A new bill put forward in the House of Representatives aims to cut down on confusion for older Americans as they make crucial retirement savings decisions.
The Retirement Simplification and Clarity Act, co-authored by Representatives Jimmy Panetta of California and Darin LaHood of Illinois, seeks to help enhance financial security for retirees by tackling existing barriers to their understanding of retirement options.
“As Americans prepare for retirement, they deserve clear, concise guidance and flexible options to make the most of their hard-earned savings,” Panetta said in a statement on Wednesday afternoon. “By allowing individuals to make informed decisions about their retirement plans, we can better ensure their financial security in the years ahead.”
Specifically, the proposed legislation includes measures to improve the 402(f) Notice process, which provides key information to individuals leaving an employer and seeking distributions from 401(k) plans.
The bill follows a report from the Government Accountability Office in May, which found 401(k) participants faced challenges understanding their options as they switched jobs, with roughly 80 percent of eligible participants it surveyed saying they were not aware of all the choices available to them.
"Additionally, GAO found that 401(k) participants do not fully understand the associated tax consequences of their distribution options, even though plans are required to outline them in the 402(f) Notice before participants receive a distribution," GAO's May report said, noting 40 percent of all those who were eligible did not grasp the tax implications they'd be facing.
Under the bill introduced Wednesday, the IRS would redesign the notice to have simpler language and clearer explanations of distribution options, such as rolling over savings into new plans or retaining them in existing ones.
The bill also proposes expanding in-service rollover options, enabling individuals aged 50 and older to move their 401(k) savings into annuities, which can stand in for the lifetime income stream provided by traditional pensions, thus helping to address concerns about outliving retirement savings.
Read more: Comparing the 401(k) vs. pension plan
“Hardworking Americans planning for retirement shouldn’t be burdened with complications that only create uncertainty about their financial future,” LaHood said on Thursday.“Providing more flexibility and a better understanding of the process will help ensure Americans are more secure and better prepared for their retirement.”
The proposed legislation drew a positive response from the American Council of Life Insurers, an industry group that regularly advocates for lowering barriers to annuities.
“Annuities allow retirement savers to replicate a traditional pension plan’s guaranteed lifetime income stream,” said David Chavern, president and CEO of ACLI. “This important legislation will help Americans nearing retirement access annuity products they need to provide for a secure financial future.”
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