Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

The Internal Revenue Service (IRS) announced inflation adjustments for many tax provisions in 2024, including higher contribution limits for various types of accounts and updated tax brackets.



<h4 class="wp-block-heading">Retirement account contribution limits</h4>



The IRS <a href="https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000" target="_blank" rel="noreferrer noopener">increased contribution limits</a> for individual retirement accounts (IRAs), as well as 401(k), 403(b), and most 457 plans.



The maximum amount a worker can contribute to 401(k)/403(b)/457 plans is $23,000 in 2024, an increase of $500. The IRA contribution limit also increased $500 to $7,000. Catch-up contribution limits remain unchanged in 2024.



<h4 class="wp-block-heading">HSA &amp; FSA contribution limits</h4>



The amount workers can contribute to medical savings accounts will also increase in 2024.



Individuals enrolled in a high deductible health plan (HDHP) with a health savings account (HSA) will be able to contribute up to $4,150 and those with family coverage will be able to save a maximum of $8,300.



For workers who don’t have an HDHP with an HSA and instead use a flexible spending account (FSA), the maximum contribution for 2024 is $3,200. For plans that allow unused balances to roll over, the maximum amount that can be rolled over will increase to $640.



<h4 class="wp-block-heading">2024 tax rates</h4>



Below are <a href="https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024" target="_blank" rel="noreferrer noopener">updated marginal tax rates</a> for single taxpayers and married couples filing jointly. See the <a href="https://www.irs.gov/irb/2023-48_IRB#REV-PROC-2023-34" target="_blank" rel="noreferrer noopener">IRS website</a> for more tax tables and additional details. Since these changes will take effect for tax year 2024, they will generally apply to tax returns filed in 2025.



<ul>
<li>10% for incomes of $11,600 or less ($23,200 for married couples filing jointly)</li>



<li>12% for incomes over $11,600 ($23,200 for married couples filing jointly)</li>



<li>22% for incomes over $47,150 ($94,300 for married couples filing jointly)</li>



<li>24% for incomes over $100,525 ($201,050 for married couples filing jointly)</li>



<li>32% for incomes over $191,950 ($383,900 for married couples filing jointly)</li>



<li>35% for incomes over $243,725 ($487,450 for married couples filing jointly)</li>



<li>37% for incomes over $609,350 ($731,200 for married couples filing jointly)</li>
</ul>



In addition to updated tax rates, the IRS announced increases to the standard deduction for tax year 2024:



<ul>
<li>Single taxpayers and married couples filing separately: $14,600 ($750 increase)</li>



<li>Heads of household: $21,900 ($1,100 increase)</li>



<li>Married couples filing jointly: $29,200 ($1,500 increase)</li>
</ul>



Visit the <a href="https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024" target="_blank" rel="noreferrer noopener">IRS website</a> for more adjustments and tax changes for 2024.



<h4 class="wp-block-heading">PERA benefits and taxes</h4>



Colorado PERA benefits are subject to federal income tax, as well as applicable state and local taxes. PERA retirees who would like to update their tax withholding can do so by <a href="https://www.copera.org/member-login-registration" target="_blank" rel="noreferrer noopener">logging in</a> to their secure member account or completing a paper Form W-4P. Learn more information at <a href="https://www.copera.org/taxes-on-benefits" target="_blank" rel="noreferrer noopener">copera.org/taxes-on-benefits</a>.

Updated Tax Brackets, Contribution Limits, Other Changes for 2024

In 2019, Congress passed sweeping legislation known as the SECURE Act that ushered in some major changes in retirement plans. One of those changes was making it easier for employer-sponsored plans like 401(k)s to offer annuities to plan participants.



Since then, consumer interest in annuities has grown, and 2020 <a href="https://www.fa-mag.com/news/total-annuity-sales-rose-16--last-year-to--255b-66117.html" target="_blank" rel="noreferrer noopener">saw the highest annuity sales in over a decade</a>, totaling nearly $255 billion.



PERA now has two annuity products to offer participants in the <a href="https://www.copera.org/peraplus-401-k-457-plans" target="_blank" rel="noreferrer noopener">PERAPlus 401(k), 457</a> and DC plans.



<h3 class="wp-block-heading" id="what-is-an-annuity">What is an annuity?</h3>



Simply put, an annuity is a financial product that provides guaranteed, regular payments — either for a fixed amount of time or for a person’s life. PERA’s Defined Benefit (DB) plan and Social Security are both annuities that provide a lifetime retirement benefit.



While PERA’s DB plan offers lifetime income in retirement, workers who save on their own in a defined contribution plan like a 401(k) risk running out of savings in retirement. Annuities, which are usually available for purchase through insurance companies, can help offset this risk by converting all or a portion of a person’s account balance into regular income. Like a pension, annuities collect or “pool” assets from a large number of individuals in order to provide each person with guaranteed payments.



There are many types of annuities with a variety of features, but PERA, through its partner Empower, is able to offer two types of annuities for participants in the PERAPlus 401(k), 457 and DC plans: A single premium fixed immediate annuity and Qualified Longevity Annuity Contracts (QLACs).



