For the retirement industry, the beginning of 2018 seems far in the past.
In January, the Labor Department’s fiduciary rule was partially implemented, with retirement professionals prepping for the remainder of the regulation by a delayed 2019 deadline.
The economy was setting up for a parabolic burst, courtesy of the tax cuts passed last year, as economists debated the merits and sustainability of debt-financed stimulus.
The labor market continued to tighten, and the New Year saw the first evidence of 401(k) plan sponsors passing savings from a slashed corporate tax rate on to participants in the form of more generous matches.
Eleven months later and Labor’s fiduciary rule is off the books. Now the Securities and Exchange Commission is undertaking writing new regs to address securities brokers’ duties and obligations to retail investors.
Equity markets are dogged, and then not, by an incipient trade war with China that may never happen, depending on which prognosticator is asked.
Savers—particularly those eyeing retirement—have had to endure fits of volatility that haven’t been felt in a decade.
Analysts at JP Morgan are putting the chances of recession in 2019 at 28 percent, 50 percent by 2019, and 80 percent within the next three years.
And of course there was an election. Democrats will control the House of Representatives in the 116th session. That may be a good deal for retirement policy, say some industry analysts.
Retirement policy remains a last bastion of bipartisanship on Capitol Hill. The prospect of Rep. Richard Neal, D-MA, chairing the Ways and Means Committee has many hoping meaningful retirement reforms will advance next year.
It was another eventful year in the retirement industry that may yet become more eventful before the book is closed on 2018. Lawmakers are prepping to debate sweeping reforms against the backdrop of the year-end budget brawl, and millions of retired union workers await a rescue package for pensions that grow closer to insolvency with each passing day.
Here is a chronological look at some of major events that shaped 2018.
1. Remember the fiduciary rule?
Last November, the Labor Department officially delayed full implementation of the fiduciary rule to July 2019, as regulators continued a reexamination of the controversial reg ordered by President Trump.
In January, FINRA announced it was shifting its exam focus to commission-based accounts that had been moved to fee-based accounts, and whether those shifts pass the suitability standard of care brokers owe to retail investors.
Meantime, confusion over the portion of the fiduciary rule that went into effect last year was considerable, according to reports.
Under the impartial conduct standards, recommendations to roll 401(k) assets into IRAs were required to be made in investors’ best interests. That meant those recommendations needed to be backed by a comparison of investment fees in both options.
“I’m concerned folks are short-circuiting processes in a way that isn’t compliant,” said Fred Reish, a partner at Drinker Biddle & Reath and chair of the law firm’s ERISA team.
2. Tax cuts a boon for 401(k) investors?
Aflac, VISA, SunTrust Bank, and Nationwide were among the first large plan sponsors to announce generous enhancements to 401(k) matches after the corporate tax rate was slashed from 35 percent to 21 percent.
An early-year survey of employers by Willis Towers Watson showed more than a quarter of sponsors had already, or were considering, increasing contributions to 401(k) plans.
But as the year progressed, announcements of increasing contributions became less common as interest rates rose, increasing the cost of corporate borrowing, and corporations’ capital expenditures showed signs of slowing as more macro-uncertainty entered the picture.
On the defined benefit side, the corporate tax cuts drove a record year for pension contributions made by the 20 largest plan sponsors, as corporations moved to write down the contributions against the 35 percent rate.
3. Retirement legislation resurfaces, and the bipartisan Joint Select Committee on Multiemployer Pension Reform is created.
The Retirement Enhancement and Savings Act is reintroduced in the Senate in early March. The comprehensive bill includes provisions impacting plan sponsors and retail investors in RIAs, and is the brain-child of Sen. Orrin Hatch, R-UT.
speculation emerges that lawmakers will make a strong push to pass the legislation, which has strong bipartisan support, in part as an homage to the retiring Hatch.
Throughout the year, other legislation would emerge that peels off parts of RESA.
The budget deal passed in February established the creation of a bipartisan Joint Select Committee on Multiemployer Pension Reform. The move is the latest, and most serious push to move a rescue package forward for 130 collectively bargained pension plans facing imminent insolvency.
