This article, originally published on November 9, 2020, was updated on January 6, 2021 to reflect the results of the Georgia Senate runoff elections that led to a Democratic-controlled Senate.
As long-time advocates of policy that furthers retirement security, State Street has been following the Biden-Harris and Democratic platforms to ascertain their retirement policy priorities. We anticipate that the Biden administration and Congress will be active regarding retirement savings and will focus on three key themes:
Changing the fiduciary framework for retirement plans
Expanding retirement coverage for workers not currently covered and increasing savings levels for lower- and middle-income workers
Providing mechanisms to allow lower- and middle-income taxpayers to save more for retirement and other financial needs while reducing tax benefits for highly compensated employees
One of the key issues to watch is the extent to which the expansion of coverage is achieved through enhanced tax incentives or through government mandates to have a retirement plan or to have a specific type of plan. With Democrats winning both Senate runoff races in Georgia, control of the Senate will now be in Democratic hands, with Vice President Harris casting any tie-breaking votes. This is expected to shift the legislative focus toward areas that are clear Democratic priorities and that only need 51 votes to pass in the Senate, as opposed to the normal need for 60 votes. The key area where only 51 votes are needed is “budget reconciliation,” which is limited to legislation that influences federal revenues that is not incidental to the policy objectives of the legislation. In other words, if a proposal has a small tax effect but a large policy effect, that would not be eligible to be included in budget reconciliation. But proposals that primarily affect federal revenues can fit within budget reconciliation and thus only need 51 votes.
We expect the House to begin work on Democratic priorities that can be structured in ways to fit within budget reconciliation. For example, in the retirement space, we anticipate that Democrats will focus on three areas: (1) multiemployer pension plan reform, along with single-employer funding relief, (2) efforts to require substantially all employers to offer a plan or automatic IRA (based on Ways and Means Committee Chairman Richard Neal’s Automatic Retirement Plan Act (ARPA)), and (3) making the saver’s credit refundable. The saver’s credit is a tax credit provided to low and middle-income employees who contribute to a plan or IRA.
Bipartisan retirement bills, such as Securing a Strong Retirement Act (SSRA) introduced by Ways and Means Committee Chairman Neal and Ranking Member Kevin Brady and a bill introduced in 2019 by Senators Rob Portman and Ben Cardin, will continue to be worked on, but we expect them to have a slightly lower priority behind signature Democratic issues like those described above.
As outlined below, we expect the Biden administration to act on a number of retirement issues at the regulatory level.
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Figure 1: Spotlighted Biden Administration Retirement Policy Areas of Focus
Likelihood of Enactment/January
1. Department of Labor (DOL) Fiduciary Regulation and SEC Regulation Best Interest (Reg BI)
Reinstating all or part of Obama administration fiduciary regulation (including possibly making rollover recommendations presumptively imprudent) and revising Reg BI
2. DOL ESG and Proxy Voting Regulations and Private Equity Information Letter
Modifying Trump administration final regulations/guidance through regulation
3. Access/Coverage Guidance
a) Supporting state and federal auto-IRA/401(k) programs through regulations
Per Chairman Neal’s Automatic ARPA legislation
b) Expanding rules for long-term part-time workers
c) Expanding opportunities for caregivers saving for retirement
d) Mandating auto enrollment/escalation for new plans
4. Increasing Tax Benefits for Lower- and Middle-Income Taxpayers
a) Increasing the saver’s credit and making it refundable
b) Supporting employer-sponsored emergency savings programs
5. Imposing an Overall Cap on Benefits
Imposing a cap on aggregate benefits from all retirement plans and IRAs
Likely in certain forms
6. Other Restrictions on Retirement Benefits for Highly Compensated Employees (HCEs)
a) Eliminating or capping catch-up contributions for HCEs
b) Reducing retirement contributions or benefits or compensation limits
Though possible regarding compensation limits
c) Eliminating Roth conversions for HCEs
Source: State Street Global Advisors
1. Top Regulatory Issues: DOL Fiduciary Regulation and SEC Regulation Best Interest (Reg BI)
In the Biden administration, it is expected that the Obama fiduciary regulation will be revisited with an attempt to reinstate in some way as much of it as possible, given that the rule was overturned by the 5th Circuit Court of Appeals in 2018. Of note is the issue of rollovers from plans to IRAs which, if revisited, could possibly be presumed to be a fiduciary breach if a rollover is recommended; such a presumption must then be rebutted by the financial services provider. In conjunction with a review of the DOL rule, it is likely that the SEC’s Reg BI will be revisited as well, with the SEC adopting a uniform fiduciary standard for broker-dealers and investment advisers.
