From investing to ESG, election a show of dramatic contrasts

The 2020 election season was disrupted early Oct. 2 with the news that President Donald Trump and first lady Melania Trump had tested positive for the coronavirus and would begin a quarantine.

That adds to the drama of a race already dominated by the pandemic and dramatic contrasts between the candidates for the White House on everything from retirement savings and investing with environmental, social and governance issues in mind, to taxes and China.

Over his nearly four-year term, Mr. Trump has made dramatic changes on these issues, often through executive orders that bypass Congress. They include recent orders changing how retirement plan fiduciaries deal with ESG issues and proxy voting, and how investment advice fiduciaries receive compensation for their guidance.

Mr. Trump's ongoing concerns with national security risks from China led to several executive moves, including directing the Federal Retirement Thrift Investment Board overseeing the $612 billion Thrift Savings Plan to scrap plans to shift billions of dollars in retirement assets to an index fund that includes Chinese companies. Similar concerns led a top State Department official to warn university endowments to divest from Chinese companies that could wind up being delisted from U.S. exchanges.

Comparing the parties or their top-of-ticket candidates is more elusive than it was four years ago. The Republican National Convention adjourned without updating its 2016 platform. On retirement issues, that platform had a brief reference to pension plan portability and support for employee stock ownership plans that "enable workers to become capitalists." Mr. Trump has not issued a detailed plan.

The Democrats and presidential candidate Joe Biden have produced scores of ideas on everything from taxes to climate change.

The other key races this round are in the Senate, where Republicans maintain a three-seat majority that has led to numerous legislative stalemates on pressing issues such as helping the country and the economy recover from the coronavirus pandemic, with Democrats controlling the House of Representatives.

Given those stalemates, it may turn out that not much changes in Washington when the 117th Congress convenes in January.

Democrats are expected to keep the House majority they gained in 2018 midway through Mr. Trump's term. That leaves scenarios ranging from no change in the White House or Congress if Mr. Trump is re-elected and Senate Republicans keep their majority, all the way to a Democratic-controlled White House and Congress, if Mr. Biden is elected and Democrats gain a Senate majority. Election results falling between the two extremes would mean the partisan wrangling continues.

Under any scenario, the practical reality is that either party would have a narrow majority and little ability to enact sweeping new legislative ideas. The 115th Congress, for example, had Republicans controlling both chambers and the White House, yet it was unable to fulfill a key campaign pledge to overturn the Affordable Care Act, also known as Obamacare.

The extra wrinkle this round is that both parties have to deal with the ongoing economic and social impacts of the COVID-19 pandemic, which has already upended traditional political calculations and forced Republicans and Democrats to the bargaining table several times.

"The last few months have seen an extraordinary amount of bipartisanship in fiscal policymaking," said S. Kenneth Leech, chief investment officer for fixed-income manager Western Asset Management Co. LLC, Pasadena, Calif., with $468.5 billion in assets under management. "Such bipartisanship is certainly not guaranteed to last," Mr. Leech noted in a recent client alert.

The biggest change could come on the regulatory front, depending on who is in the White House.

If Mr. Trump wins another term, he is expected to continue his deregulation push and finalize controversial rules from the Department of Labor and other agencies that favor companies but are strongly opposed by investor advocacy groups such as the Council of Institutional Investors.

Rules such as the Labor Department proposals to change how retirement plan fiduciaries deal with ESG issues and proxy voting are not yet finalized. They would likely be shelved by a Biden administration, and even ones recently enacted could be undone by a Democratic-controlled White House and Senate, through the Congressional Review Act process.

The CRA lets Congress disapprove — by a simple majority vote — a final rule issued by a federal agency if it has not been in effect for more than 60 legislative days, which this year makes June 1 the most probable cutoff date.

Republicans used the CRA several times in 2017, including to undo the DOL's safe harbor for states interested in creating private-sector retirement savings programs.

Shareholder advocacy groups are pledging to press a Democratic administration to use it to undo recently finalized rules from the Securities and Exchange Commission on proxy advisory firms and shareholder proposal submissions.

Mr. Trump achieved several retirement-related goals through executive orders, including ones for the Labor Department that led to a changed fiduciary standard and new rules for electronic disclosure for retirement plans and pooled employer plans for smaller employers.

Mr. Biden is calling for a tax credit for small businesses to start retirement plans for their employees, but he goes beyond that, pledging that "almost all workers without a pension or 401(k)-type plan will have access to an automatic 401(k)." The Democratic platform also supports retirement savings programs sponsored by states or cities, and allowing teachers and other public-sector workers to earn Social Security benefits.

Mr. Biden also wants to "equalize" the retirement provisions of the tax code, which he said offers more than $200 billion in tax advantages to retirement savers, including the tax treatment of 401(k) plans and individual retirement accounts. But roughly two-thirds of the tax advantage benefits the wealthiest 20% of families, according to the Democratic platform. Both Mr. Biden and the Democrats back the principles of the proposed Butch Lewis Act, a multiemployer pension reform package that centers on a federal loan program for struggling plans and avoiding benefit reductions.

At some point, retirement-related tax incentives are expected to be revisited by both parties when they are forced to deal with soaring federal budget deficits and tough spending decisions related to COVID-19 relief measures. That could revive talk from 2017's tax reform negotiations to consider "Rothification" of retirement plans as a way of raising much-needed federal revenue by reducing or eliminating the ability to contribute pretax dollars to retirement accounts.

For now, the first retirement issue the 117th Congress is likely to face is the multiemployer pension crisis, which also threatens the Pension Benefit Guaranty Corp.'s nearly insolvent multiemployer program. After several starts and stops, negotiations between congressional Republicans and Democrats over a multiemployer pension reform package still have a chance, congressional observers say.

