Industry now awaiting its turn to get things done

The biggest potential changes out of Washington for 2018 were still being written in the final days of 2017, when Senate and House Republican leaders passed, and the president signed, an ambitious tax reform package.

That means the first months of the new year will be spent figuring out whether retirement plan sponsors and investors came out ahead, or at least untouched.

As tax rates dip, "one thing to think about is, people will have more in their take-home checks and they could contribute more" to their 401(k) plans and health savings accounts, said Robyn Credico, defined contribution practice leader for Willis Tower Watson PLC in Washington. "There's a much bigger push around the country to try" to link income gains with higher contributions. "The standard deduction just went up, and I think our (plan sponsor) communications should change."

Getting tax reform done also frees up attention spans in Congress and the White House to deal with retirement issues, with the potential for bipartisanship.

At the top of the bipartisan-supported list are revised regulations that would make it easier for smaller employers to sponsor retirement plans through open multiple-employer plans. The concept gained some traction in the 114th Congress, which ended Jan. 3, 2017, when the Senate Finance Committee approved the ​ proposed Retirement Enhancement and Savings Act.

The legislation, which continues to gain supporters, calls for tax credits for small employers that start a plan or add automatic enrollment, higher caps on auto escalation of employee deferrals and other measures.

The idea lived on in the 115th Congress in 2017, when Sens. Susan Collins, R-Maine, and Bill Nelson, D-Fla., introduced a similar bill and a group of senators urged the Department of Labor to see what it could do administratively to encourage more MEPs. While that stalled this year, the confirmation in late December of Preston Rutledge as assistant secretary for the Employee Benefits Security Administration is expected to ease a regulatory vacuum.

Two more retirement savings bills introduced in December by Rep. Richard Neal, D-Mass., House Ways and Means Committee ranking member, would require most employers to offer a defined contribution plan, increase auto enrollment and auto escalation and make it easier for small businesses to use multiple-employer plans.

"That helped set the table for 2018," said Geoff Manville, principal, government relations at Mercer LLC in Washington. Mr. Neal's bills are "a really common sense, broad range of practical ways to improve the system."

Perhaps the most pressing issue facing Congress and the Treasury Department in 2018 will be struggling multiemployer pension plans. Three plans account for 63% of total multiemployer underfunding: the $15.3 billion Teamsters, Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill.; the $4.3 billion Bakery & Confectionery Union and Industry International Pension Fund, Kensington, Md.; and the $4.1 billion United Mine Workers of America 1974 Pension Plan, Washington. Their imminent insolvency also threatens the future of the Pension Benefit Guaranty Corp.'s multiemployer program, along with all the multiemployer pension benefits it guarantees.

As politicians on both sides of the aisle begin to hear from retirees and other constituents, it is creating an opportunity to discuss a new federal loan program for struggling plans, plus additional PBGC assistance for the largest plans at risk, with the possibility of legislation by spring.

"I think there's a growing awareness of just what a big problem there is, for plans and the PBGC as well," said Mr. Manville, who does expect some bipartisanship. "It will be tough to do in an election year, but it's more about building the groundwork."

Dennis Simmons, executive director of the Committee on Investment of Employee Benefit Assets in Washington, whose members are chief investment officers at 104 large companies responsible for nearly $2 trillion in retirement assets, said they will be watching how Congress and the White House deal with the PBGC's multiemployer financial crisis to make sure that "single employer plans don't get swept up in it."

When it comes to the potential changes to the tax-deferred status of defined contribution plans as a way of raising federal tax revenue, Mr. Simmons thinks that while the threatened wholesale shift to after-tax Roth accounts didn't materialize, "there is still an opportunity for the industry to remind Congress that a deferral is much different. Reinforcing that is a priority for us," he said.

Retail investors and service providers might see more changes in the Labor Department's fiduciary rule in 2018, but it shouldn't change much for retirement plan sponsors. Ms. Credico of Willis Tower Watson said their clients "have just moved forward." She advises plan sponsors to keep paying attention. "I think the conversation now needs to be what (service providers) are saying to participants. You still have a duty to monitor."

CIEBA's Mr. Simmons agreed: "Our members' position is that they are fiduciaries during the accumulation phase; whoever takes over, they should be held to the same standard. At a minimum, we are pleased that there is going more scrutiny."

Money management firms are likely to have less scrutiny in 2018 as the White House continues its effort to revisit financial regulation, including how the Financial Stability Oversight Council deals with systemically important financial institutions. A Treasury Department report in November called the SIFI designation "a blunt instrument" that should only come as a last resort.

The administration is "clearly headed in a direction that will require greater analysis by FSOC of non-banks. It would take legislation to really gut the whole process, but if the secretary of treasury is chair of FSOC, it gives more credence to the primary regulator, which is the SEC," a position favored by Treasury Secretary Steven Mnuchin, said David Tittsworth, a lawyer with Ropes & Gray LLP and former president and CEO of the Investment Adviser Association in Washington.

"It's clear to me that they're at least headed toward more transparency, more due process to potential firms that are designated," said Mr. Tittsworth.

The Securities and Exchange Commission is also expected to get more things done once the final two commissioner slots are filled, giving the commission its first full five-member commission since 2015. While the Senate confirmations of Hester Peirce and Robert J. Jackson Jr. were held up in December, final approval is expected in early 2018.

Another personnel change in Washington is happening at the Federal Reserve, where Jerome Powell will become chairman as the agency continues to ease monetary accommodations.

"The market is currently pricing two (interest rate) hikes next year, but there are a lot of moving parts," said Greg Peters, senior investment officer with PGIM Fixed Income in Newark, N.J., who expects the focus to stay on inflation. "It will be hard for them to continue to tighten if it is below target. The shape of the yield curve is really important. The risk is that they overtighten."

Mike Swell, co-head of global fixed-income portfolio management at Goldman Sachs Asset Management, New York, expects to see a Fed that is "marginally more hawkish," plus "some creative thinking in communication with the marketplace and around price targeting."

Washington also will have to deal with the debt ceiling, which received only temporary attention in late 2017. With the "sugar rush" of tax reform, "you are adding a lot to the deficit at a time when you should be adding to surpluses," said Mr. Peters of PGIM. The debt ceiling issue "is a continued source of friction. The question is: Will the white noise turn into something else next year?"

Over time, said Mr. Swell of GSAM, the debt ceiling "is likely to come back and cause problems."