ARPs may have limited choices compared to larger corporate plans.
Streamlining Multiple Employer Plans (MEPs)
The order also sought to simplify Multiple Employer Plans (MEPs), which let unrelated businesses jointly offer retirement plans. The goal was to reduce administrative burdens and costs for employers, potentially increasing retirement plan adoption.
- For Investors: More competition among plan providers could lead to lower fees for participants. However, MEPs may centralize decision-making, limiting customization for individual employers and employees.
Reevaluating Required Minimum Distributions (RMDs)
Trump’s order called for a review of RMD rules, which require retirees to withdraw a portion of their tax-deferred savings starting at age 72 (now 73 for those turning 72 after 2022). The review considered raising the RMD age to align with increasing life expectancies.
- For Investors: A higher RMD age could allow retirees to keep savings invested longer, maximizing tax-deferred growth. However, delayed withdrawals might lead to larger taxable distributions later, requiring careful tax planning.
Promoting Lifetime Income Options
The order pushed for broader inclusion of annuities and other lifetime income products in 401(k) plans. These products aim to provide retirees with steady payouts, similar to traditional pensions.
- For Investors: Annuities could offer predictable income in retirement, reducing longevity risk. However, they often come with high fees and complex terms. Investors should assess costs, surrender charges, and the financial strength of insurers before committing.
Potential Risks and Considerations
While the executive order’s goals focus on flexibility and accessibility, investors should remain cautious. Consolidation via ARPs or MEPs might lead to “one-size-fits-all” plans with suboptimal investment choices. Additionally, annuities may not suit all retirees, particularly those seeking liquidity or market exposure.
Conclusion
Trump’s 401(k) executive order aimed to address gaps in retirement savings access and sustainability. For investors, the changes could mean more opportunities to save, lower costs, and innovative income solutions. However, individuals must stay informed about plan details, fees, and tax implications to make decisions aligned with their long-term financial goals.
