Regulations in new year might look a lot like the old year for retirement plans

2014 might seem like deja vu to many retirement plan sponsors.

Issues that were supposed to be on the menu for 2013 — like comprehensive tax reform and lifetime income guidance — are still on the table.

And there will be some complications thrown in, as some key congressional committees get new leaders.

For sponsors of defined benefit plans, 2013 probably felt like The Year of the Target, as they were singled out for hefty increases in PBGC premiums to pay for a swiftly struck federal budget deal at year's end.

Money managers also got some unwanted attention from Washington, as policymakers tried to deal with systemic risk to avert future financial crises. That effort is expected to continue in 2014, “which is going to be entirely about market structure,” said Barbara Novick, vice chairwoman and head of government relations for New York-based BlackRock Inc., who sees regulators trying to learn more about things like high-frequency trading and dark pools, and to put them in a larger, global context.

Retirement plan executives and money managers spent 2013 preparing for comprehensive tax reform, where the discussion included potential revenue raisers like reduced deductions for retirement savings and curtailing the favorable carried interest tax rate afforded to private fund general partners.

The prospects for comprehensive reform dimmed considerably in December when Senate Finance Committee Chairman Max Baucus, D-Mont., was tapped as the next U.S. ambassador to China, and his House counterpart, Ways and Means Committee Chairman Dave Camp, R-Ill., faced challengers for the post. But with retirement tax incentives still on the top 10 list of revenue raisers, the industry's preparations were not a waste of effort.

“We put the time to good use, educating members of Congress and their staff,” said James Klein, president of the American Benefits Council in Washington. “Ultimately, Congress is going to turn their attention to comprehensive reform, and there's no question that retirement plans are going to be in the thick of that discussion.” As budget negotiators turn their attention early in 2014 to a federal debt ceiling increase and other budget issues, “we're by no means out of the woods in terms of targeted efforts to extract a few billion here or there,” from PBGC premiums, Mr. Klein noted. “We have to be vigilant. It's a politically easier lift for the president and Congress” to raise PBGC premiums again.

Derek B. Dorn, a partner in the Washington law firm of Davis & Harman LLP and a former senior Senate tax aide whose clients now are plan sponsors and service providers, thinks tax reform in 2013 was scuttled in part by an inability to reach agreement even on ground rules for the reform process, but he sees a change at the tax-writing committees. “We are seeing emerging areas of agreement on common-sense retirement reforms to boost retirement savings. Among these is enhanced automatic escalation of contributions, safe harbors, multiple employer plan reforms and notice consolidation,” Mr. Dorn said.

Members of Congress would also like regulators to coordinate better, said Charles Jeszeck, director of education, workforce and income security at the Government Accountability Office. “There is a lot of interest in overlap and duplication. There's a continued concern that (regulation is) excessive or onerous.” Pension-focused members of Congress also had GAO investigators spend 2013 looking at how other countries deal with the spending of retirement assets beyond lump sums. Officials at the Labor and Treasury departments “were really receptive to the findings. We really just haven't thought about the problem to the same degree,” Mr. Jeszeck said.

“We're optimistic that we will make some progress. As more of this becomes understood, the more the sponsor will understand what they're liable for and not liable for” when it comes to lifetime retirement income planning.

Another big change coming in 2014 is the retirement of longtime Senate Health, Education, Labor and Pensions Committee Chairman Tom Harkin, D-Iowa, an advocate for a new approach to lifetime retirement savings, along with other committee changes after the midterm elections in November. “The fact that we're going to have very new people in charge of pensions is going to be pretty dramatic change,” said a Senate aide who declined to be identified. Along with more attention to lifetime income, he expects to see legislative proposals that “try to make cash balance plans work better. I think there's a desire to take another crack at it.”

Another issue that will have to be addressed in 2014 is the pending expiration of rules for severely underfunded multiemployer pensions that, under the Pension Protection Act of 2006, will expire by 2015. Hearings on the multiemployer pension rules held by the House Education and the Workforce Committee raised the prospect of painful choices that could include benefit cuts, a sensitive topic on which the Senate is happy to let the House go first. There is also concern about what could happen if the PPA is revisited. “Any time there's a pension bill it never stays with one issue. These things just have a way of growing,” the Senate aide said.