<h4 class="wp-block-heading" id="single-premium-fixed-immediate-annuity">Single premium fixed immediate annuity</h4>



Empower’s parent company Great-West Life &amp; and Annuity Insurance Company offers a <a href="https://www.copera.org/pera-offering-new-lifetime-income-options-to-dc-plan-participants" target="_blank" rel="noreferrer noopener">single premium fixed immediate annuity</a> through the PERAdvantage Capital Preservation Fund within the PERAPlus 401(k)/457 and DC plans. This allows participants to use all or a portion of their account balance to make a one-time purchase that immediately converts to guaranteed payments. The participant can choose the frequency of the payments as well as how long they’ll continue.



This annuity can be a good option for plan participants who are entering retirement and are ready to start receiving income right away.



<h4 class="wp-block-heading" id="qlac-marketplace">QLAC marketplace</h4>



Plan participants who want to wait until later in retirement to begin collecting payments can take advantage of the <a href="https://www.blueprintincome.com/copera/" target="_blank" rel="noreferrer noopener">Qualified Longevity Annuity Contract (QLAC) marketplace</a> offered by Blueprint Income.



While an immediate annuity provides income right away, a QLAC is a deferred annuity that is designed to begin providing income after age 72, and as late as 85. QLACs are exempt from IRS required minimum distribution (RMD) rules, so they can be a good option for retirees who wish to reduce their RMDs and taxes between the ages of 72 and 85.



Blueprint Income facilitates the rollover of the purchase amount from the participant’s retirement account into the annuity option the participant chooses.



Both annuity options provide retirees the ability to turn their savings into reliable income, and both offer joint annuity options, which can provide income to a surviving spouse. While an annuity might not be the right fit for everyone, it can be a helpful tool in planning for one’s golden years.



For more information on these annuity options, visit <a href="https://coperaplus.org" target="_blank" rel="noreferrer noopener">coperaplus.org</a>.

PERA Offering New Lifetime Income Options to DC Plan Participants

The PERAPlus 401(k)/457 plans and the Defined Contribution (DC) Plan — collectively known as Capital Accumulation Plans — have become an important part of PERA, with more than $5.5 billion invested as of Dec. 31, 2020.



There are some important changes coming to the CAPs in the coming months, including increased contribution limits and a new recordkeeper. Continue reading for an overview of these changes and what they mean for plan participants heading into 2022.



<h4 class="wp-block-heading">New contribution limits</h4>



Earlier this month, the Internal Revenue Service announced <a href="https://www.irs.gov/newsroom/irs-announces-401k-limit-increases-to-20500" target="_blank" rel="noreferrer noopener">updated contribution limits</a> for 401(k) and 457 plans for 2022. Participants will be able to contribute up to $20,500 into a 401(k) or 457 plan next year, up from $19,500 in 2020 and 2021.



The IRS said the catch-up contribution limit for participants who are 50 and over will remain unchanged at $6,500, making for a contribution limit of $27,000 in each type of plan for that age group.



<h4 class="wp-block-heading">PERAPlus and DC plans moving to Empower</h4>



In March, the PERA Board <a href="https://www.copera.org/what-to-know-about-peraplus-401k-457-dc-plans-in-2022" target="_blank" rel="noreferrer noopener">selected Empower Retirement as the new recordkeeper</a> for the PERAPlus 401(k)/457 and DC plans, replacing Voya Financial. That transition will take place in late November and early December.



Greenwood Village-based Empower is one of the largest retirement providers in the country, with significant experience administering large public plans like PERA. The Board selected Empower based on its experience, customer service, mobile-friendly technology tools, and its modern approach to communicating with members.



With the transition to Empower, plan participants will have access to:



<ul>
<li>Expanded call center hours</li>



<li>A robust technology platform, including Empower’s website and mobile app</li>



<li>Financial wellness tools</li>



<li>Retirement planning tools, including personalized, one-on-one financial advice at no additional cost</li>
</ul>



The PERAdvantage funds available for investments in the 401(k)/457 and DC plans will not change — account balances will transfer to the same funds within Empower.



For more information on the Empower transition, including key dates, fees and more, visit <a href="http://coperaplus.org" target="_blank" rel="noreferrer noopener">coperaplus.org</a>.

What to Know About PERAPlus 401(k)/457, DC Plans in 2022

For the first time, PERA members have amassed $1 billion in savings in PERAPlus 457 accounts. The account plays a unique role in the world of retirement planning. For those in PERA’s DB plan, a 457 plan can serve as a source of flexible savings.



The 457’s Place in the Savings Universe



A 457 plan is a type of tax-advantaged retirement plan (like a 401(k), 403(b), etc.) that is primarily reserved for government employees. Jeffrey Cable, the Defined Contribution Manager at PERA, says changes in federal law over the last 15 years have minimized the number of differences among these types of accounts, which can make them seem indistinguishable. But one key difference remains, and it’s significant.



Whereas in most retirement accounts you must reach a certain age before making penalty-free withdrawals, the 457 allows a person to take penalty-free distributions immediately upon leaving the person’s job.



