Little change expected in split Congress

This unprecedented political campaign season could carry over into the 115th Congress that begins in January as a possible shift of power in the Senate and tighter margins in the House of Representatives make it hard for legislative ideas to advance, observers say.

“I think the American people should brace for gridlock,” said Mike Sommers, president and CEO of the American Investment Council, a Washington private equity advocacy and trade group. Mr. Sommers joined the group in February after more than two decades on Capitol Hill, most recently as chief of staff to former Speaker of the House John Boehner.

Republican control of the House is expected to continue after the Nov. 8 elections, but the balance of power in the Senate is up in the air.

Republicans gained control of the Senate in 2014, after seven years in the minority. This election season, they are defending 24 seats, compared with 10 for Democrats, who would need to win just five seats to regain the majority. Should Democratic presidential contender Hillary Clinton take the White House, Democrats would need only four seats, because the vice president can break ties in the Senate.

No matter what the final count is in the Senate, no party is expected to capture the 60 seats needed to override vetoes, which means that it will take bipartisanship to get anything done.

The spirit of bipartisanship is evident at the Senate Finance Committee, where Chairman Orrin Hatch, R-Utah, and ranking member Ron Wyden, D-Ore., have worked closely together on retirement issues, including a package of retirement savings reforms unanimously approved by the panel committee on Sept. 21. Among other things, it would allow employers to join unaffiliated multiple-employer plans and make it easier for plan sponsors to offer annuities. If enacted before the 114th Congress ends on Dec. 31, the Retirement Enhancement and Savings Act of 2016 would also require employers to disclose lifetime income calculations on benefit statements.

Mr. Wyden, who would become committee chairman if Democrats regain the Senate, has already circulated a draft proposal for changing the tax code, which “needs a dose of fairness when it comes to retirement savings,” he said in a statement. In addition to trimming tax advantages for “Mega Roth IRAs” with account balances above $5 million, he wants to encourage more retirement savings for other income brackets, with a refundable “savers credit” to reward lower income taxpayers who save for retirement, and other steps.

Less clear is what the Senate Health, Education, Labor and Pensions Committee might take up. “I think there is still a good amount of uncertainty with respect to HELP leadership in the next Congress,” said Michael Kreps, a principal with Groom Law Group in Washington. Mr. Kreps was the committee's pension expert under then-chairman Tom Harkin, D-Iowa, who retired in 2015.

While Sen. Lamar Alexander, R-Tenn., is expected to stay on as chairman if the Republicans stay in the majority, there are more what-if's in the event of a Democratic takeover. Ranking committee member Patty Murray, D-Wash., could choose instead to take control of the powerful Appropriations Committee or move up in a leadership position.

“If either of those things happen, Sen. (Bernie) Sanders is likely next in line to take over the HELP Committee,” said Mr. Kreps. “As for agenda, I think that's an open question” given the committee's recent focus on education issues. “I do think that — whoever is in power — the Senate is going to have to figure out how to address the problems in the multiemployer pension system. There are no easy issues on that front.”

In the House, Speaker Paul Ryan, R-Wis., has vowed to take up comprehensive tax reform in the 115th Congress, but the prospect of a more liberal Senate and Rep. Charles Schumer, D-N.Y., becoming majority leader if the Democrats take control makes any grand tax changes unlikely.

Still, private equity officials are braced for both parties to raise the perennial idea of ending the tax deduction for treatment of carried interest, something both Ms. Clinton and Republican presidential candidate Donald J. Trump are advocating. “We're always on guard,” said one industry participant.

Treasury Department officials are even standing by to issue guidance if the current Congress, spurred by both presidential candidates' anti-carried interest rhetoric, makes changes in the lame-duck session this year.

Finding the tax revenue to pay for any tax cuts also has employer groups nervous and pushing to have premiums paid to the Pension Benefit Guaranty Corp. taken out of revenue-raising calculations, which in recent years have led to significant premium hikes to pay for unrelated measures.

“With employer-sponsored retirement plans sitting there as the second-highest tax expenditure, I think there's good cause to be concerned,” said James A. Klein, president of the American Benefits Council, Washington.

Another question is who will steer the House Education and the Workforce Committee following retiring Chairman John Kline, R-Minn. If as expected Republicans stay in control, Rep. Virginia Foxx, R-N.C., has bid for the chair. Ms. Foxx has already vowed to repeal the Department of Labor's fiduciary rule, slated to take effect in January 2017. She also supports Mr. Kline's draft legislation to allow multiemployer plan trustees to adopt “composite plans” that combine defined benefit and defined contribution plan features.

Leaders of the 115th Congress will be elected in early December. One thing they will have to face early is the federal debt limit. Political brinkmanship in 2015 led to it being suspended until March 16, 2017, at an estimated $20 trillion, which could quickly be reached by the federal government's accumulated debt and force Congress to once again take up extraordinary measures.

Plan sponsor advocates are hopeful that the new Congress will reinstate the Internal Revenue Service's system for issuing the determination letters that plan sponsors rely on to prove their retirement plans are tax qualified. The IRS offered temporary relief until 2018, but “we really need legislation if we're going to keep the pension system alive,” said Will Hansen, senior vice president of retirement policy for the ERISA Industry Committee, Washington. “Unlike Congress, companies actually do project out their finances over several years.”

Mr. Klein sees bipartisan support for a solution, and expects more attention to plan sponsor derisking issues. “Both Congress and the administration have been scrutinizing this. If changes occur, it's going to need to be done in way that protects everybody's interests,” said Mr. Klein. “Where retirement plans are potentially vulnerable is the assumption held by some policymakers that it is disproportionately favoring the higher paid.”

“The good news is that retirement is one of those issues which Republicans and Democrats can find some common ground,” said Mr. Klein. “The bad news is, there is no policy. “