Retirement industry likely to go on defensive no matter who wins
By Derek B. Dorn | October 31, 2012 5:40 pm
The conventional wisdom is again wrong. Many believe the retirement industry would gain in a Republican sweep on Election Day. But in reality, neither party's victory would be an unambiguous positive.
With few voters focused on retirement policy, it's hardly surprising the candidates' platforms — and those of their parties — provide few specifics.
The Democratic platform vaguely promises, “President Obama will make it easier for Americans to save on their own for retirement and prepare for unforeseen expenses by participating in retirement accounts at work.”
We can divine more about President Barack Obama's plans for a second term from his first-term record, including his annual budget proposals. The Republican platform, on the other hand, frames retirement strictly in terms of defined benefit plans: The “current bottom line is that many plans are increasingly underfunded by overestimating their rates of return on investments.”
Finding specifics requires reading tea leaves within the broader context.
Coverage. The centerpiece of a re-elected President Obama's retirement policy will continue to be the automatic individual retirement account — a proposal to require most employees who are not covered by a plan to be enrolled automatically in a payroll deduction IRA. With notable exceptions, much of the industry is neutral or opposed to the concept. But the automatic IRA has begun to seem a moderate approach when compared to the proposal of Sen. Tom Harkin, D-Iowa, chairman of the Senate Health, Education, Labor and Pensions Committee, for the USA Retirement Fund — which would essentially mandate an employer plan with both automatic enrollment and employer contributions.
On the other hand, former Massachusetts Gov. Mitt Romney's campaign has been silent on coverage. While earlier introductions of the automatic IRA had Republican support, following ”Obamacare,” employer mandates remain anathema to congressional Republicans. Expect a laissez-faire approach from a Romney administration.
Defined benefit plans. Legislation enacted in July offers corporate defined benefit plan sponsors relief from crushing funding obligations that would otherwise result from historically low interest rates. Assuming these low interest rates remain — because the Federal Open Market Committee stated Sept. 13 it is inclined to keep the federal funds rate “exceptionally low” through at least mid-2015 — the phase-out of today's relief makes likely a need for additional action in 2015. The Republican platform suggests opposition to further relief as “taxpayers will be expected to pay for a bailout” because of plans' underfunding due to using unrealistically high rates of investment return. The politics surrounding July's enactment suggests Democrats would be more inclined to offer additional relief — and it won't hurt that funding relief raises revenue under congressional scoring conventions.
On public-sector pensions, the Republican platform call is more severe, stating, “the situation … demands immediate remedial action.” A trio of Republican congressmen — including vice presidential nominee Rep. Paul Ryan — offered the leading approach. Their bill, The Public Employee Pension Transparency Act, HR 967, would establish dramatic new disclosure rules, requiring state and local governments to report liabilities using a “riskless rate.” Failure to comply would strip the offending plan sponsor of its ability to issue tax-exempt bonds. Of course, the Republican orthodoxy is far less sympathetic toward state and local governments' fiscal concerns; any whiff of a federal rescue would be toxic to many in the party. While not a single congressional Democrat has announced support for the bill, Democrats are unlikely to offer an alternative of their own.
PBGC. This summer's funding relief was accompanied by a $9 billion increase in the Pension Benefit Guaranty Corp.'s single-employer plan premiums. When fully phased in, the average increase will be nearly 50%. Despite that severe blow, additional PBGC premium increases remain a threat in the constant hunt for revenue — both because premiums are deemed “fees,” rather than taxes, and because the increases can be dialed up or down to satisfy revenue needs. Expect a re-elected President Obama to continue his call to give PBGC the ability to adjust premiums based on risk. Yet regardless of which party occupies the White House, it remains unlikely Congress will cede this authority to the executive branch. Republican control would create similar vulnerability; the “defined benefit review panel” proposed in the party platform would likely call for premium increases to shore up PBGC's solvency.
Plan regulation. As with all other industries, retirement plans can expect far more regulatory activity under a second Obama term. Most certainly, we would see a reproposed definition of investment advice fiduciary. Under the initial proposed regulation — offered in 2010 and withdrawn one year later in the face of pressure from industry and many congressional Democrats — even one-time casual advice could trigger fiduciary status. Additionally, the Obama administration would continue its focus on enhancing lifetime income products in plans, investment option transparency and rollover oversight. But absent a legislative mandate, expect a second Obama administration to keep its ears closed to calls for enhanced electronic delivery and streamlined notices — perhaps the only regulatory area that would be of obvious interest to a Romney administration.
Tax incentives. The most dramatic threats, of course, could stem from changes to the tax code. To be sure, retirement incentives are not at the center of the tax reform and deficit reduction debates, and the political mainstream is not arguing that incentives are too generous, unfair or wasteful. But for the foreseeable future, what makes sense for revenue is likely to drive the discussion. And the high revenue loss (at least under conventional scoring methods) associated with retirement plans will ensure scrutiny.
Comprehensive tax reform — focusing on reducing tax expenditures to finance a reduction in tax rates or the deficit or both — would pose a more serious threat than a piecemeal approach. If everyone is expected to give, it's hard to see how retirement incentives can go unscathed — despite Mr. Romney's calling in his tax reform plan for “(p)reservation of incentives for saving and investment.” Democratic taxwriters in the House have positioned themselves as the guardians of tax expenditures that result in a lower tax burden for middle-class families – a torch that the increasingly populist Obama might choose to grab.
In short, regardless of whether 2013 begins a second term for Obama or a first term for Romney, the retirement industry will be playing considerable defense in the years ahead. But the Nov. 6 outcome will shape which battles are most likely to be fought.
Derek B. Dorn is a partner at David & Harman LLP, Washington. He served from 2008 to 2011 as lead adviser on tax and pension policy issues as senior finance counsel to Sen. Jeff Bingaman, D-N.M., and staff director of the Senate Finance Subcommittee on Energy, Natural Resources & Infrastructure.