What a 457 Looks Like in Practice



Say a person starts a position at a PERA-covered employer at age 25 and saves $1,000 each year. That person is able to invest those dollars in the same <a href="https://copera401k.voya.com/einfo/fundinfo.aspx?cl=CORADO&amp;pl=650301PU&amp;page=investment_informationfundperformance&amp;s=&amp;d=139350e7368e378d6f4496c683ba94fa190f1047" target="_blank" rel="noreferrer noopener" class="broken_link">PERAPlus funds</a> available to participants of PERA’s 401(k).



Between savings and investment gains, imagine that person leaves employment at age 35 with $15,000 in their 457 ($1,000 annual savings x 10 years, plus $5,000 in gains from investments). That person is able to access these funds at age 35 without the tax penalty.



If those same funds were instead in a 401(k), distribution of the funds would be penalized by the IRS in the form of additional taxes until that person turned 59.5.



Taking Advantage of the 457



The lack of age restrictions can add flexibility to financial planning, Cable said. Although 457 savings are retirement savings, the ability to withdraw them before retirement can allow those funds to serve double duty–a backup emergency fund, for example. “It can be perfect for young people who may or may not have a full career in their current role,” he said.



PERAPlus 457 Facts and Figures



Administered by PERA since: 2009



Number of PERA participants as of December 31, 2019: 18,919



Available to: Every PERA employer can offer the 457 to employees, though not every employer has enrolled in the program.



Tax advantages: You make contributions to a 457 account on a pre-tax basis; then you pay taxes when you take distributions in the future. Some employers offer a <a href="https://peraontheissues.com/colorado-pera-launches-roth-option-for-peraplus-401k-and-457-plan-participants/" target="_blank" rel="noreferrer noopener">Roth 457</a> option as well. In that case, you may choose to also make tax-paid contributions, and qualified distributions are tax free.



The maximum amount you can save in a 457 plan in calendar year 2020 is $19,500. This is not a coordinating limit—you may contribute the maximum to a 457 and a 401(k) this year. If you are 50 or older, you may contribute up to $26,000 in each plan—or, if you are in your last three years before retirement, you may be eligible to contribute even more.



However, few members hit that max. In fact, most PERA members with a 457 account contribute between $1 and $416 each month. Here’s the breakdown:



<figure class="wp-block-table"><table><tbody><tr><td class="has-text-align-center" data-align="center">Annual contributions</td><td class="has-text-align-center" data-align="center">Number of PERA participants</td></tr><tr><td class="has-text-align-center" data-align="center">$0-$5,000</td><td class="has-text-align-center" data-align="center">7,237</td></tr><tr><td class="has-text-align-center" data-align="center">$5,001-$10,000</td><td class="has-text-align-center" data-align="center">1,151</td></tr><tr><td class="has-text-align-center" data-align="center">$10,001-$15,000</td><td class="has-text-align-center" data-align="center">530</td></tr><tr><td class="has-text-align-center" data-align="center">$15,000+</td><td class="has-text-align-center" data-align="center">1,614</td></tr></tbody></table></figure>

PERAPlus 457 Plan Reaches $1 Billion Milestone

Low-cost investing was a popular topic in 2019.



In January, Jack Bogle, legendary investor and founder of The Vanguard Group, died. Bogle was known for giving straightforward, cost-conscious <a aria-label=" (opens in a new tab)" rel="noreferrer noopener" href="https://www.barrons.com/articles/jack-bogle-investing-tips-51556894514" target="_blank">investment advice</a> to the average, everyday investor. His tips were simple: keep investment costs as low as possible, diversify broadly, stay the course. 



In October, Charles Schwab Corp. made waves in the investment world when the company announced it would eliminate trading fees for all U.S. stocks and exchange-traded funds (ETFs). Companies including Fidelity, E*Trade, and TD Ameritrade soon <a aria-label=" (opens in a new tab)" rel="noreferrer noopener" href="https://www.kiplinger.com/article/investing/T052-C007-S001-commission-free-trades-a-bad-deal-for-investors.html" target="_blank">followed suit</a>. 



More than 90,000 Colorado PERA members have a PERAPlus 401(k) or 457 account. They also have access to low-cost investment choices. In 2019, those costs continued falling.



What you need to know about investing fees



Investing isn’t free. It’s worth understanding the various types of fees you encounter while investing. Over time, small differences can add up. For example, the difference between an annual fee of 0.25 percent and a fee of 0.75 percent can cost a person tens of thousands of dollars over the course of his or her career.



Account fees and minimums



A PERAPlus account costs $1 per month for all members, regardless of account balance. This fee has remained unchanged since PERAPlus launched in 2011. PERAPlus accounts don’t have minimum balance or contribution requirements. 



To cover the administration of the investments themselves, PERA funds have an annual administrative fee equal to 0.03 percent of the market value. 



Management fees 



This is the fee that investment firms charge to manage the assets. Like the administrative fee listed above, this is calculated by multiplying the management fee by the participant’s market value in that fund. For example, a management fee of 1 percent would result in a $10 charge for every $1,000 of market value.



