The 2012 elections and retirement tax policy
It’s entirely possible that, when the General Election is held November 6, not a lot will change. That is, President Obama may win re-election, the Senate may remain Democratic, and the House may remain Republican. Or not.
As President Obama has said, elections have consequences. In this article we are going to review the “front burner” policy issues that affect retirement plans and consider how a political change (or non-change) might affect them.
As we have discussed in a number of articles, a fundamental element of the budget-entitlements debate has been consideration of a reform of the Tax Code. There’s a short list of “tax expenditures” that will be on the table in any discussion of tax reform, and the tax benefit for retirement savings, particularly the 401(k) exclusion, is one of them.
Our guess is that the outcome of the election will not significantly affect this issue. Continuation of Tax Code support for 401(k) plans is not a highly politicized issue. There are opponents of the system in both parties, with very ideological critiques of it. But there are also supporters in both parties.
What is most likely is that the “cost,” the lost tax revenues, resulting from current retirement savings tax incentives will be a focus of Democrats and Republicans trying to find ways to reduce the deficit. Any changes to current rules (e.g., a reduction in the dollar limit on 401(k) contributions) will more likely be driven by a need to find revenues than by views on retirement policy or by ideology.
Reform of the retirement savings system
We have also discussed in prior articles proposals to reform the current system of retirement savings tax incentives, e.g., by going to a system of tax credits. There are formal proposals by advocates of such a system, and some believe that consideration of comprehensive tax reform presents an opportunity to move such a system. The consensus, however, seems to be that such a radical change in “the way we do retirement” is unlikely.
If there were a Democratic sweep — if the Democrats were, e.g., to take back the House — then consideration of such changes might be more likely. Although, it is generally considered that what would be most likely, in that event, would be more modest reforms, such as adoption of the Administration’s “Auto-IRA and Saver’s Credit” proposals, rather than a fundamental change to the way, e.g., 401(k) tax incentives work.
Generally, as we understand it, policymakers are not currently considering revisiting the issue of Pension Benefit Guaranty Corporation premiums (see our article Pension Funding Relief/ PBGC Premium Increases).
But: typically, PBGC releases information on its deficit in November. Last November, in connection with a request for a premium increase, PBGC announced a deficit of $26 billion. The main driver, currently, of PBGC’s deficit is interest rates, and as we have discussed (see our article How low can you go? Interest rates and DB plans), interest rates have gone down significantly since last November. So the $26 billion number is likely to go up significantly. Taking into account Congress’s need to find revenues to close the budget gap and the fact that PBGC premiums are counted as revenues (but not as taxes), it’s hard to believe that policymakers, in budget negotiations, will not think hard about raising PBGC premiums further.
Again, this is not a Democrat vs. Republican issue. House Republican budget hawks are said to be concerned about PBGC’s deficit. And obviously so is the PBGC. On the other hand, there are both Democrats and Republicans from states with companies that would be hit hard by a big increase in premiums.
Definition of fiduciary
One of the most important regulatory initiatives of the Obama Department of Labor has been the re-definition of ‘fiduciary’ for purposes of ERISA. Under pressure from Congress, DOL withdrew its original proposal on the issue, which included a broader definition of fiduciary.
If the Democrats retain the White House, then DOL is likely to go forward with a new proposal early next year. If there is a change in Administrations, then it is likely that this proposal will be reconsidered. There are issues addressed by the fiduciary re-definition that many agree require some solution. But much of the original proposal was very controversial, and a new Administration is likely to move more slowly than the current one.
Hybrid/cash balance plan regulations
There are some issues with respect to IRS’s proposed hybrid plan regulations that have to be clarified, most importantly rules with respect to permitted interest crediting rates, variable interest crediting rates and what is a “market rate of return.” (See our article, IRS proposed cash balance plan regulations allow equity-based rates of return.) IRS is very much dominated by career policymakers un-affiliated with any particular political point of view. A change in Administrations is unlikely to change how these hybrid plan issues are being handled.
Other regulatory issues
Briefly, with respect to other regulatory issues:
MAP-21 interest rates — IRS has indicated that it might change its methodology for calculating MAP-21 rates for 2013 and future years. (On the calculation of MAP-21 rates and their significance, see our articles 2012 segment rates under MAP-21 released by IRS and Implications of MAP-21 for DB plan finance.) It is unlikely that a change of Administrations will change IRS’s approach to this issue, but a change in methodology could significantly affect funding requirements.
DOL electronic disclosure rules — Many have been critical of DOL’s electronic disclosure rules. Earlier this year Congressman Neal (D-MA) introduced legislation (H.R. 4050) to fix some of the problems critics have raised (generally, allowing more widespread use of electronic disclosure). (With regard to H.R. 4050, see our article Congressman Neal introduces retirement savings legislation.) A change of Administrations is likely to change the result in this area: DOL’s “foot dragging” on moving to electronic disclosure is widely identified with the current leadership of DOL, although we note that there is support for DOL’s position amongst some advocacy groups.
Retirement income issues — There is a widespread and bipartisan desire to “do something” about retirement income issues. “Retirement income” is the label that policymakers give to efforts to get participants in account-based plans to (1) think about their account balance in terms of a stream of income after retirement and (2) consider taking payout in an annuity form. There are several very difficult ERISA issues that are thought to be holding up sponsor adoption of, e.g., an annuity program in 401(k) plans, most critically, sponsor fiduciary exposure for selecting an annuity provider. DOL is at work on this, and it is generally thought that a change in Administrations will not affect the trajectory of their deliberations.
Brokerage window arrangements — One result of the controversy over DOL’s (now notorious) FAB 2012-02 Q&A 30 is that we have learned that DOL leadership is concerned about brokerage windows and particularly about the fiduciary issues with respect to brokerage window-only plans. If the Democrats hold the White House, it is possible that we will see a proposal on this issue, conceivably one that addresses broader issues about the duty to monitor fund menu options. It’s not clear that a Republican Administration would be as focused on this issue.
Effect of a transition
One final “process” point: if there is a change in Administrations, there will be “transaction costs.” Key Administration policymaking positions will have to be re-staffed, the new people will have to get up to speed, and positions on key issues will have to go through whatever new policymaking procedure is put in place. All of that will inevitably slow the regulatory process down. So, if the Republicans win the White House, policy changes will, for a while, take longer to happen.
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To summarize: political changes coming out of the November 6 elections are generally unlikely to have a major effect on how critical retirement plan policy decisions are made. Most significantly, decisions about fundamental changes to the Tax Code are likely to be made with a view to budget issues rather than retirement policy issues.