Congressional forecast 2019: Retirement, taxes, and debt ceiling
RIA Washington Watch is an ongoing series featuring the observations, insights, and analysis of Michael Townsend, vice president of legislative and regulatory affairs for Charles Schwab & Co., Inc., regarding issues and topics that affect Registered Investment Advisors (RIAs), their clients, and the RIA industry.
Retirement policies: Key representatives make retirement savings a top priority.
Tax provisions: Lawmakers to focus on required minimum distributions and age limits for contributions to traditional IRAs.
Debt ceiling: Suspension ends March 1, raising questions about the Treasury’s next move.
Contribution limits: IRAs and employer-sponsored retirement plans will increase in 2019.
The outcome of November’s much-anticipated midterm elections will bring major change to Washington in 2019.
Democrats flipped 40 seats in the House of Representatives to claim the majority for the first time since 2011. Starting January 3, they will control the House by a margin of 234 to 200, with one seat in North Carolina possibly headed to a new election. Republicans claimed two more seats in the Senate, increasing their margin to 53–47.
Washington has not seen the combination of a Democratic-controlled House, a Republican-controlled Senate, and a Republican president since 1987. The question: Will it bring compromise or more gridlock?
Fresh faces, new energy, same gridlock?
The election of 10 first-time senators and 102 new members of the House of Representatives, which now includes more than 100 women, help make the 116th Congress the most diverse in history. While we can expect the already-low enthusiasm for working together to continue, leaders of both parties have identified issues that stand a chance at bipartisanship support—notably, infrastructure and reducing prescription drug prices. Closer to home for advisors, policy around retirement savings has also been recognized as fertile ground for bipartisan compromise.
Making retirement policy a priority
Rep. Richard Neal (D-MA), a 30-year veteran of Congress, will become the chairman of the powerful House Ways and Means Committee, which has jurisdiction over taxes, health care, trade, and retirement policy. Since the election, Neal has signaled that his top priority as chairman will be retirement policy. In January, Neal intends to reintroduce two pieces of retirement legislation that he has long championed:
- Pension and retirement issues. The first is a comprehensive bill that includes provisions to make it easier for small businesses to offer retirement savings opportunities to their employees. The bill is also likely to include simplified pooled employer plans (also known as open multiple-employer plans, or open MEPs), which would allow unrelated small businesses to band together to offer a plan to their employees. President Donald Trump has endorsed the idea, and the Labor Department has proposed regulations in this area, but Congress needs to make the necessary changes to the law in order to make it work. Open MEPs have strong bipartisan backing, and have an outside chance at making it into law in December as part of a last-minute effort to pass a modest tax package.
- Automatic Retirement Plan Act. Introduced in December 2017, this proposal would require employers with 10 or more employees to establish a 401(k) or 403(b) plan or offer an IRA for all employees. The bill’s mandate has long been a sticking point, particularly with Senate Republicans. Advisors can expect Neal to push hard for this legislation early in 2019. In the Senate, the retirement of Senate Finance Committee Chairman Orrin Hatch (R-UT) leaves an opening for a new leader on retirement and pension policy. Senator Charles Grassley (R-IA) will replace Hatch at the helm of the Finance Committee; Grassley previously chaired the committee in the early to mid-2000s and was instrumental in passing meaningful retirement legislation. Senator Rob Portman (R-OH) and Senator Ben Cardin (D-MD), both Finance Committee members, have a long history of working together on retirement issues and have already floated draft bipartisan legislation that overlaps considerably with Neal’s bills. The Portman-Cardin proposal, however, does not include Neal’s employer mandate, so that remains an issue to be decided.
Changes to contribution limits
In late October, the IRS announced that contribution limits for both IRAs and employer-sponsored retirement plans would increase in 2019. The contribution limit for 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan will rise from $18,500 to $19,000 next year. Catch-up contributions for these plans for savers 50 and older will remain at $6,000.
For IRAs, the contribution limit increases from $5,500 to $6,000 in 2019, while the catch-up contribution for individuals 50 and older remains unchanged at $1,000. In addition, the IRS adjusted the income limits for which contributions to IRAs can be tax-deductible, along with the income limits for Roth IRAs. Those new limits and other details can be found in the IRS announcement.
A tax-package sequel
Other issues in the mix early next year could include provisions that were part of a proposed year-end tax package:
- Eliminating required minimum distributions for individuals with less than $50,000 in total retirement savings
- Waiving additional taxes on distributions from retirement accounts that are used to pay for childbirth and adoption expenses
- Repealing the age limit of 70½ for making contributions to traditional IRAs
- Providing lifetime income disclosure to help individuals understand how their current level of savings translates into a monthly income during their retirement years
An executive order signed by Trump in August directed the Treasury Department to review the current rules around required minimum distributions and determine whether those rules needed updating to ensure that retirees’ savings will last long enough. A report with recommendations is expected in February 2019.
It is tricky to forecast how next year’s legislative agenda will unfold. Bitter partisan disagreements and an embattled White House could push both parties toward their respective corners, doing away with any pretense of bipartisanship. Controversy, scandal, and investigations could derail the legislative agenda. But to the degree that Congress is willing to work on substantive issues, look for retirement to top the list.
Debt ceiling: potential market mover in 2019
One issue that advisors should have on their radar in 2019 is the return of the debt-ceiling fight. Congress suspended the debt ceiling for all of 2018. But it returns on March 1, 2019, and will immediately launch the countdown toward a potential U.S. default. The Treasury Department has a number of tools at its disposal to stave off default for a period of weeks to months. Ultimately, Congress will need to raise or suspend the debt ceiling, likely by mid-2019.
Uncertainty surrounding Congressional action and the debt ceiling has caused market volatility in the past. Before Congress reached a deal in summer 2011, major indexes suffered a double-digit percentage drop in the two weeks leading up to a potential default date. The divided Congress in 2019 could make this a particularly challenging battle. While there are a number of pressures on the market right now, the debt ceiling could become a flash point.
Advisor exam priorities
While the Securities and Exchange Commission (SEC) often waits until late January or early February before releasing its annual exam priorities list, the Investment Adviser Association (IAA) has already heard about one issue that advisors should bookmark. (News article also featured earlier in Schwab Advisor Center®)
The SEC’s Office of Compliance Inspections and Examinations (OCIE) reviews investment advisors’ compliance with relevant rules and regulations. If OCIE finds that an advisor is out of compliance on something, it issues a deficiency letter. The advisor usually responds and fixes the problem. In egregious cases or for repeat offenders, OCIE refers the issue to enforcement.
The SEC’s no-action letter that provided guidance for the new custody rule in February 2017 said, “We understand that investment advisers, qualified custodians and their clients will require a reasonable period of time to implement the processes and procedures necessary to comply with this relief.” Since then, OCIE has not been citing failure to comply with custody rule guidance in deficiency letters.
But nearly a year later, the SEC has let the IAA know that it believes sufficient time has passed for advisors and custodians to implement operational changes related to the custody rule guidance—the SLOA no-action letter and FAQ II.4.
SEC examination staff will begin citing exam deficiencies if they do not comply with this guidance. Schwab has a number of resources and information available to help you understand the guidance on our Custody Rule Service Guide page.
This report is current as of December 10, 2018. Look for a future RIA Washington Watch from Schwab’s D.C. insider Michael Townsend.
If you're thinking about becoming an independent advisor, consider a custodian that invests in your success. Contact us to learn more about the benefits of a custodial relationship with Schwab.