As of November 2019, the total fee (plan administration plus investment management) for PERAPlus funds ranged from 0.08 percent to 0.3 percent. Fee information for each PERAPlus fund can be found <a label=" (opens in a new tab)" rel="noreferrer noopener" href="https://copera401k.voya.com/einfo/fundinfo.aspx?cl=CORADO&amp;pl=650301PU&amp;page=investment_informationfundfees&amp;s=&amp;d=ce4791fb72934759a7898de9fbe03f04e00ac982" target="_blank" class="broken_link">here</a>. 



PERA has reduced these fees consistently for years. PERAPlus fund fees decreased an average of 68 percent between 2011 and 2018. 



Trading costs



This is a transaction fee, usually a flat dollar amount, paid to the brokerage where an investor buys or sells a stock or fund. 



PERAPlus investors are free to buy or sell PERA’s 17 funds at any time at no cost. Those who wish to have additional investment options can move funds to a self-directed brokerage account at TD Ameritrade. TD Ameritrade’s fee structure applies.



Front-end and back-end loads



Some mutual funds charge a one-time fee, usually a percentage of the amount invested, whenever an investor buys or sells that fund. This fee is in addition to whatever trading fee the brokerage charges. Front-end loads occur when you buy a fund, back-end loads occur when you sell. None of the PERAPlus funds have loads.



Financial planner fees



This is a fee you pay for someone else to manage your account for you. PERAPlus accountholders have the option to hire an account manager at Voya. The annual fee begins at 0.5 percent of the participant’s account balance. As the account balance gets higher, the percentage goes down.



How PERA cut one fee by more than half



In 2019, four PERAdvantage funds saw additional fee reductions: the Fixed Income Fund, the International Stock Fund, the U.S. Small and Mid Cap Stock Fund, and the SRI Fund. 



The <a aria-label=" (opens in a new tab)" rel="noreferrer noopener" href="https://copera401k.voya.com/einfo/fundinfo.aspx?cl=CORADO&amp;pl=650301PU&amp;page=investment_informationfundinformationperadvantageus2&amp;domain=copera401k.voya.com&amp;s=v0a2tb302l0dypng5uelyfyk&amp;d=38d3cda68025e2ce1c3865610b8d5dd9865e5b7e" target="_blank">U.S. Small and Mid Cap Stock Fund</a> saw the most precipitous drop, with annual fees falling from 0.46 percent to 0.18 percent. This drop came on the heels of a restructure of the fund. 



In 2018, PERA initiated a due diligence review of the U.S. Small and Mid Cap Stock Fund. An investment team reviewed elements such as risk, cost, and composition. “We were comfortable with the <a aria-label=" (opens in a new tab)" rel="noreferrer noopener" href="https://www.investopedia.com/terms/a/activerisk.asp" target="_blank">active risk</a> in the fund, but we thought we could do it at a lower cost,” said Jim Liptak, Director of Equities at PERA. 



At that time, the fund contained three underlying funds. Like ingredients in a recipe, each underlying fund contributes something to the overall mix. During the review, staff decided to move from three underlying funds to two. “We knew we wanted to add a small-cap fund we were already managing internally on the [defined benefit] side,” Liptak said. “It demonstrates strong relative performance at a low cost.”



The objective then became identifying a mid-cap fund that would pair effectively with the more growth-oriented small-cap fund. Liptak said the ideal pairing was a value-oriented fund. <a aria-label=" (opens in a new tab)" rel="noreferrer noopener" href="https://www.investopedia.com/terms/g/growthstock.asp" target="_blank">Growth-oriented</a> equity portfolios focus on companies that are expanding at above-average growth rates. <a aria-label=" (opens in a new tab)" rel="noreferrer noopener" href="https://www.investopedia.com/terms/v/valuestock.asp" target="_blank">Value-oriented</a> funds focus on companies that are underpriced relative to companies in similar industries.



Because PERA does not currently manage this type of equity fund in-house, the review team looked elsewhere to find the best fit. The team reviewed both passive and active investment options. Dimensional Fund Advisors provided the best solution. “We want the best long-term odds of success at the lowest cost,” Liptak said.



The PERAdvantage U.S. Small and Mid Cap Stock Fund restructure was completed in June 2019. The outlook and risk levels have remained similar, but the cost to PERA members has dropped by nearly 60 percent.

PERAPlus Investing Costs Continue to Fall

Employees will be able to contribute up to $19,500 in pre-tax wages to their 401(k) plans next year thanks to an <a href="https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500" target="_blank" rel="noreferrer noopener" aria-label=" (opens in a new tab)">increase in the IRS limits</a> that also covers 403(b) plans, most 457 plans, and other tax-advantaged savings vehicles. Each year, the Secretary of the Treasury is <a rel="noreferrer noopener" aria-label=" (opens in a new tab)" href="https://www.irs.gov/pub/irs-drop/n-19-59.pdf" target="_blank">required</a> to adjust limits based on cost-of-living changes. 



Many financial experts <a href="https://www.fidelity.com/viewpoints/retirement/retirement-income-strategies" target="_blank" rel="noreferrer noopener" aria-label=" (opens in a new tab)">suggest</a> building up multiple sources of income during your working years, even if you are in a pension plan. While pensions provide steady, reliable income, it can help to have access to a 401(k) for additional monthly spending needs as well as a source of cash for larger one-time expenses, such as an unexpected health care bill or purchasing a home.



