Navigating Washington's Regulatory Landscape: Latest Developments in Retirement Policies and SEC Agenda

With a split Congress and razor-thin majorities in both the House and Senate, Washington continues to be a hotbed of dysfunction. Both Democrats and Republicans are eagerly anticipating the election in less than six months, and neither party wants to give the other an advantage that can be used on the campaign trail. Yet Congress did manage to come together this spring to pass key federal spending bills – a reminder that even in divisive times, bipartisan majorities can find their way to success. Looking forward, however, legislative victories are likely to be rare between now and November.

As often is the case as the end of an administration approaches, regulatory agencies in Washington are very busy trying to push key proposals across the finish line before the election. For the retirement savings industry, the Labor Department’s lightning-fast regulatory process for a new fiduciary rule has been the focal point. Here’s a look at the latest developments in the nation’s capital.

Labor Department finalizes “Retirement Security Rule”

The biggest retirement policy development thus far in 2024 was the much-anticipated unveiling of the Department of Labor’s latest fiduciary rule, which the DOL dubbed the “Retirement Security Rule,” on April 23. It marks the DOL’s latest attempt in a 15-year odyssey to redefine who is a fiduciary in the retirement savings context. The rule went from proposal to final in less than six months, an unusually fast timetable for any rulemaking of this significance. The speed itself has become a major point of contention, with the business community arguing that the DOL made little effort to review or take into consideration the hundreds of public comments. DOL Assistant Secretary Lisa Gomez may have inadvertently underscored that argument when she somewhat oddly declared in a press briefing, “there’s nothing in these clarifications or changes that anyone should interpret as a watering down or real change from the proposal.” DOL staff later attempted to walk back that statement, pointing out that many changes were made in the final rule because of public comments, but that the principles behind the rule remained the same.

A key point of contention is that the rule declares that one-time advice, such as recommending an investor roll over assets from a 401(k) to an IRA, triggers fiduciary status, even though the 2016 version of the rule was vacated by the courts in 2018 due in part to this very issue. The rule also eliminates or modifies three elements of the long-standing five-part test. Annuity providers are particularly frustrated by the final rule, which is set to go into effect in September. There will be a year-long phase-in period for compliance with the full conditions of related prohibited transaction exemptions, provided an advice provider complies with impartial conduct standards and acknowledges fiduciary status.

Within days of the final rule’s release, a legal challenge had been filed by a group of insurers in Texas, requesting both an injunction to stop the rule’s implementation and a vacating of the rule itself. The suit makes many of the same arguments that numerous commenters (including Schwab) did during the public comment period: that the regulatory process was rushed, that the rule was arbitrary and capricious, that the agency was dismissive of public input, and that the rule failed to address the very issues that formed the basis of the court’s rejection of the previous iteration of the rule in 2018. Other legal challenges are likely, but the legal process is likely to be lengthy, so the industry likely will need to begin the process of coming into compliance before any decision is rendered.

Congress passes key funding bills

On Capitol Hill, months of tensions over government spending are finally in the rearview mirror – for now. In March, strong bipartisan majorities in both the House and Senate approved two packages of six appropriations bills each, ensuring that all federal agencies and government programs are funded through the end of the fiscal year on September 30. Lawmakers have begun the appropriations process for Fiscal Year 2025, which starts on October 1, but the proximity of that deadline to the election all but guarantees a bipartisan agreement to temporarily extend funding until late November or early December. Neither party wants to shut down the government just weeks before the election.

In April, Congress, again with overwhelming bipartisan support in both chambers, approved the $95 billion foreign aid bill. The package includes funding for Ukraine, Israel, and Taiwan, as well as provisions requiring TikTok’s Chinese parent company, ByteDance, to sell the company within nine months or the app will be banned in the United States. This dispute is headed for the courts – but it might be the issue that makes your teenager interested in Washington’s policy debates.

So what’s next on the Congressional agenda? Truthfully, not much. There are precious few “must-do” items between now and the election. Expect a lot of “messaging” bills in the House of Representatives – policy issues that have no chance of passing the Democrat-controlled Senate but might make for fodder on the campaign trail. We will be keeping our eye on cryptocurrency-related legislation that passed the House in May, as well as bipartisan efforts to put some guardrails around artificial intelligence, but expectations are low for big legislative initiatives in the coming months.

Perhaps the most notable policy debate on Capitol Hill is one that won’t even ripen until next year: Taxes. All of the 2017 tax cuts are set to expire at the end of 2025, including the lower individual income tax rates, higher standard deduction, dozens of corporate tax provisions and the higher amount of assets that can be passed on without triggering the estate tax. That means that a major tax bill is likely to dominate the next Congress. This Congress is laying the groundwork for that debate, with the two parties not only staking out positions on the expiring provisions but coalescing around priorities for other tax changes that could be added to a sweeping tax reform package next year. While significant changes to retirement savings do not currently seem to be a high priority, we’ll be keeping an eye on any proposals that emerge. For now, expect tax reform to be a major element of the presidential and Congressional campaign season in anticipation of a blockbuster debate in 2025.

IRS delays decision on Inherited IRAs – again

In April, the IRS announced that owners of Inherited retirement plan accounts and IRAs would not have required minimum distributions in 2024, providing heirs with relief for another year but maintaining the underlying confusion about the agency’s intentions. The issue arose from the original SECURE Act, which required heirs to distribute the assets in an inherited account within 10 years. It was broadly understood that the heir could distribute those assets on whatever timeline he or she preferred, as long as the account was liquidated by the end of the 10 years. In 2022, the IRS unexpectedly proposed a rule that required heirs to take annual distributions. Overwhelmed by public criticism and confusion, the IRS announced that individuals who inherited an account after January 1, 2020, would not be expected to take distributions retroactively, at least until the rule was finalized. With the rule still in limbo, the IRS extended that relief for 2023 and more recently for 2024. The agency did indicate that it planned to finalize the rule by the end of 2024, though it also said that in both 2022 and 2023. Owners of inherited retirement plan accounts and IRAs, meanwhile, continue to hope for clarification.

SEC continues busy agenda

Over at the SEC, the agency still has a long list of proposed rules in the queue for finalizing. March saw perhaps the most high-profile rule reach the finish line, as a divided SEC approved a controversial rule requiring public companies to disclose more to investors about the risk they face from climate change and the role they play in climate change via greenhouse gas emissions. That rule was also immediately challenged in court. In fact, a total of 10 different lawsuits have been filed and now consolidated in a single court of appeals. The SEC has formally paused implementation of the rule until the legal situation is resolved, which of course could take a while.

Meanwhile, we continue to wait for final rules on a few key pending issues at the SEC, including the mutual fund liquidity proposal that includes the controversial “swing pricing” and “hard 4 p.m. close” provisions. That proposal, which would require mutual fund trades to be received by the fund by market close, has the potential for significant impact to retirement plans if brokers must cut off trading for mutual funds well before market close to comply. There is tentative optimism, however, that the SEC may back away from those elements of the proposal in the final rule.? Also in the queue for possible final rules in the coming months are multiple equity market structure overhaul proposals, several rules that would affect investment advisers including an expansion of the custody rule, and a proposal that would curtail the use of technology in any investment advice interaction, though there are reports that the agency may rework and repropose that proposal. With a possible change in administration looming, the SEC and other regulators are likely to try to move quickly to get final rules on the books in the next few months.

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