It would require overcoming some big differences between Republicans and Democrats over various proposals floated so far, including a federally financed loan program, more funding for the PBGC, and allowing plans to have variable benefits. Both parties are feeling the pressure from retirees to do something, but support for various legislative proposals remains firmly divided. A coronavirus relief legislative package passed by the House in May with major changes for multiemployer pension plans passed largely along party lines, and has not advanced in the Senate. The package, the Health and Economic Recovery Omnibus Emergency Solutions, or HEROES Act, includes some funding relief for both multiemployer and single-employer retirement plans and gives the PBGC more funds and authority to partition multiemployer plans.

"The biggest issue next year is the state of multiemployer plans and the PBGC and will that debate spill over into the single-employer space," said Geoffrey Manville, partner and senior director of government relations at Mercer in Washington.

PBGC officials repeatedly stress that the single-employer and multiemployer program finances are separate legal entities, but mounting federal deficits continue to make plan sponsors nervous that the assets could be tapped in an emergency.

The latest PBGC projections report released in September predicts a $46.3 billion surplus for the single-employer program and an $82.3 billion deficit for the multiemployer program over the next 10 years. Based on fiscal year 2019 data, it does not factor in how the current economic crisis related to COVID-19 could impact both single- and multiemployer plan sponsors.

House Ways and Means Committee Chairman Richard Neal, D-Mass., who prevailed in his primary race and is expected to continue leading the influential committee, has also pledged to build on 2019's Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, which made it easier for employers to join multiple employer plans; increased the safe harbor cap for automatic enrollment; and increased 401(k) access for part-time workers, among other provisions.

In the next Congress, Mr. Neal said he intends to work on a SECURE Act 2.0 package based on two of his proposals: the Automatic Retirement Plan Act, which would require many employers to offer a 401(k) or 403(b) plan; and the Retirement Plan Simplification and Enhancement Act, which among other provisions, would exempt retirement savings below $250,000 from complicated required minimum distribution rules and make it easier to take advantage of the saver's credit.

In the Senate, Rob Portman, R-Ohio, and Ben Cardin, D-Md., pledge to press for hearings on their proposed Retirement Security and Savings Act, featuring more than 50 provisions aimed at improving coverage with small employers and among part-time workers.

A Democratic-controlled Senate would move all of those proposals closer to reality.

Both parties are careful to praise Social Security, but Mr. Biden and the Democratic Party support increasing benefits and pledge to reject efforts to privatize the system, a prospect raised in the 2016 Republican platform statement.

Mr. Trump said he would terminate the payroll taxes that fund Social Security and Medicare, and have it supported instead through the government's general fund, with tax revenue losses offset by economic growth.

According to the non-partisan Congressional Budget Office, that would create an additional $16 trillion budget deficit over 10 years, between the 12.4% payroll tax split between employers and workers for Social Security, and a 2.9% payroll tax for Medicare.

The parties and their candidates diverge dramatically on the subject of climate change and other ESG issues.

Last November, the Trump administration formally notified the United Nations it would withdraw the U.S. from the Paris Agreement to limit global temperature rise by reducing greenhouse gas emissions, while its regard for ESG was clearly signaled in the DOL rule proposal to limit ERISA plan fidicuaries' ability to invest in ESG vehicles.

Mr. Biden and the Democrats pledge to immediately rejoin the Paris Agreement and take other steps to integrate climate change into foreign policy and national security strategies.

Mr. Biden is also linking climate change with economic recovery from the coronavirus pandemic. His $2 trillion climate plan seeks to eradicate carbon pollution from the power sector by 2035 and achieve net-zero emissions by 2050, while creating jobs in the energy, transportation and infrastructure sectors, and targeting more of the benefits toward disadvantaged communities.

The Democratic platform has aggressive goals for combating climate change and mobilizing "transformative public and private investments to launch a clean energy revolution." It calls for making all American power plants carbon neutral by 2035 and adding 500 million solar panels and 60,000 wind turbines to the electricity grid within the next five years.

A Democrat in the White House could also change ESG dynamics at the SEC, which so far has resisted calls from investors to enhance corporate disclosure on climate impact and other ESG issues.

Regardless of the outcomes, the election results "will not deflect ESG momentum" for market-driven solutions, which have gained considerable traction over the past four years despite an unfriendly administration, said John Streur, president and CEO of ESG-focused money manager Calvert Research and Management in Washington.

"Any company around the world has to be competitive on a bigger stage. Even if the U.S. doesn't move on climate change, the things that are happening globally will ultimately push them," Mr. Streur said. "At some point the regulatory framework will catch up."

The immediacy of the COVID-19 crisis is also changing the debate over taxes. Democrats have promised to reverse Mr. Trump's 2017 tax cuts if they gain control in the Senate and the White House, but their priority now is containing the pandemic, creating jobs and raising wages.

Mr. Trump has not proposed specific tax policy changes other than calling for a lower capital gains rate.

Mr. Biden supports raising corporate taxes to 28% from the current 21% enacted in 2017 to replace a 35% rate. The bump would raise a much-needed $1.3 trillion, he said. He also wants a 15% minimum tax on profits.

For individuals, Mr. Biden supports restoring the pre-2017 top marginal rate to 39.6% for people making over $400,000 annually, up from the current 37% rate.

Tax hikes are also in the Democratic platform, which wants to "make sure investors pay the same tax rates as workers and bring an end to expensive and unproductive tax loopholes," including carried interest — a perennial threat that has yet to translate into action.