By Randy Myers
Sometimes, unlocking one door is the key to opening another.
When Congress passed the $1.9 trillion American Rescue Plan in March 2021, it took another step toward helping the country recover from last year’s pandemic-related economic downturn. But the plan also included a smaller piece of legislation—the Butch Lewis Employee Pension Plan Relief Act—designed to prevent the insolvency of approximately 100 multiple employer pension plans currently in poor financial shape. The latter act had long been a priority for Democratic lawmakers, some of whom had taken the position that they wouldn’t act on further retirement-related reforms until it passed. Now that it has, says Greg Long, public policy expert with Alight Solutions, a business process outsourcing company, it may open the door for bipartisan cooperation on other issues of high importance to retirees and people saving for retirement.
Speaking at the 2021 SVIA Spring Seminar in mid-April, Long said legislation that now has a better chance of passing in Congress includes the Securing a Strong Retirement Act of 2020 (SECURE Act 2.0) in the House of Representatives and the Retirement Security and Savings Act in the Senate.
“Those bills were (introduced) on a bipartisan basis and there’s a lot of overlap between them,” Long said. “They both want more small companies to start plans, so they want to offer tax incentives (for that.) They both want people, especially people above the age of 60, to be able to put more money in their retirement plans through expanded catch-up provisions. And they want to allow people to save longer. We’re living longer, let’s increase the age for required minimum distributions.”
Congress could also use these legislative initiatives, Long suggested, to make it easier to use different investment vehicles in the retirement market, such as stable value funds and annuities. “There is an enormous appetite on the Hill, among regulators as well as legislators, to make it easier for people to turn the pile of cash they’ve grown over 30 years into a stream of income for the rest of their life,” he observed.
Despite his generally positive outlook on the climate for new retirement legislation, Long warned of potential clouds on the horizon. The Biden administration succeeded early this year in passing an expansive fiscal stimulus package in the form of the American Rescue Plan, and is pursuing still more big-ticket items like the $2.25 trillion Build Back Better Plan, which includes a combination of infrastructure spending and tax hikes on the wealthy and big businesses. But Republicans are leery of tax increases, and Congress, as it seeks sources of revenue to fund Biden’s agenda, could look to pare back some of the tax breaks currently afforded to retirement savers. It could also consider freezing retirement plan contribution limits.
“We’ve got a bulls eye on our back, because a lot of the largest benefits in the tax code are for retirement plans,” Long explained. He said considers it “entirely possible” that through a reconciliation bill aligning House and Senate legislation, Congress might seek to cap some of the tax benefits on retirement plans for high-income earners or high-net-worth individuals. On the other hand, he cast doubt on the idea that Congress might impose a much-discussed financial transaction tax, which has been fiercely opposed by the financial services industry.
“Bottom line, I’m optimistic,” Long said. “I believe there is a clear path to SECURE 2.0 and meaningful things happening in Congress, potentially this year. You’ll have a big bipartisan fight over the reconciliation bill, but probably something passes, and probably some of it impacts the retirement business.”
Action also expected from regulators
As the longtime executive director of the Federal Retirement Thrift Investment Board, which runs the nation’s largest defined contribution retirement savings plan, the federal government’s Thrift Savings Plan, Long is keenly aware that it’s not just policymakers who influence the operation of retirement plans but also regulators.
Among the biggest recent changes for the retirement industry on the regulatory front is the new prohibited transaction exemption from the U.S. Department of Labor that took effect on February 16. The exemption is designed to provide a number of protections for investors, including a “best interest” standard of care that fiduciaries must meet when recommending that an investor roll money out of a workplace retirement account into an IRA. Under the new rule, Long suggested, many financial advisors are going to have to change how they do business. Citing just one example, he said it may become difficult for an advisor to recommend that a client roll money out of an employer-sponsored retirement plan with extraordinarily low fees into an IRA that charges materially more.
Beyond new regulations like the prohibited transaction exemption, Long predicted that the retirement industry also will continue to see a flow of sub-regulatory guidance from regulators that may not have the force of law—it won’t have gone through a formal notice and public comment period—but can still be important in driving the behavior or retirement plan sponsors. In January of this year, for example, the DOL issued sub-regulatory guidance on how plan sponsors should deal with plan participants who have gone “missing,” perhaps because they did not update their personal information with their plan.
“You’re going to see a lot of this” sub-regulatory guidance going forward, Long concluded.