April 23, 2021

Washington Update: Retirement-Related Priorities For The New Administration

Washington seems to have finally caught its breath after a frantic first quarter. The year began with riots at the US Capitol and continued throughout the inauguration of a new president, the impeachment of the previous president, and the remarkably quick passage of a $1.9 trillion economic stimulus bill, the second-largest ever signed into law.

With President Joe Biden settled in the White House, the Democrats have laid out a rather ambitious plan, considering they have razor-thin majorities in both the House and the Senate. With a single-digit margin in the House and Vice President, Kamala Harris as the tie breaker in the 50-50 split Senate, nothing will likely come easily over the next two years. Democrats will need to focus on keeping their ideologically diverse members on the same page, in order to increase their chances at legislative successes. 

Here's a look at some of the retirement-related issues on the agenda in 2021:

New leadership, familiar issues at Labor Department

Former Boston Mayor Marty Walsh was confirmed by the Senate as the new Secretary of Labor on March 22. Walsh is a long-time labor leader who forged a reputation as someone willing to work with the business community during his time in Massachusetts. While his focus at the Department of Labor (DOL) is expected to be on traditional issues like workplace safety, pay equity and the minimum wage, he will also oversee the Employee Benefits Security Administration (EBSA), the division that has oversight responsibilities for employer-sponsored retirement plans. As of the writing of this article, President Biden has not yet nominated the assistant secretary for the EBSA. 

Retirement advisors will be closely watching how the DOL handles some familiar issues like the fiduciary rule, which now has been in flux for more than a decade. After the courts vacated the Obama-era fiduciary rule in 2018, the Trump administration finalized an investment advice exemption in the final weeks before Biden took office. That exemption went into effect in February, and subjects rollover advice to the 1975 five-part test that defines who is a fiduciary. The Biden administration changed the policy, so that advisors are no longer required to provide written notice to clients but still must ensure a good-faith effort to work in the client's best interest. Tougher enforcement will begin in December 2021. In April 2021, the DOL released additional guidance, including a set of compliance-focused frequently-asked-questions for investment advisers who are planning to rely on the exemption. The DOL also issued a set of questions that investors can ask when interviewing potential advisers. In its April release, the department reiterated that it "anticipates taking further regulatory and sub-regulatory actions" as it continues to review the entire scope of the fiduciary issue in the retirement space. The bottom line: Expect another chapter in this long-running saga.

The Biden administration has also stated that they will not be enforcing two other retirement-related rules finalized in the last days of the Trump administration.  Both deal with environmental, social and corporate governance (ESG) investing, an increasingly popular investing strategy. One rule requires plan sponsors to put economic interests of plan participants ahead of so-called "non-pecuniary" goals, while the other prohibits plans from casting proxy votes that are not directly related to the plan's financial interests. Both rules are expected to be re-proposed soon. 

Finally, the DOL also issued new guidance in April for plan sponsors, plan fiduciaries,  recordkeepers and plan participants on best practices for cybersecurity, the first time the agency has ever released such guidance. The guidance comprises three documents – a tip sheet for plan sponsors and fiduciaries to help ensure they are selecting a service provider with strong cybersecurity practices; a best practices document for managing cybersecurity risks; and a tips document to help plan participants practice good cybersecurity when checking their retirement accounts online.

Bipartisan retirement legislation in the works?

On Capitol Hill, retirement savers are eager to see the re-boot of what has become known as "SECURE Act 2.0."  Last fall, bipartisan retirement bills were introduced in both chambers to build upon the popular SECURE Act that was passed in late 2019. The House version attracted attention because it was co-sponsored by House Ways & Means Committee Chairman Richard Neal (D-MA) and the panel's top Republican, Rep. Kevin Brady (R-TX), in a rare show of bipartisanship. Provisions in the bill increased the required minimum distribution age from 72 to 75; added an additional "catch-up" contribution at age 60; increased tax credits for low-income savers; made it easier for small businesses to start plans; and more. The bill overlapped significantly with a Senate bill from Senators Rob Portman (R-OH) and Ben Cardin (D-MD).

With a new Congress underway, the legislative process will need to start over. Chairman Neal has indicated that he will be re-introducing the bill this spring and he intends to make it a priority in his committee. Whether it will get the same level of bipartisan support this year is unclear, as partisan tensions on Capitol Hill are very high and cooperation across the aisle has been rare. On the Senate side, Portman announced earlier this year that he will not be seeking re-election in 2022. While the retirement industry will lose one of its primary champions on Capitol Hill, Portman's decision could help his legislation, as colleagues may be inclined to support a bill that builds on one of Portman's legacy issues before he leaves Congress. All of these factors contribute to a sense of optimism in Washington that another retirement savings bill could become reality during this Congress.  

Tax increases in play

Tax increases will likely happen, but when? In late March, President Biden laid out The American Jobs Plan which he proposed would be paid for by a corporate tax increase. Other tax increases are expected to be paired with forthcoming spending proposals. Congress will ultimately have to draft the legislation and determine what tax code changes can pass through the narrow divides in both chambers. Here are the prospects for some tax changes that investors will undoubtedly be keeping an eye on:

  • Capital gains and dividends: During the presidential campaign in 2020, then-candidate Biden called for taxing capital gains and dividends as ordinary income for individuals with more than $1 million in income.
  • Estate taxes: Two proposals are in the mix. One is lowering the exemption amount, an idea that has strong backing from many Democrats, but does not yet have unanimity within the party. A more controversial approach under consideration is either eliminating or reducing the step-up in basis, but it is far from clear that all 50 Democrats in the Senate would support it.
  • Financial transaction tax: The idea of a small tax – 0.1% has been proposed in both chambers of Congress – on stock, bond and derivatives trades has floated around Washington for a decade or more without gathering much traction. In 2021, though, the idea has received more attention. As a result of the social media-fed retail trading frenzy that sparked extraordinary volatility in so-called "meme stocks" like GameStop Corp. earlier this year, some lawmakers have said that a financial transaction tax would curb overly speculative trading. It's also long been known that such a tax would raise an enormous amount of revenue – an attractive feature to an administration with big spending plans and facing a large budget deficit. But the Biden White House has not endorsed the plan and other tax increases seem to be higher on the priority list.
  • Wealth tax: Senators Elizabeth Warren (D-MA), Bernie Sanders (I-VT) and several colleagues have proposed a bill that would levy a 2% tax on households and trusts above $50 million, with an additional 1% surtax on billionaires. At this point, such an idea does not seem likely to move forward in Congress.

SEC examination priorities

Late last year, the SEC officially rebranded the "Office of Compliance Inspections and Examinations" as the "Division of Examinations," simultaneously simplifying the name and elevating the group's importance at the agency, where "division" is reserved for the most important sections. The new division immediately becomes the agency's second largest, and it recently issued its annual examination priorities.

Compliance with Regulation Best Interest, Form CRS and whether registered investment advisors are fulfilling their fiduciary duties of care and loyalty are near the top of the list of priorities. The SEC indicated it would be focusing on whether advisors are reducing and disclosing any conflicts of interest. And the agency said it would be looking at the "appropriateness of recommendations and advice provided to retail investors, with a particular emphasis on: (1) seniors, including recommendations and advice made by entities and individuals targeting retirement communities; (2) teachers; (3) military personnel; and (4) individuals saving for retirement." The SEC also plans to focus on information security and resiliency; anti-money laundering programs; and disclosures and recommendations to investors about ESG investing opportunities. On that point, the SEC said it would "review the consistency and adequacy of the disclosures…provide[d] to clients regarding these strategies."