2. Top Regulatory Issues: DOL ESG and Proxy Voting Regulations and Private Equity Information Letter
The DOL regulations on the inclusion of ESG funds in retirement plans, as well as the ability of ERISA plan fiduciaries to vote proxies, raised significant opposition in the retirement community as well as by Democrats in Congress. Given President-elect Biden’s focus on climate change generally, this focus will probably extend to retirement plans. We would expect the Biden administration to (1) at a minimum return the law to the Obama administration position where ESG factors could function as a legitimate tie-breaker between comparable investments (without special documentation requirements) or (2) go further and provide guidance on the importance of taking long-term trends, like climate change, into account. The regulatory guidance could also expressly permit all otherwise permissible ESG options to be qualified default investment alternatives (which was prohibited in some cases in the Trump administration’s regulation). We also expect ESG legislation to be introduced, but since the legislation is unlikely to gather bipartisan support or be eligible for budget reconciliation, the legislation may not move to enactment. With regard to the use of private equity in retirement plans, with Congressional Democrats voicing opposition to the guidance that the Trump DOL issued in June, we would expect the new DOL to issue guidance putting a higher burden on plan fiduciaries to determine if such a component is appropriate.
3. Access/Coverage Guidance
This category of proposals includes both legislative and regulatory approaches to expand access to retirement plans as well as boosting savings within those plans. A variety of approaches at both the state and federal levels are discussed below.
3a. Supporting state and federal auto-IRA/401(k) programs
With retirement plan coverage rates not significantly increasing since the passage of ERISA 46 years ago, legislators at both the state and federal levels have attempted to remedy that by enacting laws (at the state level) to require employers who do not sponsor plans to auto-enroll employees in a state-run IRA. ARPA, introduced by Congressman Richard Neal, Chairman of the House Ways and Means Committee, would put such a requirement in place at the federal level. Under the Biden administration, and a Democratic-controlled Congress, we expect to see possible movement of federal legislation under budget reconciliation. although, with Republicans controlling the Senate, such a requirement would be challenging to enact. Short of a federal requirement, we expect more states to enact legislation. The Biden DOL would also try to bolster those efforts through guidance, although, with the overturning of the Obama guidance on this topic by the Senate in 2017, it will take some creativity to issue any guidance in this area.
3b. Expanding rules for long-term part-time workers
Generally, under the SECURE Act, employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee can become eligible to participate in the plan by completing no more than (a) one year of service (1,000 hours) or (b) three consecutive years of service where the employee completes at least 500 hours of service. There is bipartisan support for reducing the three-year requirement to two years, but it is not clear if this proposal could be included in a budget reconciliation bill, making the prospects for its enactment unclear.
3c. Expanding opportunities for caregivers saving for retirement
President-elect Biden’s “Plan for Older Americans” states: “Under current law, people who work as caregivers without receiving wages are ineligible to get tax breaks for retirement saving. The Biden Plan will allow caregivers to make ‘catch-up’ contributions to retirement accounts, even if they’re not earning income in the formal labor market, as has been proposed in bipartisan legislation [H.R. 3078] by Representatives Jackie Walorski and Harley Rouda.”
