Tax reform and the fiduciary rule have been the top retirement plan stories of 2017.

As Congress attempts to reconcile the House and Senate tax reform proposals and come up with a final product by Christmas, the Office of Management and Budget granted the Department of Labor an 18-month delay in implementation of the fiduciary rule’s enforcement mechanisms: the best interest contract exemption, the prohibited transaction exemption 84-24 and the class exemption for principal transactions.

The rule, which went into partial effect in June 2017, now won’t be fully in effect until July 1, 2019.

Tax Reform

The Senate passed its version of the tax reform bill on Dec. 2, and while it didn’t include any major revisions to employer-sponsored retirement plans, changes could be reintroduced in the final bill. Industry insiders are hopeful that the reconciliation process between the Senate and House bills won’t include any proposals that could potentially damage Americans’ ability to save for retirement, including a very low cap on pre-tax contributions and forced Rothification of any other retirement plan contributions above the pre-tax amount, but there are some Republican senators who “were resistant to any tax reform that would heighten the deficit,” says Shelby George, senior vice president of adviser services for Manning & Napier.

U.S. House Speaker Paul Ryan, a Republican from Wisconsin, holds up a Simple, Fair "Postcard" Tax Filing card while speaking during a news conference on tax reform in Washington, D.C.
U.S. House Speaker Paul Ryan, a Republican from Wisconsin, holds up a Simple, Fair "Postcard" Tax Filing card while speaking during a news conference on tax reform in Washington, D.C. Bloomberg

And because of that, they could move to include some of these retirement provisions that were cut out of both the House and Senate bills moving forward as a way to help pay for proposed tax cuts.

Diane Oakley, executive director of the National Institute on Retirement Security, said in October, when rumors started flying about what would be included in the House tax reform bill, that the “retirement plan, America’s piggy bank, has always been the first go-to place Congress goes to when it needs money to pay for other tax breaks. You can look back over 20 or 30 years and see these situations. Some of them are gimmicks, like the Roth concept that was introduced to pay for tax benefits by shifting tax liability to current days to generate revenue, yet making a much bigger tax benefit available, especially to higher income people.”

She added that if Congress caps the contributions individuals can sock away in their workplace 401(k) plans at a low level, such as the $2,400 limit that initially was floated, she is “extremely concerned. We already have a retirement crisis. This will only exacerbate it. They really need to save consistently and, ultimately we will get a whole generation of retirees who are less adequately prepared than people are today. About six out of 10 households are not on track to maintain their standard of living [in retirement].”

When the House and Senate bills were finally introduced, the retirement industry breathed a collective sigh of relief that neither included changes to workplace retirement plans.

“Retirement plans are safe for now but there is a question of whether they will continue to be safe as both sides of Congress reconcile to find terms suitable for both,” says George.

Fiduciary rule

President Donald Trump made gutting the fiduciary rule one of his main priorities on the campaign trail. The fiduciary rule, which has been in the works for years, would level the playing field between broker-dealers and registered investment advisers when it comes to giving out retirement advice.

Under the Department of Labor’s final rule, which went into effect June 9, those who advise on IRAs must follow the same strict fiduciary standards as their RIA counterparts. They must act in their client’s best interest.

And while the final rule went into effect in June, companies were given until Jan. 1, 2018, to comply with the enforcement provisions of the bill. The OMB moved that goal post to 2019 in recent weeks.

The most controversial provision of the rule as it stands currently is the best interest contract exemption, which would allow employers to continue working with a retirement plan broker who collects commissions from firms that offer retirement products as long as the broker meets certain conditions, such as agreeing to act in a fiduciary capacity and disclosing the different types of compensation and fees it collects. Brokers must also state that they won’t make any misleading claims about the investments they recommend.

Under 84-24, the insurance agent or broker must disclose his initial and recurring compensation, expressed as a percentage of the commission payments, while plan fiduciaries or IRA owners must acknowledge receipt of that information in writing. The rule covers variable annuities, fixed income annuities and all other annuities.

Many in the retirement industry rejoiced at the delay, but supporters of the rule believed it was retirement savers who would be hurt by the rule not going into effect sooner.

“There are two issues here. The first is, how long will it take the DOL to rewrite BICE and the other delayed exemptions, including coordination with the SEC. The second is, how much time will the private sector need to come into compliance once the final exemptions are issued?” says Fred Reish, a partner in Drinker Biddle & Reath LLP’s Employee Benefits and Executive Compensation Practice Group. “At this point, July 1, 2019, seems reasonable for both purposes. But if the DOL is slow in issuing the final guidance, the July 1 date may need to be further delayed to allow time for the private sector to develop the procedures, disclosures and systems to comply.”

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