The effects the election and regulatory changes could have on the retirement industry in 2025

By Mike Townsend

The summer in Washington has been dominated by the dramatic developments in the presidential race, from President Biden's disastrous debate performance in late June to the July assassination attempt on former President Donald Trump, to the decision a little more than a week later by President Biden to drop out of the race. Now all attention is focused on the reset race between Trump and Vice President Kamala Harris.

Democrats are clearly re-energized by the switch from Biden to Harris, as the Harris campaign has seen an explosion of fundraising and strong movement in the polls since she entered the race. But the race remains close and is likely to remain that way right through Election Day on November 5. Seven battleground states—Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin—hold the key to the outcome. Polls in early September showed all seven in the "toss-up" category, so expect the campaigns to focus their energy, time, and advertising on these key states.

But while much of the attention will be on the presidential race, the battles for control of the Senate and the House of Representatives are perhaps even more important to the markets. That's because while presidential candidates can and do make a wide array of policy promises on the campaign trail, it is ultimately Congress that turns those ideas into laws.

Republicans remain a strong favorite to capture the majority in the Senate. Democrats (including the four independent senators who caucus with the Democrats) have a narrow 51-49 majority, so Republicans need to flip just two seats in November to win the majority. There are 23 Democrat-held seats on the ballot this year, and just 11 Republican-held seats. Republicans are all but guaranteed to win the open seat in ruby red West Virginia, where moderate Democrat-turned-Independent Senator Joe Manchin is retiring. And Democrats have tough seats to defend in Arizona, Michigan, Montana, Nevada, Pennsylvania, and Wisconsin. Republicans are likely to come out with a slim majority, though there is no sure thing in politics.

Democrats, on the other hand, are optimistic about flipping the House of Representatives. Republicans hold just a four-seat majority and Harris's entry into the presidential race appears to be benefitting down-ballot candidates in close races. We think Democrats are a slight favorite to win the House, but it is far from a slam dunk. If Republicans win the Senate and Democrats capture the House, it would be the first time in history that the two chambers flipped in opposite directions in the same election.

November's outcome will be critical in clarifying the path forward in 2025 for a key policy issue: taxes. All of the 2017 tax cuts, including lower individual income tax rates, the higher standard deduction and the larger amount of assets that can be inherited without triggering the estate tax, are set to expire at the end of 2025. That means a titanic battle is shaping up next year on what to do about those expiring provisions. And both parties are thinking about what other tax issues could be included in a large bill. In recent weeks, for example, both presidential candidates have endorsed ending the taxation of tip income. Trump has indicated support for eliminating taxes on Social Security benefits, while Harris has proposed a large tax credit for homebuyers. Expect a lot of back-and-forth this fall about next year's tax debate, but until we know who will be occupying the White House and which party controls the House and Senate next year, it's impossible to predict how the complicated issue will play out.

Focus on the election has meant that Congress has found little time for significant legislative action in recent months, and we expect that to continue until after the election. Congress does face an October 1 deadline to fund government operations for the new fiscal year, but it is widely expected that lawmakers will pass a temporary extension to keep the government open and operating through the election. Congress will reconvene in November for what could be a busy "lame duck" session between Election Day and the Christmas holiday.

While Congress has been relatively quiet, there have been notable recent developments on the regulatory front.

Labor Department Retirement Security Rule rejected by the courts

In July, two different federal courts issued a nationwide stay of the Department of Labor's "Retirement Security Rule," usually just referred to as the fiduciary rule. The rule was supposed to go into effect in September, but now will be delayed indefinitely and may ultimately be overturned entirely. Among the key issues has been whether one-time advice, such as providing advice to an investor who is rolling a 401(k) into an IRA, is covered by the fiduciary definition. The issue of whether annuity sales should be covered was also central. Both cases resulted in the nationwide stay were brought by groups representing insurance agents.

The development is the latest twist in the 15-year saga for the DOL as it has struggled to craft a rule to clarify who is a fiduciary in the retirement savings context. A previous iteration of the rule, finalized during the Obama administration, was vacated by the courts in 2018. That decision, in fact, came into play in the 2024 cases, with one judge citing the substantial similarities between the new rule and the previous rule as the basis for his decision.

Federal Judge Reed C. O'Connor, of the Northern District of Texas Fort Worth Division, said that the plaintiffs in one of the cases, the American Council of Life Insurers, and several other trade associations, were "virtually certain to succeed on their claims that the Rule exceeds DOL's statutory authority...." He added that the rule "is almost certainly unlawful for a broad class of investment professionals." That court went beyond the first court's ruling in also staying the DOL's amendments to Prohibited Transaction Exemption 2020-02. 

The DOL has indicated that it plans to appeal. While further legal wranglings proceed, however, the DOL's original 1975 five-part test for determining which advisers qualify as fiduciaries under ERISA will remain in effect.

Supreme Court decision likely to have dramatic effect on regulations

The DOL's arguments in defending its fiduciary rule took an additional blow when the Supreme Court issued an important decision in late June that will have a far-reaching impact on the regulatory environment. The Court ended 40 years of adherence to the Chevron doctrine, a 1984 decision that said the courts needed to defer to the expertise of regulatory agencies when a law passed by Congress was unclear or vague.

The implications of the Supreme Court decision could directly impact another DOL rule: the agency's 2022 401(k) ESG rule. That rule made it easier for retirement plans to consider environmental, social and governance factors when selecting investment options for the plan. In September 2023, a Texas judge upheld the rule, relying heavily on the Chevron deference. But after the Supreme Court decision, an appellate court sent the challenge over the ESG rule back to the lower court for reconsideration. Observers believe that the ESG rule could now be overturned.

The Supreme Court decision is likely to affect the SEC as well. That agency has already seen multiple rules overturned by the courts this year. Implementation of its high-profile climate risk disclosure rule, which was approved in March and requires public companies to disclose more to investors about their contributions to climate change, has been paused in the face of eight legal challenges. The SEC has several other rules in the queue that could be impacted, including a series of proposals to overhaul retail trading, a proposal requiring mutual funds to hold more liquidity and a proposal to govern the use of predictive data analytics and other technology in investment advice interactions. The SEC recently indicated that it was planning to pull back and re-propose both the mutual fund rule and the predictive data analytics rule.