August 19, 2022

What's new in Washington DC in the Retirement Space?

With the midterm elections now just three months away and inflation at a four-decade high, it has been a busy summer for lawmakers and regulators in Washington. As August began, Democrats were working to pass the "Inflation Reduction Act," a surprise bill that combines measures to combat climate change with some health care provisions, a new corporate minimum tax and a boost in funding for the IRS – all of which is projected to result in a modest reduction in the budget deficit. It's a significantly scaled-down version of the president's long-sought economic package but would still represent a win for the White House.

Meanwhile, retirement savings legislation continues to make progress, while regulatory agencies, particularly the SEC, have also been active. Here's a brief look at the state of play on some of the key issues impacting retirements savers and investors.

Retirement savings bills make progress in Senate

Among the key issues to watch as we head into the fall is retirement savings legislation. The House of Representatives voted 414-5 to approve the "SECURE Act 2.0" back in March. That bill would increase the required minimum distribution age from 72 to 73 next year, then move the age to 74 in 2030 and finally to 75 in 2033. The legislation also would increase the "catch-up contribution" limit to $10,000 for individuals aged 62 to 64 years old. And it includes numerous provisions to boost employer-sponsored plans, making it easier for businesses to start and operate plans and for employees to participate.

This summer, the Senate has been making progress on its version of retirement savings legislation. The Senate approach has involved two bills. The first, known as the "RISE and SHINE Act," was approved unanimously in June by the Senate Health, Education, Labor and Pensions Committee. It would increase to $7,000 the limit for making automatic rollovers when employees leave an employer with a small retirement savings balance; allow 403(b) plans to band together to form pooled employer plans; provide employers with the option to allow for after-tax emergency savings accounts within a plan; and streamline several administrative aspects of plans, among other provisions.

The second and larger bill, the Enhancing American Retirement Now (EARN) Act, received unanimous approval from the Senate Finance Committee. Rather than a phased-in RMD age increase, the bill would jump the RMD age to 75 all at once – but not until 2032. The $10,000 catch-up contribution would apply to individuals ages 60 to 63, slightly different from the House approach. Other notable provisions include allowing part-time workers with two consecutive years of 500 hours to become eligible for a 401(k) plan; permitting employer matching contributions based on student loan payments; allowing annual penalty-free emergency expense withdrawals of up to $1,000, with repayment permitted within three years; and the creation of a new safe harbor automatic enrollment formula.

Normally, the Senate would combine the bills from its two committees into one bill, pass that through the full Senate, and House and Senate negotiators would meet to produce a final compromise. However, key members of both chambers are reportedly modifying that approach by negotiating behind the scenes now, with the goal of reaching an agreement before any further votes. Then each chamber could vote on the final product.

We continue to believe that the most likely scenario for the retirement savings legislation is that it won't see final action until after the November elections. It is likely to be combined with other spending measures in a larger package, so a December timeline remains a possibility very much. That's how the original SECURE Act passed in December of 2019.

Cryptocurrency in retirement plans stays in the spotlight

Earlier this year, the Labor Department issued strongly worded guidance that questioned whether cryptocurrency was an appropriate investment option in employer-sponsored retirement plans. While the guidance stopped short of banning cryptocurrency-related investments, it raised numerous questions and sparked a legal challenge by one plan provider. Testifying before a House committee in June, Labor Secretary Marty Walsh acknowledged that clarity was needed and said that the department "is looking at potentially going through a rulemaking process" on the issue. Walsh's comments came just days after Treasury Secretary Janet Yellen called cryptocurrency a "very risky investment" to include in a retirement plan and said Congressional action to regulate it "would be a reasonable thing." Congress has also taken an interest, with Senator Elizabeth Warren (D-MA), Senator Richard Durbin (D-IL) and Senator Tina Smith (D-MN) questioning Fidelity after the firm announced that it would begin allowing retirement plans the ability to offer participants the opportunity to invest a portion of their assets in Bitcoin. Congress is also wrestling more broadly with crafting a clear regulatory framework for cryptocurrency. It's clear that this issue will continue to receive attention from regulators and Capitol Hill in the months ahead.

SEC continues breakneck regulatory pace

This summer has seen the SEC welcome two new commissioners to the agency. Jaime Lizárraga, a long-time aide to House Speaker Nancy Pelosi (D-CA), was confirmed as a replacement for Democratic Commissioner Allison Herren Lee, who announced her intention to step down earlier this year. And Mark Uyeda, a former staff counsel to the Senate Banking Committee, was confirmed to fill the vacancy created when Republican Commissioner Elad Roisman resigned in January.  The two new commissioners will be busy from the outset, as the SEC continues its aggressive regulatory agenda. In a late June update on its regulatory priorities, the agency listed 53 issues – 27 in the "Proposed Rule Stage," and 26 in the "Final Rule Stage," meaning the rules have been proposed and a public comment period completed.

Of note for investors, SEC Chair Gary Gensler used a June speech to outline a major initiative to overhaul equity market structure. He called for the creation of an order-by-order auction mechanism for retail trades run by the stock exchanges, which would be a fundamental change to the way trades are handled today. He also called for changes to best execution rules, payment for order flow rules, the treatment of odd lots and the consideration of sub-penny pricing, among other ideas. Importantly, this was just a speech, but a package of rules is likely to be formally proposed in the coming weeks. There's no question that there are potentially significant impacts here for retail investors, depending on the details.

Climate-related disclosure continues to be a hot topic at the SEC. The agency's controversial proposal to require public companies to disclose more about their climate impact and the risks they face from climate change spurred about 3,500 comment letters, with many commenters concerned that the proposal increases legal liability and imposes significant costs. There are also questions about whether the SEC even has the legal authority has to promulgate such a rule. 

The SEC also recently proposed revisions to the long-standing "Names Rule," which governs how funds can use certain words in their names. While the proposal ostensibly tries to create some standards for using words like "green" and "sustainable" in a fund name, the language of the proposal impacts the use of a broad array of terms, including "growth," "value," "international" and more. Funds using such words in their names would be required to ensure that at least 80 percent of the fund is invested in assets suggested by the name. Comments on the proposal are due in mid-August, and a final rule could come late this year or early in 2023. Plan sponsors and plan providers should keep an eye on this proposal. Given the potential for widespread renaming of funds if the proposal becomes final, there could be some confusion among plan participants who see their investment options change names.

New Labor Department proposal

Over at the Department of Labor (DOL), regulations were recently proposed to amend the rules governing qualified professional asset managers, or QPAMs. The existing rules provide limited relief from prohibited transactions for asset managers dealing with retirement plans.  The proposed changes would expand DOL's authority to decide that an asset manager has violated the rules and to automatically disqualify the QPAM, increase recordkeeping requirements, and make certain changes in cases where a QPAM has been convicted of certain crimes.  The comment period will run through September 26.

Finally, no Washington update on retirement savings developments is ever complete without a brief update on the Department of Labor's perpetual quest to update the fiduciary rule. The Biden administration has made it clear that it intends to take another run at redefining who is a fiduciary in the retirement savings context. But the growing sense in Washington is that competing priorities and the lack of Senate confirmation for the long-delayed nominee to head the DOL's Employee Benefits Security Administration have made it likely that another attempt at a fiduciary rule overhaul won't kick off until 2023.