In addition to the higher contribution
limit, the IRS announced the following changes:



<ul>
<li>The IRS allows people over 50 to contribute an additional amount to a 401(k) or 457, a rule known as the “catch-up contribution.” In 2020, that limit increases to $6,500 from $6,000.</li>



<li>Eligible low- and middle-income taxpayers who make contributions to accounts such as an IRA or 401(k) can file for a <a rel="noreferrer noopener" label=" (opens in a new tab)" href="https://www.copera.org/irs-announces-changes-for-2020" target="_blank">nonrefundable tax credit</a> worth up to $2,000 ($4,000 for joint filers). The income limit for this Saver’s Credit increased to $65,000 for joint filers, $48,750 for heads of households, and $32,500 for singles. </li>



<li>Health Savings Account (HSA) <a rel="noreferrer noopener" aria-label=" (opens in a new tab)" href="https://www.irs.gov/irb/2019-22_IRB" target="_blank">contribution limits</a> will go up for calendar year 2020. Anyone with a high deductible health plan (HDHP) can open a HSA and save money for health expenses in the future. These accounts have the ultimate tax advantage: As long as money is withdrawn for qualified medical expenses, these dollars are never taxed. Contributions are pre-tax, investment gains or interest are tax-free, and withdrawals aren’t taxed. The contribution limit for an individual is $3,550 for 2020, and, if a family is on an HDHP, their total contribution limit is $7,100. PERA retirees enrolled in Kaiser Permanente’s HDHP plan can enroll in an HSA with their preferred financial institution to take advantage of these savings (PERA does not offer HSA accounts).</li>
</ul>



Options
available to PERA members



Any active PERA member (currently working for a PERA employer) can <a rel="noreferrer noopener" label="enroll (opens in a new tab)" href="https://www.copera.org/recap-of-pera-boards-september-meeting" target="_blank">enroll </a>in a 401(k) through PERA. Some members can also enroll in a 457 if their employer has chosen to offer one. Those who have access to both types of accounts don’t need to choose between the two—a person may contribute to both at the same time. All PERAPlus accounts offer the same low-cost investment options.



These accounts allow members to contribute pre-tax dollars from their paychecks. When a person begins taking withdrawals in retirement, the amount withdrawn is taxed. Some people would prefer to make contributions to these accounts after they’ve already paid taxes, which would allow for tax-free withdrawals in the future. This arrangement is called a Roth contribution. Some employers allow employees to make Roth contributions to their 401(k) or 457 accounts directly from their paychecks. People whose employers don&#8217;t allow them to make Roth contributions directly from their paychecks can still take advantage of the Roth rules by doing an <a href="https://content.copera.org/news-you-should-know-which-states-offer-retirees-the-best-healthcare/" target="_blank" rel="noreferrer noopener" label=" (opens in a new tab)">in-plan Roth conversion</a>. 



Find more information about these two types of retirement accounts <a href="https://www.copera.org/irs-announces-changes-for-2020" target="_blank" rel="noreferrer noopener" label=" (opens in a new tab)">here</a>.

IRS Announces Changes for 2020

More than 87,000 PERA members have retirement savings in a PERAPlus 401(k) or 457 account. Rules that govern those accounts could soon change. If the bill becomes law, a person could keep money invested longer and take out up to $5,000 upon the arrival of a new child, among other changes. 



In May, the <a href="https://content.copera.org/senators-try-to-revive-retirement-bill/">SettingEvery Community Up for Retirement Enhancement Act of 2019</a> (SECURE
Act) was approved by the U.S. House with 99 percent of the vote—an
overwhelmingly bipartisan tally. Colorado Rep. Ed Perlmutter was a bill
cosponsor, and all seven members of the Colorado congressional delegation—four
Democrats and three Republicans—voted in favor of the bill.



After
the SECURE Act passed the House, it moved to the Senate. While <a href="https://www.cnbc.com/2019/05/24/what-the-secure-act-would-mean-for-you.html">some
expected</a>
a quick passage by <a href="https://www.senate.gov/reference/glossary_term/unanimous_consent.htm">unanimous
consent</a>,
opposition from three senators <a href="https://www.plansponsor.com/in-depth/secure-act-ensnared-senate-flying-house/">has
slowed</a>
the bill’s momentum. Sens. Cruz, R-Texas, Toomey, R-Pa., and Lee, R-Utah, all
reportedly have concerns about components of the bill. The bill could still
pass with a majority vote, but it <a href="https://www.plansponsor.com/congressional-leaders-want-secure-act-passage-2019/">would
require a lengthier process</a>.



In October, seven Republican Senators,
including Colorado Sen. Cory Gardner, <a href="https://www.scott.senate.gov/imo/media/doc/Sen.%20Scott%20Letter%20on%20SECURE%20Act.pdf">wrote a
letter</a>
to McConnell, in which they urged passage of the bill.



