March 1, 2024

What can we expect from Washington DC in 2024?

By Mike Townsend

2024 is shaping up to be a year of unpredictability and anxiety for investors. Wars continue in Ukraine and the Middle East, neither with any clear path to resolution. US-China tensions continue to be on the rise. The Federal Reserve and central banks around the world are wrestling with inflation and other economic data as they determine when to begin interest rate cuts. A landmark election looms in November here in the United States, but there are also elections in more than 60 nations around the globe in 2024, impacting more than 4 billion people. Add to that list unprecedented dysfunction on Capitol Hill and it's no surprise investors are nervous.

But markets have been resilient in the first two months of the year, with the S&P 500 and the Nasdaq, as well as international stock indexes, in positive territory. Volatility may increase as the year goes on, as some of the geopolitical and domestic risks sort themselves out. So, what can we expect from Washington this year?

Congress stymied by dysfunction

With Republicans holding a margin of just 219-213 in the House of Representatives and Democrats having just a two-seat majority in the Senate, the split Congress has struggled to pass even the most basic legislation. Indeed, lawmakers still have not settled on the government spending bills for the current fiscal year, which started back on October 1. A series of temporary extensions of last year's funding levels have thus far avoided a government shutdown, but the next deadline looms on March 22.

The inability to pass the government funding bills, coupled with the rapid collapse last month of a bipartisan border security package that was months in the making, raises the question of whether Congress can get anything substantive done in the nearly eight months before November's election. With some Republicans eager to leave key issues unsolved until after the election, we think the legislative agenda in the coming months will be very sparse.

Rare bipartisanship on taxes

There was one surprising bit of bipartisanship that emerged amidst the chaos of the first few weeks of 2024 when the House easily passed a $78 billion tax bill. It's one of those rare bills that has something for everyone: It combines an expansion of the child tax credit, a top priority for Democrats, with the extension of several business tax breaks, a priority for Republicans. After an overwhelming House vote of 357-70, the bill is now in the Senate, where the path forward has proven a little rockier. Senators are pushing for a chance to amend the bill with other tax priorities, which risks upsetting the fragile bipartisan balance in the House. One possibility to watch for is whether the tax package gets attached to government funding legislation later this month, as that would allow it to move forward without getting bogged down with endless amendments.

But this month's tax debate is also relevant because it serves as a preview of what is shaping up as a massive battle over taxes next year. That's because the 2017 tax cuts, including lower income tax rates, the higher standard deduction and the increased amount of assets that are exempt from the estate tax, expire at the end of 2025. Whether to extend some or all of those tax cuts will be the one of the highest priority items for the new Congress that takes office next January.

Auto-IRA bill introduced

In early February, Rep. Richard Neal (D-MA) introduced the Automatic IRA Act, a bill that would require businesses with 10 or more employees to offer a retirement plan. Neal, the top Democrat on the House Ways & Means Committee who could return as chairman in 2025 if Democrats recapture the House this November, has long been a champion of an auto IRA. The SECURE 2.0 Act originally included the provision, but it was dropped before the bill became law in 2022. The legislation would create a federal IRA option, similar to state options that now exist in more than a dozen states. It includes a default contribution level of 6%, though companies can choose a higher default level. Given the dysfunction on Capitol Hill right now, it seems unlikely the bill will move in 2024, but it will be an issue to watch next year if Democrats regain the House majority.

DOL's new fiduciary rule comes under fire

On the regulatory front, the comment period for the Department of Labor's new Retirement Security rule proposal closed on January 2. The rule is the latest entry in the 15-year effort by the DOL to redefine who is a fiduciary in the retirement savings context, a battle that has now spanned three presidential administrations. The proposal revises the test for determining who is a fiduciary and would make one-time advice, such as rollover advice or annuity purchases, subject to the fiduciary definition. To many, the proposals bears a striking similarity to the DOL's 2016 fiduciary rule, which went into effect briefly before being vacated in 2018 by the Fifth Circuit Court of Appeals.

Not surprisingly, pushback from the industry has been fierce. Trade associations like the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA), called on the agency to withdraw proposal, arguing that it overstepped the agency's authority and would likely be rejected by the courts. The ICI called the proposal "legally flawed," noting that "it ignores past case law, exceeds the DOL's authority and falls short of applicable administrative law standards." Schwab also called for the DOL to "withdraw its proposal, rather than embark on an ill-fated sequel to its 2016 rulemaking." Schwab, in addition to arguing that the proposal contradicts existing law, also said that the DOL has failed to provide a coherent rationale for the proposal, overestimated the potential benefits to investors and underestimated the cost to the industry. Schwab wrote that the proposal "is wrong as a matter of law and policy ... There are ample opportunities for industry and the Department to partner on expanding the accessibility and affordability of investment advice, where our collective energies would be better expended."

The Labor Department is currently reviewing the comments and final rule is expected later this year. A court challenge is likely if and when the rule is finalized.

Big SEC decisions loom

The SEC has several rules in the queue to be finalized in the first or second quarter, many of which could have big implications for investors, retirement plan participants and advisors. We are keeping an eye on the SEC's equity market structure reform proposals, a package of four rules that include more transparency for investors on trade executions, allowing some stocks to be traded in increments smaller than a penny and a sweeping overhaul of retail trading that would see trades go to an auction system at the exchanges. Another proposal focused on mutual funds could make it more difficult for retirement plan participants to have same-day exchanges in their plan. And a proposal to limit the use of predictive data analytics in investment advice could also impact how plan participants get advice about the investing options in their plan. All of these rules are slated to be finalized in the coming months, though changes from what was originally proposed are common.

It all adds up to a busy and unpredictable year that should keep investors and advisors on their toes.