GOP Congress might revisit tax incentives for retirement plans

Tax incentives for retirement plan sponsors and participants could change once Republicans take control of the 114th Congress in 2015. Plus, money managers could be affected if the new Congress revisits much-criticized financial regulation.

The dramatic election results of Nov. 4 gave Republicans control of both houses of Congress for the first time since 2006. But their Senate majority of 52 confirmed seats won't be enough to run roughshod over other legislators; Republicans still will have to work with Democrats to accomplish their agenda or avoid presidential vetoes.

Both incoming chairmen of key Senate committees — Lamar Alexander, R-Tenn., on the Senate Health, Education, Labor and Pensions Committee and Orrin Hatch, R-Utah, on the Senate Finance Committee — are known for their bipartisan approach. Mr. Alexander will replace retiring Chairman Tom Harkin, D-Iowa, while Mr. Hatch will replace Ron Wyden, D-Ore., who will become the ranking minority member of the committee.

Mr. Hatch has sponsored legislation to expand the use of multiple employer plans, allow public defined benefit pension funds to purchase private annuities, and create a “starter 401(k) plan” for small private-sector employers. Mr. Alexander does not have a track record on retirement issues.

“Sen. Hatch has been a major driver of a consensus in both chambers around certain common-sense enhancements to retirement plans,” said Derek Dorn, a partner in Washington law firm Davis & Harman LLP and former senior Senate tax aide whose clients include plan sponsors and service providers. “His perch atop the Finance Committee certainly creates a significant likelihood that they will move forward.”

Mr. Dorn said he expects to see continued efforts to advance retirement savings features like auto escalation and more generous safe harbors and a renewed focus on promoting multiple employer plans to expand retirement savings coverage.

Multiple employer plans “are ripe for bipartisan compromise,” agreed Geoff Manville, principal, government relations, at Mercer LLC in Washington.

A proposal by Sen. Marco Rubio, R-Fla., to open the Washington-based $403.9 billion Thrift Savings Plan to non-governmental employees who do not have access to workplace retirement savings “suggests there is some possible crossover” in ideas to expand retirement access, said David Madland, director of the American Worker Project at the Center for American Progress in Washington, a progressive think tank.

“The good news is that retirement policy is a lot less partisan than some other issues,” said James Klein, president of the Washington-based American Benefits Council, which typically represents corporate retirement plans and providers. “There should be a lot more coordination between House and Senate. They will be in a position to find compromise on some things.”

The Senate Banking Committee, which oversees financial regulators, also has a history of bipartisan collaboration. That will be tested next year as Republicans press for changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act — and in particular, the Financial Stability Oversight Council, which the law created. “The fact that they have questioned FSOC members so much on the (systemically important financial institution) designation ... may signal a shift in direction,” said Justin Schardin, associate director of the financial regulatory reform initiative at the Bipartisan Policy Center in Washington.

Taking a cue from vocal House critics, Mr. Schardin said he expects more FSOC hearings in the Senate as well, which “now they'll be able to do in a more pointed way,” he said. “I think there is room to do a general Dodd-Frank improvements package. Every major piece of legislation has had a fix bill; you never get everything right,” Mr. Schardin said.

Another Republican priority is corporate tax reform, which will have to be offset with other sources of federal revenue. In recent years, revenue offsets to pay for big-ticket items like unemployment insurance and highway funding have put tax incentives for retirement savings in the spotlight. The Highway and Transportation Funding Act of 2014, for example, increased tax revenue — at least on paper — by allowing companies to use a higher interest rate when calculating liabilities, which lowers pension contributions. The revenue source was first used to pay for highway funding in 2012 and could come up again early next year before the current highway funding law expires in May 2015.

Other retirement-related measures that could be used to free up federal dollars sometimes include limiting the amount of tax deductions for higher-income plan participants or increasing yet again premiums paid to the Pension Benefit Guaranty Corp.

“There's going to be the continuing need for revenue,” said Ann Marie Breheny, senior legislative adviser with Towers Watson & Co. in Arlington, Va. “There's always the potential that they look to retirement-related provisions.”

While many variations of tax reform are expected to be actively discussed in the 114th Congress, final agreement on a tax reform package is considered a long shot, with a lack of agreement even among Republicans on what it should cover.

Some state elections also featured pension issues.

Republican Pennsylvania Gov. Tom Corbett, who pushed for reforms to the $28 billion Commonwealth of Pennsylvania State Employees' Retirement System and $53 billion Pennsylvania Public School Employees' Retirement System, lost re-election to Democrat Tom Wolf, who did not call for pension changes. The outcome “was incredibly important,” said Rachel Barkley, vice president of the analytical services division of Chicago-based Loop Capital Markets, an investment services firm that tracks public pension funding. The state's 2010 pension reforms to tackle unfunded liabilities and increase annual contributions “need time to work,” Ms. Barkley said.

In Rhode Island, General Treasurer Gina Raimondo won her bid for governor — despite or because of her controversial reforms to the $7.7 billion Rhode Island Employees' Retirement System. Connecticut state Treasurer Denise Nappier, the sole trustee of the $29.4 billion Connecticut Retirement Plans & Trust Funds, also won her re-election bid. In Minnesota, Gov. Mark Dayton, chairman of the $63.8 billion Minnesota State Board of Investment, St. Paul, won re-election.

In Illinois, Bruce Rauner — former lead partner of private equity fund GTCR LLC — defeated Gov. Pat Quinn, who took unpopular steps to deal with severely underfunded state public pension funds. Mr. Rauner has advocated for switching participants to a defined contribution system but did not make it a campaign issue and did not offer specific proposals.

In Phoenix, voters rejected an initiative that would have closed the $2.2 billion Phoenix City Employees' Retirement System and created a new 401(k) plan for city employees.