What the
SECURE Act does



Increase
access to retirement plans



About <a href="https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/02/retirement-plan-access-and-participation-across-generations">one third</a> of U.S.
workers do not have access to workplace retirement plans, like a 401(k) or defined
benefit (pension) plan. The SECURE Act seeks to expand access to retirement accounts,
making it easier and more affordable for businesses, particularly small
businesses, to offer retirement plans. Every Colorado PERA member already has
the <a href="https://www.copera.org/recap-of-pera-boards-september-meeting">opportunity</a> to have
both a defined benefit plan and a 401(k).



Raise the Required Minimum Distribution age to 72



The advantage to saving money in a qualified retirement plan, like a 401(k), boils down to two tax benefits: Contributions made to these accounts are made with pretax deductions from a person’s paycheck, and profits from the sale of investments in these accounts are not subject to the <a href="https://www.investopedia.com/terms/c/capital_gains_tax.asp">capital gains tax</a>. Distributions from these accounts in retirement are taxed as ordinary income. Currently, retirees are required to begin taking distributions from these account no later than age 70.5, a rule known as Required Minimum Distribution (RMD). The SECURE Act would raise the RMD age to 72, giving retirees a few more years of tax-free growth. (You can find RMD calculators like <a href="https://content.copera.org/senators-try-to-revive-retirement-bill/">this</a> online).



The SECURE Act also would alter the following:



<ul><li>Parents could withdraw up to $5,000 from retirement accounts within the first year of giving birth or adopting a child.</li><li>Currently, a person can make contributions to an IRA until they reach the age of 70.5. The Act would remove this age cap.</li><li>Say you retire with a 401(k) balance of $175,000. Understanding how much you can expect to be able to spend per month without depleting the account can be difficult. The Act would require providers of defined contribution accounts to demonstrate how an account balance might translate to monthly lifetime income through the purchase of an annuity or similar product. </li><li>An IRA accountholder can designate a beneficiary—a person who receives the IRA upon the accountholder’s death. Currently, the beneficiary is able to spread out tax-free distributions over his or her lifetime while taking advantage of continued tax-free growth. The bill would limit the amount of time a beneficiary has to withdraw all funds from the IRA to 10 years. A beneficiary who is the spouse of the original IRA accountholder would be exempt from this rule.</li></ul>

Senators Try to Revive Retirement Bill

The news is full of stories about Americans failing to adequately save for retirement. (<a href="https://www.marketwatch.com/story/if-the-stock-market-can-make-you-rich-why-are-so-many-americans-poor-2017-07-26" target="_blank" rel="noreferrer noopener">MarketWatch</a>, <a href="http://fortune.com/2017/02/23/investment-psychology-recency-bias/" target="_blank" rel="noreferrer noopener">Fortune</a>, and <a href="https://www.cnbc.com/2017/04/07/how-much-the-average-family-has-saved-for-retirement-at-every-age.html" target="_blank" rel="noreferrer noopener">CNBC</a> offer a few recent examples.) And national <a href="http://www.nirsonline.org/index.php?option=com_content&amp;task=view&amp;id=956&amp;Itemid=48" target="_blank" rel="noreferrer noopener">research</a> has confirmed that Americans are uneasy about their retirement security. Why is it so hard to save enough to feel confident about retirement? A recent Nobel Prize winner offers important insight for those interested in protecting Americans from poverty in their retirement years.



In October of this year, the Royal Swedish Academy of Sciences <a href="https://www.nytimes.com/2017/10/09/business/nobel-economics-richard-thaler.html" target="_blank" rel="noreferrer noopener">awarded</a> its <a href="https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2017/" target="_blank" rel="noreferrer noopener">Nobel Prize in Economic Sciences</a> to <a href="https://www.chicagobooth.edu/faculty/directory/t/richard-h-thaler" target="_blank" rel="noreferrer noopener">Richard Thaler</a>, a professor in behavioral science and economics at the University of Chicago Booth School of Business. In awarding the prize to Thaler “for his contributions to behavioural economics,” the <a href="https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2017/press.html" target="_blank" rel="noreferrer noopener">Royal Swedish Academy of Sciences</a> noted that he incorporated psychologically realistic assumptions into economic decision-making.



“People are complicated beings,” the Academy <a href="https://content.copera.org/nobel-prize-puts-spotlight-on-behavioral-economics-retirement-plan-policy/" target="_blank" rel="noreferrer noopener">wrote</a>. Thaler’s research has considered three psychological traits that systematically influence how people make economic decisions &#8211; limited rationality, perceptions about fairness, and lack of self-control. Thaler has shown how these “human traits” affect individual decisions as well as outcomes of financial markets and his work has had critical impacts on how workplace retirement savings programs are designed.



“In his applied work, Thaler demonstrated how nudging – a term he coined – may help people exercise better self-control when saving for a pension, as well in other contexts,” the Academy continued.



Along with <a href="http://home.uchicago.edu/csunstei/" target="_blank" rel="noreferrer noopener">Cass Sunstein</a>, a law professor at the University of Chicago, Thaler has argued that both public and private institutions should try to <a href="https://www.penguinrandomhouse.com/books/304634/nudge-by-richard-h-thaler-and-cass-r-sunstein/9780143115267/" target="_blank" rel="noreferrer noopener">nudge</a> individuals in the right direction to avoid the temptation of irrational decisions. Simple changes such as how a default option is defined can make it more likely for people to save for retirement, participate in organ donation, or even eat more vegetables. When employees are automatically enrolled in a retirement savings plan, or drivers are asked to participate in organ donation any time a license is up for renewal, even the worst procrastinators can prepare for retirement or help save a life.