Along with the Department of Labor's reproposed fiduciary rule, expected in 2014, Scott Macey, president and CEO of the ERISA Industry Committee in Washington, expects the department to continue pushing legal cases challenging fiduciary issues such as prudence and conflicts of interests.

In the spring, the Labor Department will argue for less deference to sponsors in several cases that the Supreme Court agreed to hear. “The court seems to have a continued interest in benefits and ERISA,” Mr. Macey said. “In some ways that's positive; they can clarify things that are important” by removing some of the uncertainty caused by differing opinions from lower courts.

Phyllis Borzi, assistant secretary of labor and head of the Employee Benefits Security Administration, said in an e-mail response to a request for comment that she is “especially hopeful” about the EBSA's mission as her agency prepares to celebrate the 40th anniversary of the Employee Retirement Income Security Act in 2014.

“In 2014, you'll see some common themes in our emphasis on increasing transparency and education and making sure workers have the resources they need to make informed decisions,” Ms. Borzi said in the e-mail. “We will also have a strong focus on outreach and education … including fiduciary compliance and voluntary corrections.”

Staff changes strengthened her team as top enforcement official Timothy Hauser switched roles and joined Judy Mares, former vice president and chief investment officer of Alliant Techsystems Inc., Arlington, Va., as her deputy assistant secretaries.

Tighter regulatory oversight for the money management industry is expected to continue into the new year, following the Financial Stability Oversight Council's 2013 designation of three non-banks — American International Group, General Electric Capital Corp. and Prudential Financial Inc. — as systemically important financial institutions. It was the council's controversial report raising the prospect of more regulation of money managers that has observers wondering what is next.

Figuring out which institutions are systemically important “is a long process, but hopefully those things come to more clarity in 2014,” said Kurt Schacht, New York-based managing director of the CFA Institute's standards and financial market integrity division. “Trust in finance has never been lower. I think the trust deficit has led to a much bigger regulatory impact. The investment management industry has never been more focused on regulatory compliance,” he said.

“One of the biggest systemic concerns is whether we are starving the SEC and the CFTC,” Mr. Schacht said, noting the Securities and Exchange Commission and the Commodity Futures Trading Commission are at an important juncture as they implement and enforce new rules for swaps, many of which become effective in 2014 or later.

“You're going to see whether there are unintended consequences, but it will take time. We've 'only' had five years since the crisis. We're hoping year six will do something,” Mr. Schacht said. “We still feel (enforcement) is not up to where it needs to be for the 21st century.”

SEC enforcement officials point to a record $3.4 billion in total monetary sanctions in fiscal year 2013. While the number of enforcement actions dipped slightly from the previous year, Andrew Ceresney, enforcement co-director, noted the number of investigations started was up, as the agency looks “to bring high-quality enforcement actions that make an impact across the market,” including high-profile insider-trading cases like the 2013 action against S.A.C. Capital Advisors.

To get a better handle on market structure, SEC officials levied penalties against Nasdaq and the Chicago Board Options Exchange, and began considering rules to address the markets' operational risks and how regulators can keep pace with trading technology and practices like high-frequency trading and dark pools.

For private fund managers, 2013 was a setback for implementing the JOBS Act provision ending the ban on general solicitation and advertising. Instead of an expected concept release allowing for rules already in place, the SEC slowed the clock by proposing amendments. “It's a significant difference,” said Stuart Kaswell, executive vice president and general counsel of the Managed Funds Association in Washington, which has 3,000 global hedge fund member firms. “It's created a lot of uncertainty, and it's another reason why private funds managers haven't taken advantage of the JOBS Act as we had hoped. We are hopeful that 2014 will be the year for that,” as well as another look at the definition of accredited investors.

Money managers will also be watching how new trading restrictions on financial institutions, stemming from the so-called Volcker rule, will affect market liquidity. “When all this begins to kick in, does the market remain deep, because that's what our members need,” Mr. Kaswell said. “The critical test of (the restrictions) will be how liquid and deep markets will remain. This is a new element in the regulatory framework that's going to have an effect on people's behavior.”