3d. Mandating auto enrollment/escalation for new plans
If enacting a federal requirement that all employers sponsor a retirement plan for their employees is not possible, it is likely that the Biden administration and a Democratic House and Senate would seek to enact legislation that would require all new DC plans to include auto enrollment and escalation provisions. If Chairman Neal’s ARPA cannot pass, this proposal might be able to be included in budget reconciliation.
4. Increasing Tax Benefits for Lower- and Middle-Income Taxpayers
President-elect Biden has stated that he will equalize benefits across the income scale, so that low- and middle-income workers will get a tax break when they put money away for retirement equal to the tax break provided to high-income workers. Below are discussed ways to support lower- and middle-income workers as they save for retirement and other financial needs. There are also proposals that would cap or reduce benefits for highly compensated workers.
4a. Increasing the saver’s credit and making it refundable
Most likely, the equalization proposal could be implemented through modifications of the saver’s credit, which is a nonrefundable tax credit for low- and middle-income employees who contribute to a plan or IRA. Under the modifications, the credit would be increased and made refundable. And the credit would be deposited directly into a plan or IRA, though it is unclear if this element could be these modifications would “equalize” tax benefits by enhancing the benefits for those who most need help.
In numerous research surveys, many workers state that they do not have enough savings to pay for a $400 car repair. The Democratic platform contains a provision on emergency savings that reflects a growing interest in helping workers save for emergencies through employer programs. Bipartisan legislation has been introduced in the past but has not been well received by employers because it included employer burdens and liabilities without any tax incentives. It is likely that work on this type of proposal will continue in 2021, particularly in light of the impact of the COVID-19 pandemic on employment and Americans’ savings.
5. Imposing an Overall Cap on Benefits
The last Obama budget would have imposed a cap on the aggregate benefits in a taxpayer’s IRAs, section 401(a) plans, section 403(b) plans, and funded section 457(b) plans (qualified arrangements). Additional contributions (or accruals, in the case of a DB plan) generally would not be permitted if an individual’s aggregate benefits in qualified arrangements reached the cap. An alternative proposal would place a specific dollar cap on an individual’s savings in DC plans and IRAs (e.g., $3 million or $5 million), which would have a much greater chance of enactment than the Obama version.
6. Other Restrictions on Retirement Benefits for HCEs
6a. Eliminating or capping catch-up contributions
A proposal to eliminate catch-up contributions for high-income taxpayers was included in some 2017 tax reform proposals. This could be done for individuals with wages over, for example, $500,000.
6b. Reducing retirement contributions or benefits or compensation limits
In lieu of or in addition to an overall cap on retirement savings, there might be a move to reduce contribution or benefit limits. Alternatively, Congress may seek to reduce the limit on the amount of compensation that may be taken into account for determining retirement benefits.
6c. Eliminating Roth conversions for HCEs
Today, individuals have the ability to convert their pre-tax accounts in plans and IRAs to after-tax Roth accounts. This is seen as desirable in some cases, such as for individuals who believe they will be in a higher tax bracket in the future (due to possible changes in tax rates or higher levels of income). One possible legislative change would be to deny this opportunity to HCEs.
Although it is unlikely that there will be a wholesale change in the tax structure for retirement plans, plan sponsors should be focused on the following key points and their potential impact on plan design in the future:
Congress could increase equity among plan participants by providing greater tax incentives to lower-income employees.
With increasing focus on the need for emergency savings due to the pandemic and unemployment spikes, employer-sponsored supplemental savings programs will be a focus in both Congress and the Biden administration.
Climate change will be an overriding theme in the Biden administration. Coupled with younger workers’ desire to invest in socially and environmentally focused funds, it is very likely that the Biden administration will seek to roll back the Trump administration’s ESG and proxy voting rules, making it easier for plan sponsors to consider including such funds in their defined contribution plans. For more insights on State Street’s perspective, read ESG Will Enhance Americans’ Retirement Security, Not Diminish It.
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