The PERA defined benefit (DB) plan is the retirement savings default option for public employees in Colorado. Public employees are automatically enrolled and contribute a set percentage of pay each pay period to fund a retirement account, thus alleviating the need to determine individual risk tolerance and the inertia associated with selecting how assets will be invested.



PERA members are also encouraged to save in addition to the PERA DB plan by participating in the voluntary PERAPlus 401(k) and 457 Plans. These plans use <a href="https://www.copera.org/nobel-prize-puts-spotlight-on-behavioral-economics-retirement-plan-policy" target="_blank" rel="noreferrer noopener">white label funds</a> where the need to choose an investment allocation from a lengthy menu of brand-name investment products is simplified. Participants in the PERAPlus plans may also elect to participate in a target retirement date fund with premixed portfolios based on a future retirement date. Both the white label and target retirement date fund options use features that eliminate the pitfalls Thaler sees as hurdles to achieving investment success.



More and more retirement plans are using “<a href="https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-automatic-enrollment" target="_blank" rel="noreferrer noopener">auto-enrollment</a>” and “<a href="https://www.copera.org/nobel-prize-puts-spotlight-on-behavioral-economics-retirement-plan-policy" target="_blank" rel="noreferrer noopener">auto-escalation</a>” options to encourage participation, which should lead to successful retirement outcomes. The theory behind these features addresses the problem of investment inertia that many Americans have in their approaches to retirement saving.



Back in 2003, Thaler and Sunstein <a href="https://www.law.uchicago.edu/news/whos-first-review-michael-lewiss-moneyball-art-winning-unfair-game" target="_blank" rel="noreferrer noopener">wrote a review</a> of Michael Lewis’ <a href="http://books.wwnorton.com/books/978-0-393-05765-2/" target="_blank" rel="noreferrer noopener">Moneyball</a> for <a href="https://newrepublic.com/article/61123/whos-first" target="_blank" rel="noreferrer noopener">The New Republic</a>. Lewis’ book (which then became a <a href="http://www.sonypictures.com/movies/moneyball/" target="_blank" rel="noreferrer noopener">movie</a>) was about the low-budget success of the Oakland Athletics and their general manager, Billy Beane.



Thaler and Sunstein pose a question: Why did it take Billy Beane, a first-round baseball draft pick out of high school who abruptly quit the game after 301 at-bats and a disappointing .219 batting average, to change how baseball teams were managed?



“The problem is not that baseball professionals are stupid,” Thaler and Sunstein wrote. “It is that they are human.”



“Most people, including experts…tend to rely on simple rules of thumb, on traditions, on habits, on what other experts seem to believe,” they continued. “Even when the stakes are high, rational behavior does not always emerge.”



More recently, Lewis (of Moneyball fame) wrote a book called <a href="https://www.nytimes.com/2016/12/06/books/review/michael-lewis-undoing-project.html" target="_blank" rel="noreferrer noopener">The Undoing Project</a> about Amos Tversky – who is Richard Thaler’s mentor. In The Undoing Project, Lewis chronicles the work of Tversky and Daniel Kahneman and their collaboration in the field of behavioral finance and economics.



The stakes may not get much higher than saving enough for retirement. Hopefully the attention that Thaler’s work has received as a result of the Nobel Prize will continue to inspire baseball executives, policy makers, and retirement workers to avoid their own poor instincts and implement systems that make good decisions the easy decisions.



Read more about the work of Richard Thaler in “<a href="https://content.copera.org/nobel-prize-puts-spotlight-on-behavioral-economics-retirement-plan-policy/" target="_blank" rel="noreferrer noopener">Easy money or a golden pension? Integrating economics and psychology</a>,” a Popular Science background from The Royal Swedish Academy of Sciences.



Read more from PERA on the Issues on the topic of behavioral finance <a href="https://www.copera.org/nobel-prize-puts-spotlight-on-behavioral-economics-retirement-plan-policy" target="_blank" rel="noreferrer noopener">here</a>, <a href="https://www.copera.org/nobel-prize-puts-spotlight-on-behavioral-economics-retirement-plan-policy" target="_blank" rel="noreferrer noopener">here</a> and <a href="https://www.copera.org/nobel-prize-puts-spotlight-on-behavioral-economics-retirement-plan-policy" target="_blank" rel="noreferrer noopener">here</a>.

Nobel Prize puts spotlight on behavioral economics, retirement plan policy

A digest of timely information and insight about finance, investing, and retirement.



