Friday, October 26, 2012

November Elections Could Enable, or Disable, Retirement Readiness

One recurring theme in our national election system finds the challenger promising to lead the nation in a different direction than the one taken by the incumbent.  Whether this happens can depend on many things, not least of which is the inherent difficulty of “turning the ship” from the direction in which it’s sailing.  But that was the plan from the beginning of our nation.  For the sake of stability, the founding fathers created a governing system that—by its nature—is difficult to rapidly or radically change.  This has become even more evident in recent times, with a highly polarized Congress, which is a reflection of a very polarized electorate. 
Nevertheless, the coming presidential and congressional elections could put the retirement industry on any of several paths, each leading to a different place.  Some are predicting that the post-election period could resemble 1986, the year that the Tax Reform Act of 1986 brought about very significant changes to employer plans and IRAs.  Now, as then, one of the driving forces behind reform is a move towards balancing the federal budget.  In other words moving towards a place where tax revenues equal or outpace federal spending.
On a regulatory level, if president Obama wins another term as president, and we retain the same leaders in our regulatory agencies, many feel we will see a more aggressive regulatory approach than under Mitt Romney.   One of the regulatory issues that stands front-and-center is the Department of Labor, Employee Benefits Security Administration (EBSA) definition of fiduciary for retirement plan purposes.  EBSA proposed regulations defining fiduciary status were withdrawn in September, 2011, amid great industry and political opposition, to the great relief to many. 
Of special concern is defining fiduciary status and standards not only for employer plans, where fiduciary protocols are well-established, but for IRAs as well.  Applying the same definition to IRAs could, many fear, lead to an unwillingness of financial professionals to work with IRA owners in need of investment guidance, especially those with smaller balances.  Perhaps, in the opinion of some, the IRA owners who need it most.  If this proves to be the result, such savers would be less likely to receive the guidance they need to adequately prepare for retirement.  Some have asked why EBSA should even be considered to have regulatory authority over IRAs.
Few interpret EBSA’s withdrawal of proposed fiduciary definition regulations in 2011 as motivated by a desire to recast them as “kinder and gentler.”  Many feel that only a technicality caused them to be withdrawn, EBSA not having done an adequate job of estimating and disclosing the time and cost of compliance.  Still others interpreted the withdrawal as temporarily defusing opposition from an engaged and mobilized retirement industry and the related political pressure. 
If the present administration and EBSA leadership remain in place, without the same need to be concerned about the 2016 election, some feel there will be little inclination on the part of EBSA to show flexibility and forbearance.  Conversely, much of the political rhetoric during the Republican primary season, and from Republican candidates during the presidential and congressional campaigns, has advocated reduced regulatory burdens on business.  It is hard to imagine EBSA under a Romney administration being as aggressive in its regulation of retirement arrangements.  This is not an endorsement, but a carefully considered observation.
Potentially more game-changing than regulatory philosophy, is possible congressional action to reform the Internal Revenue Code.   There is strong sentiment that the Code is too complex, and needs to be simplified.  There is also a desire, chiefly on the part of fiscal conservatives, to reduce tax rates for individuals and businesses.  For this to be accomplished, it will be necessary to either curb federal expenditures, or to accomplish real economic growth that increases gross tax revenues, despite lower tax rates.  Or, some combination of both.
If reducing federal tax expenditures is pursued, some popular tax exemptions and deductions are likely to be prime candidates for limitation, potentially even outright elimination.  Some in Congress feel that the Tax Code should not favor certain kinds of behavior by providing tax breaks to encourage it.  Such popular tax deductions as home mortgage interest, charitable contributions, and retirement and education savings, fall into this category, as does the exemption for employer-provided health care benefits. 
Some in Congress would eliminate all such tax deductions and exemptions in favor of a “pure” Tax Code.  Others would preserve some of the more popular tax breaks; mortgage interest, charitable giving and retirement saving have all been mentioned as possible carve-outs that might be preserved in a reformed Tax Code. 
Interestingly, both presidential candidates have advocated positions that could limit tax-favored saving opportunities now available to American taxpayers.  President Obama, in a budget proposal released in February of this year, recommended setting an upper limit of 28 percent on the tax savings for deductions and exclusions, including those associated with retirement savings.  For example, a taxpayer whose marginal tax rate is 35%, would—under current law—recover 35 cents for every dollar of tax deductions or exclusions.  But under the president’s recapture principle, such tax benefits could not be greater than 28%, even for those in higher taxing brackets.
For his part, Republican presidential candidate Mitt Romney recently provided details on a tax cut plan that would cap annual itemized income tax deductions at $17,000, not including employer-provided health care benefits.  Depending on the mix of income tax deductions a taxpayer qualifies for, it is not difficult to imagine this $17,000 cap requiring a taxpayer to have to choose between a retirement savings contribution and an alternate tax deduction.
Still other economic policy "experts" have proposed such things as limiting annual retirement contributions to the lesser of $20,000, or 20% of income, which could greatly limit the contributions of savers attempting to maximize their retirement savings.  At the other end of the spectrum, there have also been proposals to establish automatic IRAs, as well as to create a mandatory auto-enrollment retirement plan with guaranteed payouts, something akin to a public/private partnership in a hybrid defined contribution/defined benefit plan.  We believe that a mandatory automatic IRA plan for employers who don't currently have a plan in place is very likely to be proposed under an Obama administration and something similar, but possibly without the "mandatory" aspect likely under Romney. 
Then, too, there are those in Congress and positions of influence who believe that America’s retirement saving mechanisms must be preserved despite federal budget woes, in order to avoid impoverishing millions of retirees in the future.  They contend that the present retirement system, particularly the 401(k) environment, is sound, needing at most fine-tuning, rather than a major overhaul. 
Preservation, limitation, elimination, all are words that could potentially have relevance in the post-election retirement savings world.  It’s up to the voices in our industry to make sure that elected officials and policymakers hear, in no uncertain terms, how critical it is that Americans continue to have meaningful opportunities to save for retirement; no matter which side of the political aisle those decision makers sit on.