January 29, 2021

Washington Update: With Inauguration In The Past, What Does The Future Hold for Plan Sponsors and Their Participants?

While the new year may only be weeks old, it feels like we've already seen enough drama for a full year – or five. The unprecedented scenes of a mob overrunning the U.S. Capitol building and interrupting the counting of the electoral votes were shocking, to say the least. Yet our democracy endured, with Members of Congress fulfilling their constitutional duty to certify Joe Biden's win in the 2020 presidential election in the wee hours of January 7.

Meanwhile, victories by both Democratic Senate candidates in Georgia's twin run-off elections on January 5 meant that Democrats have forged a 50-50 tie in the Senate. Ties in the Senate are broken by the vice president, so Vice President Kamala Harris' tiebreaking vote gives Democrats the narrowest of majorities in the chamber. Coupled with their narrow majority (221-211, with three vacancies) in the House of Representatives, Democrats have full control of Washington.

The results bring the 2021 policy agenda into clearer focus. The Biden administration has more freedom to pursue its policy priorities than it would if it was facing a split Congress. But the razor-thin margins in both chambers and the lack of Democratic unanimity on a wide variety of issues will act as a brake on the party's most ambitious goals. Markets will likely take comfort that the administration may need to scale back its plans in areas like climate change, health care, and tax increases. And major structural reforms such as ending the filibuster in the Senate, expanding the Supreme Court or changing the Electoral College will be much harder to achieve in the narrowly divided Congress, where some Senate Democrats have already publicly opposed such changes.

That said, there are areas where Democrats believe they can have success. Among the likely candidates for action in 2021 are:

  • Another economic stimulus/coronavirus relief package. Expect this to be the new administration's top priority. There was already growing bipartisan support for stimulus payments of $1,400; that is a core feature of the proposed package. Democratic priorities, including aid to state and local governments, more funding for vaccine distribution, a further extension of enhanced unemployment benefits (currently due to expire March 14th), and an extension of the moratorium on evictions (currently due to expire at the end of January) are among the items included in the new proposal.

    One item that is not in the mix is an extension of the 2020 waiver for required minimum distributions (RMDs). RMDs were waived for the year as part of the Covid-19 response, but they resumed in January. There does not seem to be any enthusiasm on Capitol Hill for extending the provision, so individuals who are required to take such distributions should plan to do so this year.

  • Infrastructure spending. Both parties support more spending on roads, bridges and other infrastructure needs, but have been stymied by how to pay for it. While that issue will still need to be sorted out, infrastructure spending is likely to be a top priority for the incoming administration.

  • Retirement savings legislation. A bill introduced in late 2020 has attracted high-profile bipartisan support from leaders in both chambers. While the bill will have to be re-introduced in 2021, the 2020 version included provisions that would increase the RMD age to 75; waive RMDs for savers with account balances of less than $100,000; and add a second tier of catch-up contributions at age 60. The bill also would require employers to automatically enroll employees in new plans; create a national "lost and found" database for retirement benefits that are lost when a company changes name, moves locations or merges with another company; make it easier for small businesses to start a retirement plan for their employees, and reduce the retirement plan eligibility requirements for part-time employees. Also under consideration: the so-called "Auto 401(k)," which would require companies that don't offer a plan to send employee contributions to a state-based IRA. These provisions are likely to change as the bill is negotiated, and there are many questions for retirement plan sponsors and administrators that will need to be clarified. But there appears to be real momentum for moving a bill forward in 2021.

Key question for investors: Are tax increases coming?

One of the most common questions from investors is whether taxes will increase in 2021. The Democratic majorities in both chambers of Congress certainly put that possibility squarely on the table. But again, the narrow margins in the House and Senate will make tax increases the subject of considerable debate.

During the campaign, President Biden proposed a host of tax increases, mostly on wealthier filers, that could be used to offset the cost of the new administration's spending plans. But there is far from Democratic unanimity on many of his proposals. Given the wide spectrum of political ideologies within the party, getting tax increases approved won't be a slam dunk.

The most likely candidates for tax code changes are ideas like a modest increase in the corporate tax rate and returning the top individual tax rate to 39.6%, both of which have broad support within the party. But there is far less agreement among Democrats on other ideas, such as making changes to the estate tax, increasing taxes on capital gains and dividends for wealthier filers or imposing broad taxes on wealth. We expect those kinds of proposals will be much tougher to get through Congress, even with Democrats in control of both chambers. The political implications of raising taxes during a pandemic are also a factor. There is a high degree of uncertainty as to how the tax agenda will play out.

New leaders at key regulators

One immediate effect of Democrats winning the Senate majority is that it should smooth the confirmation process for Biden's nominees for Cabinet positions and heads of regulatory agencies. Barring something unforeseen Biden's Cabinet should be in place relatively soon.

Among key regulators of the retirement industry, President Biden's choice for Secretary of Labor, Boston Mayor Marty Walsh, will have jurisdiction over retirement accounts, but it is not clear where retirement savings issues will be on the priority list. Turnover is also underway at the SEC, where Chair Jay Clayton stepped down in late December. President Biden has tapped Gary Gensler, who chaired the Commodity Futures Trading Commission during the Obama administration. Gensler has a reputation as being tough on enforcement and is likely to focus on strengthening corporate disclosure, protecting shareholder rights and pressing companies on executive compensation. Both Walsh and Gensler will need to go through the Senate confirmation process, which can take a month or more.

End-of-the-year regulatory frenzy

As is typical in the final weeks of a presidential administration, a flurry of regulations were finalized in recent months. Some are likely to be targets for the Biden administration, which could utilize rules that allow a new administration to delay, block or revisit so-called "midnight regulations" by the previous administration. Of particular note for professionals in the retirement plan space:

  • Labor Dept. finalizes fiduciary rule. The DOL rule, which was finalized on December 15, is intended to align with the SEC's Regulation Best Interest. Advisers who make recommendations to retirement account holders would have flexibility in how they are compensated, as long as they act in the best interest of their clients, charge reasonable rates and do not make any misleading statements. The rule applies this tougher oversight regime to rollovers. However, because the rule will not take effect until mid-February, weeks after the Biden administration took office, it is widely believed that the rule will be delayed and eventually rewritten.

  • DOL rules on ESG. The Labor Department also finalized a pair of rules last fall that effectively discourage the use of socially responsible funds in retirement plans. One rule requires retirement plan fiduciaries to focus only on "pecuniary" factors when choosing fund options for a plan, while the second requires plans to only vote on proxy questions when there is an economic impact on the plan. Both rules are viewed as steering plans away from the use of "ESG" (environmental, social and governance) funds as investment options. These rules are also candidates to be overhauled by either the Biden administration or the Democratic-controlled Congress.

Contribution limits unchanged for 2021

Finally, the IRS announced last fall that contribution limits for defined contribution plans would not increase in 2021. The limits will remain at $19,500, plus an additional $6,500 for employees age 50 or older.