4. 5th Circuit kills fiduciary rule.
After a protracted delay in issuing a ruling on the whether the Obama-era Labor Department usurped its statutory limitations in promulgating the fiduciary rule, the 5th Circuit Court of Appeals issued a 2-to-1 ruling vacating the fiduciary rule.
“Although lacking direct regulatory authority over IRA ‘fiduciaries’, DOL impermissibly bootstrapped what should have been safe harbor criteria into ‘backdoor regulation’,” wrote Judge Edith Jones in the ruling.
“Millions of IRA investors with small accounts prefer commission-based fees because they engage in few annual trading transactions. Yet these are the investors potentially deprived of all investment advice as a result of the fiduciary rule, because they cannot afford to pay account management fees, or brokerage and insurance firms cannot afford to service small accounts, given the regulatory burdens, for management fees alone,” added Judge Jones. “It is likely that many financial service providers will exit the market for retirement investors rather than accept the new regulatory regime.”
The ruling was crushing to consumer advocates and fiduciary advocates that backed the rule. But it did not put an end to the years-long battle over the rule, as speculation of an appeal to the Supreme Court began to swirl, and the 5th Circuit procrastinated in issuing the formal certification of the ruling that would officially scrap the fiduciary rule from the books.
Days after the ruling, SEC chair Jay Clayton publicly commits to quickly moving forward on the agency’s goal of promulgating new rules for broker standards.
5. SEC rules move forward for public comment.
In April, the SEC voted to move Regulation Best Interest and two other proposed rules forward for public comment, by a 4-to-1 vote.
The 1,000 pages of proposed rules met the fiercest criticism from Commissioner Kara Stein, the lone dissenting vote, in an open public hearing.
“Today’s proposal fails to provide comprehensive reform, or adequately enhance existing rules,” said Ms. Stein, who claimed the SEC “squandered” an opportunity to act in the best interest of investors.
SEC Chair Clayton defended the proposed Reg BI, albeit in less colorful terms, insisting that the rule would substantially raise the existing suitability standard that guides broker-dealer recommendations to retail investors.
The agency is slated to finalize a rule by September of 2019. Since the rules were opened for public comment, they have been criticized as being too soft by consumer advocates, and too vague by securities lawyers.
6. 5th Circuit finally certifies fiduciary rule decision.
In June, the 5th Circuit finally issues a certification officially vacating the fiduciary rule. That came a month-and-a-half after it was expected, and after two requests for a rehearing by state attorneys were denied by the court.
Lawyers tracking the case speculated that the 5th Circuit may have been exploring internal procedures that would have allowed for an en banc review, or rehearing of the March decision, before the full panel of Appellate judges on the court.
“Opponents of the rule are breathing a sigh of relief that the mandate was finally issued,” said Walsh. “But it does leave financial institutions in a bit of an uncertain place. For those that have taken steps to comply with the rule, it leaves them wondering what they get for their efforts.”
7. SEC gives unscrupulous fiduciaries chance to turn themselves in.
The June 12 deadline for the SEC’s Share Class Selection Disclosure Initiative closes. Launched in February, the initiative was designed to rein in “potential widespread violations” of the Investment Advisers Act of 1940, according to the SEC.
The program targeted advisors’ failure to disclose 12b-1 fees on mutual funds, and recommendations of higher cost share classes when lower-cost shares of the same fund were available.
The SEC’s Division of Enforcement will recommend that firms self-reporting violations will not be subject to civil penalties. Firms will, however, be responsible for returning ill-gotten gains from 12b-1 fees on higher-cost share classes to investors.
“Scores of investment advisers participated in the SCSD Initiative, which will result in charges against them,” write Stephanie Avakian and Steven Peikin, co-directors of SEC’s Division of Enforcement, in the agency’s recently released annual report.
SEC staff are working with mutual fund experts to cull through the cases, and taking “aggressive and critical views” of how firms defend their capture of 12b-1 fees, said James Lundy, a partner at Drinker Biddle and head of the firm’s SEC and Regulatory Enforcement Team.
