Introduction
With all that happened in the Capitol yesterday, it was a little hard to focus on the other significant development of Jan. 6: Democrats taking control of the Senate as a result of Georgia Democrats Jon Ossoff and Rev. Raphael Warnock both narrowly winning the state’s runoff elections.
In doing so, the makeup of the upper chamber of Congress is now evenly divided at 50-50 among Democrats and Republicans, with Vice President-Elect Kamala Harris set to act as a potential tiebreaking vote for the Democrats.
This big news that was buried somewhat yesterday by events in Washington D.C. provides President-Elect Joe Biden a wider avenue—with Democratic control of the Oval Office, House and Senate—to push through his legislative agenda, including issues related to retirement, tax, student debt, financial regulation and Social Security reform.
But with slim advantages in both chambers of Congress, most seem to expect that the incoming Biden Administration will not try to steamroll through an agenda of radical policy changes.
“What I do not expect to see are policies that are wildly out of the mainstream. Even in a blue Washington, there simply aren’t the votes,” said Brad McMillan, chief investment officer at Commonwealth Financial Network, the nation’s largest privately held Registered Investment Adviser-broker/dealer, in a Jan. 6 blog post.
McMillan, the primary spokesperson for Commonwealth’s investment divisions, noted that Biden himself is a centrist, and centrist Senators and potential Democratic defectors will prevent anything radical.
“While the Republicans may have lost the leadership of both houses, they still have commanding minorities that can block anything out of the mainstream. In that sense, nothing has really changed in terms of what policies can be passed,” McMillan said.
The big difference between the last Congress and this one, he added, is simply that Democrats will be able to introduce policies in the Senate and actually bring them to a vote—something Senate Majority Leader Mitch McConnell—who will likely become Senate Minority Leader now—severely limited in recent years. “But they still won’t be able to pass them without Republican support.
“This isn’t the blue wave; instead, it’s something much closer to politics as usual. Despite the risks, as an investor, I am comfortable with that,” McMillan concluded.
While dealing with the COVID-19 pandemic and related issues will be an obvious priority once Biden takes office, it remains to be seen how aggressively he’ll pursue some of the retirement-related reform proposals he introduced or promised on the campaign trail, or actions he may take to undo recent rulemaking by the Department of Labor. There are many, including those covered in the following slides:
Swapping 401k tax breaks for credits
There is a possibility that the Biden Administration would seek to end traditional tax incentives inherent in 401ks and replace them with a “credit” or “match,” something that came to light last fall upon closer examination of the Biden-Sanders Unity Task Force Recommendations.
Observers claim that it generally translates to eliminating the tax advantages currently enjoyed by retirement savings accounts and replacing them with the credit; the idea being that the tax advantages disproportionately accrue to relatively higher earners. Biden could seek to equalize the incentive system by ending upfront deductions, replacing them with flat tax credits for each dollar saved.
The campaign didn’t say what that percentage would be, but the Urban-Brookings Tax Policy Center has estimated a 26% credit would be roughly revenue-neutral over the first 20 years and beyond.
SEE ALSO: Will Biden Swap Tax Breaks for Credits?
As a candidate, Biden floated imposing a 12.4% Social Security payroll tax on earnings above $400,000, while retaining the 2021 payroll-tax ceiling of $142,800. An analysis by the Tax Policy Center found adding this sort of “wealth tax” would raise an additional $740 billion for Social Security over a 10-year period, which would pay for his stated goal of increasing Social Security benefits for lower-income retirees.
SEE ALSO: Social Security 2021: What Will and What Might Happen
Biden has said he wants to switch Social Security’s inflationary tether, used to calculate the annual COLA, from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Consumer Price Index for the Elderly (CPI-E), an experimental index that specifically tracks the spending of households with persons aged 62 and over.
This would result in slightly bigger annual COLAs than under the CPI-W, according to The Senior Citizens League. Biden supports the switch as part of his stated campaign promise of preserving and strengthening Social Security, noting how this particular initiative would help older Americans in particular.
witch the pricing index to CPI-E would likely generate opposition from Republicans because the larger COLAs would result in increased benefits and therefore an increase in the overall cost of Social Security.
SEE ALSO: Biden Backs This Change for Social Security COLA
Vacating the new Fiduciary Rule
The U.S. Department of Labor rolled out a new exemption for investment advice fiduciaries in December, retaining much of what was in the proposed rule introduced last June. Fiduciary expert Fred Reish called it a “dramatic expansion” of the definition of fiduciary advice.
