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Outlook 2015

Congressional changes raise prospects for legislative action

Retirement savings incentives and regulation of money managers will get a fresh look from federal officials in 2015, as Republicans gained control of both houses of Congress for the first time since 2006, and seek to distance themselves from the 113th Congress' thin record of accomplishments.

At the committee level, the change of leadership raises the prospects for serious consideration of new retirement ideas, like incoming Senate Finance Committee Chairman Orrin Hatch's SAFE Retirement Act proposal, which would 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.

Interest in protecting retirement savings also will influence Mr. Hatch, R-Utah, as his committee plays a key role in the tax reform efforts that are a priority for the House Ways and Means Committee, where Rep. Paul Ryan, R-Wis., will be in charge. The focus of tax reform is expected to be on reducing corporate and individual rates, but money managers are still bracing for the perennial proposal to have private equity and venture capital firms pay regular tax rates instead of carried interest rates.

“I think there is enormous pressure on members (of Congress) to address revenue questions,” said Richard Baker, president and CEO of the Managed Fund Association, Washington, which represents hedge fund and managed futures firms. His members are braced for Congress to revisit the idea of changing the enterprise value tax to higher rates for ordinary income instead of current capital gains rates. “I expect it to be in the mix at some point in a discussion of where one goes for revenue,” said Mr. Baker, a former House member.

As the tax reform debate heats up, “Republicans are going to want to cut expenses and raise revenue,” said Michael Webb, vice president of Cammack Retirement Group, Wellesley, Mass., a consulting firm specializing in defined contribution plans. “How do you do that? By changing things like deductibility on retirement plan contributions.”

Along with those discussions, “there might be opportunities in 2015 for retirement plan proposals that would enhance coverage and benefits,” said Kent Mason, an attorney at law firm Davis & Harman LLP, Washington, who is outside counsel for the American Benefits Council, Washington. He and others note that multiple employer plans enjoy bipartisan support in Congress, which could convince regulators to make them easier to create.

Both Republicans and Democrats would like to see more automatic enrollment and escalation in defined contribution plans. “This is showing up in bipartisan bills because (current default rates) are not high enough” for retirement security,” said Mr. Mason. “This is an area where I could see common ground.”

Hybrid retirement ideas like cash balance plans will come up early, starting with a Jan. 9 hearing on IRS regulations finalized in September for plan years after 2015. “I do think there is pent up demand for some type of DB (proposal),” said Alan Glickstein, Dallas-based senior retirement consultant at Towers Watson & Co. Hybrid pension plans for the military will also come up early in the year, when recommendations from the Military Compensation and Retirement Modernization Commission are due, sources said.

Also on the defined benefit side, plan sponsors will be pushing to make permanent some temporary relief from non-discrimination testing rules issued by the IRS set to expire after 2015.

Paying for retirement incentives is another matter. Tax revenue lost to retirement savings deductions for employers and participants has to be made up somewhere. In the past, that has meant good and bad news for plan sponsors, who have seen their Pension Benefit Guaranty Corp. premiums hiked to pay for highway funding, but also got some pension funding relief that allowed lower contributions, resulting in more tax revenue.

“When we think about Congress and we think about retirement, we've seen policy come about mostly as 'pay-fors', and we could see more of the same,” said Mr. Glickstein.

Former PBGC Director Joshua Gotbaum now a guest scholar at the Brookings Institution in Washington, is even less optimistic. “In 2015, I expect lots of handwringing about the fact that more and more people are worried about retirement, but unfortunately little actual action in Washington.”

One bright note for the PBGC, Mr. Gotbaum said, were the multiemployer pension reforms passed in December, giving trustees of distressed plans more tools and doubling PBGC multiemployer premiums. “Thanks to bipartisan courage in the House, in 2015 multiemployer plans will be able to act to preserve benefits and PBGC will have the ability to help them,” said M. Gotbaum.

The Securities and Exchange Commission will spend 2015 assessing risks in the asset management industry. Chairwoman Mary Jo White told investors earlier this month that SEC officials will seek more data to determine whether further regulation is needed, and will push asset managers to do a better job of identifying and controlling systemic risk and transition planning. Managers also face new stress testing requirements mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

On the flip side, regulators involved in the Financial Stability Oversight Council's efforts to deal with system risk and designate systemically important non-bank financial institutions, or SIFIs, will also be pressed for more accountability and transparency, while Federal Reserve officials overseeing designated firms will be urged to do a better job of tailoring rules for non-banks.

“There will be a fair amount of interest in Congress in changing the role and mission of FSOC,” said Aaron Klein, director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center, Washington. “We think there is fertile ground for common sense solutions,” said Mr. Klein, who expects another big issue next year to be data security at both financial institutions and regulatory agencies.

As regulators work on ways to improve transparency in equity markets, hedge fund managers are keeping a close watch on how that will affect market efficiency, and how the SEC handles the data that managers have started to provide in recent years. “We want to have assurances that that proprietary data is absolutely protected,” said Mr. Baker of MFA, whose members also hope to see final standards on advertising and solicitation dictated by the JOBS Act in 2015.

Private equity and other alternative investments will continue to be scrutinized by the SEC. “I think you're going to see significant enforcement action in 2015 in the (alternatives) space,' said Todd Cipperman, CEO of Cipperman Compliance Services, Wayne, Pa., who expects lots of questions about co-investing, fees and performance data. He also predicts more pressure from regulators and investors for private equity firms and hedge funds to build robust compliance programs. 

Another highly anticipated event in 2015 is the Department of Labor's reproposal of its controversial fiduciary rule.

Now officially called the “conflict of interest rule for investment advice,” it was delayed as officials gathered more feedback from stakeholders to avoid further setbacks. For plan sponsors that want participants to be more aware of fees and IRA rollover pressure, “we're hoping for a fiduciary rule,” said Deborah Forbes, executive director of the Committee on Investment of Employee Benefit Assets, which represents more than 100 of the largest U.S. corporate pension funds with more than $1.7 trillion in retirement plan assets. “We think the current system is not working well.”

Given the proposal's rough path so far, “it's hard to say what's going to happen,” said Mr. Glickstein of Towers Watson. “This year we got another round of pension funding relief, which many had not expected,” he said. “I wouldn't be surprised if there are some surprises in 2015.”