“It feels like an enforcement initiative, not self-reporting,” added Lundy, who is representing several firms under the program.
8. CalSavers sued.
California’s state-administered auto-IRA program is sued by a tax advocacy group.
The program is designed to get nearly 7 million workers that don’t have access to a workplace savings plan enrolled in IRAs.
The Howard Jarvis Taxpayers Association alleged CalSavers violates the Supremacy Clause of the U.S. Constitution because the Employee Retirement Income Security Act, a federal law, preempts California’s law.
Under ERISA, all employer sponsors of private-sector retirement plans are fiduciaries. Under California’s law, employers that will be required to participate in CalSavers will not be considered fiduciaries.
ERISA “does not allow state-run retirement programs for private employees,” according to HJTA’s complaint. The advocacy group claims participants in CalSavers will be deprived of the consumer protections built into ERISA.
9. IRS opens door for 401(k) sponsors to address student loan debt.
In August, the IRS issues a private letter ruling to an anonymous 401(k) plan sponsor that many in industry hope will create a template for other employers looking to address workers’ student loan debt burden.
According to the letter, participants can earn the 401(k) plan’s employer match without making their own contributions to the plan, so long as participants can prove they have made payments to service student loan debt.
The plan in question offers a generous match—the employer chips in 5 percent of participants’ salary after a 2 percent employee deferral.
Under the IRS’s explanation, the employer can still match 5 percent to a 401(k) account if a participant elects to pay at least 2 percent of their salary to a student loan repayment.
Trade groups representing the interests of large plan sponsors soon after lobby the IRS to extend a formal ruling based on the private letter ruling. All told, 45 million Americans hold a total of $1.52 trillion in student loan debt, accounting for the second largest source of consumer debt behind mortgages, according to Federal Reserve data.
10. Trump issues executive order on Open MEPs.
At the end of August, President Trump signed an executive order instructing the Labor Department to craft guidance that would relax existing restrictions on Open Multiple Employer Plans.
Existing regulations, established under the Obama administration, require employers to share commonality, or a nexus, such as membership in a trade group, to gain the full benefits of MEPs.
11. Labor releases proposed rule on MEPs, but many say it’s too weak.
In October, Labor releases it proposal on MEPs under President Trump’s executive order.
It does not fully remove the existing commonality requirement. Rather, small businesses can pool workers under one 401(k) plan if those employers share a principal place of business in the same state or metropolitan area.
The proposal prohibits service providers from sponsoring MEPs, but does pave the way for Chambers of Commerce and Professional Employer Organizations as sponsors.
On and off the record, industry sources universally pan the proposal, which is slated for finalization in December.
12. House flips to blue.
The midterm elections result in a shift in power in the House of Representatives, making Rep. Richard Neal, D-MA, long viewed as a leading expert on retirement issues in the lower chamber, as the likely candidate to chair the Ways and Means Committee.
“He’s on record saying retirement legislation will be a number one priority,” said Empower president Ed Murphy of Rep. Neal.
“He’s a well-respected and astute legislator. His ability to get something done is real,” added Murphy.
13. Republicans introduce lame-duck retirement legislation.
A sweeping retirement bill, modeled on Sen. Hatch’s RESA, is introduced by House Republicans as lawmakers return from the Thanksgiving break and begin negotiating a budget bill to avoid a government shutdown during the lame duck session.
Open MEPs, and an annuity selection safe harbor for plan sponsors, are included in Retirement Savings, and Other Tax Relief Act of 2018.
“The policy proposals in this package have support of Republicans and Democrats in both chambers. I look forward to swift action in the House to send these measures to the Senate,” said Rep. Kevin Brady, R-TX, outgoing chair of the House Ways and Means Committee, in a statement.
The bill comes without Universal Savings Accounts, or provisions that would make permanent the cuts to the individual tax rates last year, giving the retirement reforms greater chance of attracting Democrats.
Still, the negotiations will be cast against the larger debate over funding the government, and a showdown setting up over funding for a boarder wall, which President Trump is insisting on.