Fortunately, he added, the Department of Labor said that it will not enforce that definition retroactively and will grant limited relief for the next year; for instance, if the advice is in the participant’s best interest, and the advisor’s compensation is not more than reasonable.
“It looks to me like the final rule is substantially similar to the [June] proposal. In other words, while there are changes, they do not materially alter the conditions to obtain relief from the prohibited transaction resulting from conflicted fiduciary advice.”
He concluded with an additional comment; the rule is “Economically Significant,” which means that it cannot become effective until 60 days after it is published in the Federal Register.
“As a result, the effective date is after Biden’s January 20 inauguration, and the new administration will, as all do, pull it back for further study and possible changes.”
Barbara Roper of the Consumer Federation of America told 401k Specialist in December that the “DOL appears to be trying to make it as burdensome as possible for the Biden Administration to revise this deeply deficient rule.
“They are not alone in that. We’ve seen a similar rush to push through rules at the SEC on partisan votes that suggests the rules aren’t likely to last long in a new administration. However, this is one area where I believe the new administration will go through the hoops necessary to revise the rules, consistent with the Democratic Party platform, at both the DOL and the SEC.”
SEE ALSO: DOL Fiduciary Rule Sent to OMB, But is it Too Late?
Student Loan Debt
Then there’s the question of what Biden might want to do about student loan debt. Will he quickly seek to extend the current CARES Act-enabled student loan payment pause that is set to expire on Feb. 1, 2021 after twice being extended already?
Will he take the advice of Sens. Elizabeth Warren (D-MA) and Chuck Schumer (D-NY) and cancel a large portion (potentially up to $50,000) of student debt without Congress by issuing an executive order?
Or will he push for the plan he outlined in “The Biden Plan for Education Beyond High School,” the creation of a new, “simple program which offers $10,000 of undergraduate or graduate student debt relief for every year of national or community service, up to five years. Individuals working in schools, government, and other non-profit settings will be automatically enrolled in this forgiveness program; up to five years of prior national or community service will also qualify.”
Post-election last November, Biden sidestepped a press conference question about whether he would use an executive order to forgive student debt, but reiterated support extending the suspension of payments through Sept. 2021 and canceling some student debt.
While the recently passed Stimulus Bill Extends Tax-Free Status of Employer-Sponsored Student Loan Programs, which is a notable development, it did not extend the student loan payment holiday.
Also, the SECURE 2.0 legislation, expected to be reintroduced in the 117th Congress, includes a provision that would allow individuals to pay down a student loan instead of contributing to a 401k plan and still receive an employer match in their retirement plan.
SEE ALSO: Student Loan Debt on Front Burner for Biden?
Stimulus Bill Extends Tax-Free Status of Employer-Sponsored Student Loan Programs
DOL’s ESG Rule
The Department of Labor says its final ESG rule released Oct. 30 “intends to provide clear regulatory guideposts for fiduciaries of private-sector retirement and other employee benefit plans in light of recent trends involving environmental, social and governance (ESG) investing,” per a DOL statement announcing the final rule.
Critics of the rule say it provides anything but clear regulatory guideposts, and will lead to unintended consequences that will result in additional costs for and set a double standard by forcing more scrutiny on ESG funds than on non-ESG alternatives. The final rule is likely to be challenged in court, or the Biden Administration could act to vacate the rule before it is enacted.
SEE ALSO: ‘Disappointing’ DOL Final Rule on ESG Investing Could Face Challenges
SECURE Act 2.0
The sequel to the 2019 SECURE Act, the Securing a Strong Retirement Act of 2020, also known as SECURE 2.0, was introduced last fall as bipartisan legislation intended to build on the SECURE Act and “help a greater number of Americans successfully save for a secure retirement.” The legislation is expected to be reintroduced by Congress this year, but could see some changes with Democrats potentially figuring they could now tailor and pass a more “Democrat-friendly” bill.
Among the bigger reforms in the bill are provisions to expand auto-enrollment, provide incentives for small businesses to offer plans, increase the RMD age to 75, and allowing for bigger catch-up provisions. And don’t forget the previously mentioned provision that would allow individuals to pay down a student loan instead of contributing to a 401k plan and still receive an employer match in their retirement plan.
SEE ALSO: SECURE Act 2.0 Legislation Introduced—And Wow!
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