<a href="https://www.copera.org/retirement-roundup-a-new-plan-for-repealing-the-windfall-elimination-provision" target="_blank" rel="noreferrer noopener">Rep. Kevin Brady: It’s Time to Fix the WEP</a> |&nbsp;<a href="https://www.teachthevote.org" target="_blank" rel="noreferrer noopener">Teach the Vote</a>In a recent editorial, U.S. Rep. Kevin Brady wrote about the inherent unfairness of the Windfall Elimination Provision or “WEP.” “It’s unfair to public servants in Texas and across the nation, including places like California, Massachusetts and Ohio,” Brady said. “I’ve been working to repeal and replace the WEP for a decade. This is something we must do for our teachers, firefighters, police, and other public servants. You probably know the history: When Social Security was created in 1935, state and local governments were excluded from participating due to Constitutional concerns. Later, the law changed to allow state and local governments to offer Social Security to their employees. I think we can all agree that our teachers, police, and firefighters deserve better,” Brady added.



<a href="http://www.investmentnews.com/article/20171206/FREE/171209953/legislation-to-combat-elder-financial-abuse-advances-in-senate?itx%5bidio%5d=6201115&amp;ito=792&amp;itq=d9989b79-f570-466e-a76b-baed6695f49c" target="_blank" rel="noreferrer noopener" class="broken_link">Legislation to combat elder financial abuse advances in Senate</a> |<a href="http://www.investmentnews.com" target="_blank" rel="noreferrer noopener">InvestmentNews</a>Legislation that would give financial advisers civil liability protection when reporting suspected financial abuse of seniors advanced in the U.S. Senate on Tuesday. The Senior Safe Act was approved by the Senate Banking Committee as part of a larger bill that would reform regulation of credit unions, community banks, and small regional banks. The Senate action follows approval of a companion elder-abuse bill by the House Financial Services Committee in October.



<a href="https://www.washingtonpost.com/news/get-there/wp/2017/12/04/whats-the-largest-social-security-retirement-check-someone-can-get/?utm_term=.48b57bd982b8" target="_blank" rel="noreferrer noopener" class="broken_link">What’s the largest Social Security retirement check someone can get?</a> |<a href="https://www.washingtonpost.com/" target="_blank" rel="noreferrer noopener" class="broken_link">The Washington Post</a>Looking at your Social Security statement regularly should be a key part of your retirement planning. This means not just waiting until a few years before you retire to check what’s on your benefit. Retirement planning should begin the day you start working full-time. Knowing how much you can expect from Social Security (assuming there aren’t major changes by the time you do retire) should be part of determining how much you need to save and invest for retirement.



<a href="https://www.plansponsor.com/retirees-found-some-expenses-in-retirement-higher-than-expected/" target="_blank" rel="noreferrer noopener">Retirees found some expenses in retirement higher than expected</a> |<a href="https://www.plansponsor.com/" target="_blank" rel="noreferrer noopener">PLANSPONSOR</a> In a survey of Baby Boomers, Capital Group found that, among those who are retired, 60 percent say that life post-employment is better than they had anticipated. Thirty percent say it meets their expectations, and 10 percent say it is worse than they expected, with many in this group blaming finances or health. Others point to lifestyle issues, such as boredom, loneliness, or the fact they miss work. However, despite many saying retirement is surprisingly better, Boomers face a myriad of costs that are surprisingly higher, starting with those for health care; 43 percent of Boomers say health care costs are higher than anticipated. Other unexpectedly high expenses are: travel (40 percent), taxes (34 percent), food (25 percent) and utilities (23 percent). By comparison, only 11 percent of retired Boomers say they spend more than they had hoped to to support dependents, a mere 9 percent say credit card debt is a problem, and only 9 percent say housing costs exceed those anticipated.



<a href="https://www.forbes.com/sites/kateashford/2017/12/06/adult-children/#6351216b4264" target="_blank" rel="noreferrer noopener">Supporting adult children could cost you $227K in retirement</a> |<a href="https://www.forbes.com" target="_blank" rel="noreferrer noopener">Forbes</a>If you’re not careful, lending your adult children a financial hand can have significant consequences later on. It could cost you as much as a quarter of a million dollars out of your retirement nest egg, new research has found. Some 80 percent of parents of children 18 and older are covering, or have covered, at least a portion of their adult child’s expenses, according to a recent survey from NerdWallet. That includes helping pay for groceries (56 percent), health insurance (40 percent), rent or housing (21 percent), cell phone bills (39 percent) and car insurance (34 percent). However, if parents took the money they were spending on their children and put it toward retirement, they’d have about $227,000 more to tide them over, the report says.



<a href="https://hbr.org/2017/12/how-digital-tools-and-behavioral-economics-will-save-retirement" target="_blank" rel="noreferrer noopener">How digital tools and behavioral economics will save retirement</a>&nbsp;|&nbsp;<a href="https://hbr.org" target="_blank" rel="noreferrer noopener">Harvard Business Review</a> In Shlomo Benartzi’s work as a behavioral economist, he’s thought a lot about how nudges can drive lasting behavior change. In the domain of retirement savings, he and Nobel laureate Richard Thaler devised a program called Save More Tomorrow back in the mid-1990s that used nudges to help people make better decisions about their long-term financial future. That program invites employees to gradually increase their savings rate over time, and it has been a success: according to Mr. Benartzi’s latest estimates, it has boosted the savings rates of as many as 15 million Americans. Read more about Behavioral Economics in this week’s PERA on the Issues article, “Nobel Prize puts spotlight on behavioral economics, retirement plan policy.”

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