With the Dow Jones Industrial Average (DJIA) spiraling downwards the last month in response to the spreading Coronavirus, decreasing 28.5% from its record high of 29,568.57 on February 12th to its recent low of 21,154.46 on March 12th, President Trump declared a national emergency on March 13th. Trump’s move invoked the Stafford Act, making available up to $50 billion in federal aid to the states.
The stock market decline has conjured up memories for many investors of the last major bear market when the DJIA declined 54.4% from its high of 14,198.10 on October 11, 2007 to its low of 6,469.95 on March 6, 2009. While the circumstances, duration (29 days vs. 512 days), and the economic impact of the current stock market decline are quite different from the previous one, investors’ portfolios have taken a hit.
Unlike the 2007 – 2009 event, we’re still in the early stages since the Coronavirus was declared a pandemic by the World Health Organization on March 11th. Although the DJIA increased 1,985 points, or 9.4%, on March 13th from its previous close, 1,176 points, or 72%, of the increase occurred in the last half-hour of trading after President Trump announced his financial response to the Coronavirus. The global economic impact, which is already widespread, is just beginning to unfold.
Precedent for Required Minimum Distribution Relief
Flashback to 2008. 439 days and 41% into the stock market decline from its October 11, 2007 high, Congress unanimously enacted, and President Bush signed, the Worker, Retiree, and Employer Recovery Act of 2008 on December 23, 2008. The Act contained various provisions designed to help pension plans and plan participants weather the economic downturn that existed at that time.
One of the key provisions of the Act was the waiver of the rule for individuals to take required minimum distributions, or RMDs, from their qualified retirement plans and IRAs in 2009 only. This was in response to many individuals, especially older ones, being upset that they would be forced to sell deflated assets to satisfy their RMD and avoid a 50% penalty.
While the long-term benefit of one-year relief from RMDs is questionable, especially since many retirees still needed to take distributions from their retirement plans in 2009 due to lack of alternative income sources to meet their financial needs, it did serve a purpose. Most important, it provided psychological relief for many retirees, especially those who had recently retired and were forced to return to the workforce.
Potential for 2020 RMD and Other Retirement Plan Relief
Will Congress suspend 2020 RMDs as part of an ongoing economic response to the Coronavirus situation? Will they enact other legislation to provide other types of retirement plan relief? I believe that both are possibilities, especially if the stock market continues its downward trend. Unlike the 2009 RMD suspension, there are five key differences that need to be considered before this becomes reality:
1. We’re still early in the game.
As previously stated, the 2008 legislation to provide RMD relief was enacted after the stock market dropped 41% in fourteen months. The current stock market decline, while significant, has lasted only about a month. As such, it doesn’t qualify as a bear market, which is generally a decline of 20% or more over a sustained period of time, typically at least two months.
Given the possibility that the stock market could reverse its course in the next three to six months, if not sooner, many would argue that it’s premature to enact any legislation to provide RMD and other retirement plan relief in 2020.
2. We were overdue for a sizable stock market correction.
Many financial advisors, including myself, have been warning clients about the likelihood of a major stock market correction for the last several years. The DJIA experienced unsustainable growth of 225% from 2009 through 2019. The average annual return of 20.5% over that 11-year period dwarfed the DJIA’s 99-year average return of 7.75% from 1921 to 2019, unadjusted for dividends and inflation.
Seasoned investors as well as younger ones who are familiar with the 54% drop between October, 2007 and March, 2009, are psychologically better prepared for the current market correction. Having said this, we’re living in different economic times and once again, we’re early in the game with the Coronavirus.
To the extent that the stock market continues to experience sharp daily declines and individual investors’ portfolios underperform for an extended period of time, many will experience buyer’s remorse. This will be more prevalent among those approaching, and who are already in, retirement that don’t have adequate sustainable income and extended care protection plans.
3. There’s more awareness of the importance of sustainable income when planning for retirement.
An interesting development that makes it less likely for Congress to implement an RMD suspension plan and other types of retirement plan relief is that more individuals have assumed personal responsibility for their retirement planning. This began with the replacement of the vast majority of private industry defined benefit pension plans that our parents and grandparents depended on for a significant portion of their retirement income with 401(k) plans.
Following the 2007 – 2009 stock market decline, people became more aware of the importance of sustainable income when planning for retirement. I personally expanded my business model in 2009 from one that focused on traditional investment management, or accumulation, to a retirement income planning, or distribution, model.
The inclusion of appropriate sources and adequate amounts of sustainable income, taking into consideration timing of income distributions to meet projected changing expense needs throughout retirement, is essential to preparing for a financially successful retirement. Individuals who recognize this and have developed a retirement income plan are less vulnerable to stock market downturns and less dependent on the government for financial relief.
4. The SECURE Act recently provided retirement relief.
Congress, when considering any retirement relief in 2020, including suspension of RMDs, may be reluctant to pass new legislation at this time because of favorable changes in the SECURE Act which became law on December 20, 2019 and went into effect this year. One of the key provisions was the increase in the RMD age from 70-1/2 to 72. Another favorable change was the elimination of the 70-1/2 age limit for making traditional IRA contributions.
The foregoing changes were enacted in exchange for elimination of the “stretch IRA” which was replaced with a 10-year rule for most beneficiaries. This change will result in most non-spouse retirement plan beneficiaries no longer being allowed to take retirement plan distributions over their lifetime. These individuals are now required to withdraw 100% of the funds from their inherited plans by the end of the tenth year following the year of death for deaths occurring after 2019.
Given the Coronavirus pandemic and associated negative economic impact that has occurred since the SECURE Act went in effect, Congress may be willing to consider a delay of the commencement of the 10-year rule until 2021 or 2022 or changing to a 12-year rule.
5. 2020 RMD suspension would need to be retroactive.
The fifth and final consideration relates to timing. When the Worker, Retiree, and Employer Recovery Act of 2008 was enacted, it occurred at the end of 2008 effective for 2009. Given the fact that we’re already two and a half months into 2020 and many individuals have already taken their 2020 RMDs, any legislation providing RMD relief for 2020 would need to be retroactive to January 1st.
The legislation would need to give individuals who have already taken their 2020 RMDs the option to return the full amount to the retirement plan accounts from which they were withdrawn. Retirement plan sponsors and IRA custodians would have additional responsibilities, including tracking the returns, not issuing 2020 Form 1099-R’s to report the withdrawals, and confirming that the returned amounts don’t exceed the distributions that were taken.
Retirement Plan Relief More Likely in 2021
Suspension of 2020 RMDs and other types of financial relief for retirement plan participants, while possible, aren’t likely to be enacted and made effective this year. Although such legislation would increase the longevity of retirees’ assets and provide psychological relief, there are various considerations discussed in this blog post that need to be addressed.
If the economy and stock market continue its downward trend for the next six months or so, it’s more likely that legislation suspending RMDs and delaying the commencement of the nonspouse beneficiary10-year rule, or potentially changing to a 12-year rule, would be enacted at the end of 2020 effective in 2021.