There have been plenty of headlines exploring what the November US elections might mean for the economy and markets. But it’s just as important to look at what they might have in store for defined contribution (DC) and other retirement vehicles, which more Americans than ever rely on.
Besides Social Security, DC plans are the foremost retirement vehicles for most Americans. So, it makes sense to understand where the presidential candidates stand on the issues relevant to these and other retirement-savings policies. Both Donald Trump and Joe Biden have pledged to shore up retirement-savings incentives and protect retired seniors, and that’s a good thing. But the similarities end there.
Busy Years for the Department of Labor
During the first three years of the Trump administration, the Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA) focused mostly on healthcare offerings, not retirement planning. But it shifted gears last June, resulting in a busy summer of retirement rulings.
From fiduciary responsibilities and pooled employer plans to implementing ESG and lifetime income disclosures, a bevy of proposals rippled across the plan pond—and this was on top of EBSA’s already jam-packed agenda to implement key provisions of 2019’s SECURE Act.
Most of the organizations responsible for implementing new DOL regulations have signaled they’ll hold off until well after the election results are determined—although there’s considerable interest in codifying new ESG implementation measures more quickly. A Trump win would likely allow most or all of them to move forward; if Biden wins, he’ll likely have a different view on some of the changes.
Not Much Overlap in Candidate’s Retirement Priorities
Trump and Biden have championed distinct views on private-sector and government retirement benefits, so the election will have a lot to say about the future direction of retirement-related legislation and rules, including Social Security, taxes and retirement plans.
Trump will likely follow through on payroll tax deferral if he’s re-elected. Payroll taxes directly fund Medicare and Social Security, which provides half the income for 50% of retired seniors—and 90% for one-quarter of them. The goal of the payroll tax deferral is to provide financial relief to businesses hurt by the COVID-19 pandemic. Funding and other aspects for Social Security haven’t yet been clarified.
Biden has proposed changes to shore up long-term solvency and increase benefits to widows and widowers who lose benefits once the primary earner dies. Biden’s plan calls for high-wage earners (individuals making more than $400,000) to pay Social Security taxes on a higher percentage of their income. Currently, employees and employers each pay 6.2% percent through payroll taxes toward Social Security funding up to incomes of $137,700.
A Trump win could speed his proposed middle-class tax cut, including larger tax breaks for retirement savings. The administration is floating an idea to treat some household income as tax-free if invested outside of a traditional 401(k) account. Another proposal is the USA account, which would combine all tax-advantaged savings vehicles to simplify the experience for participants and account holders.
Biden favors replacing up-front 401(k) tax breaks for contributions with flat-tax credits for each dollar saved. The campaign hasn’t indicated what that flat percentage would be, but based on a credit as high as 26%, the Urban-Brookings Tax Policy Center said the measure would be roughly revenue-neutral over the first 20 years. The proposal also makes the credit refundable, so those not earning enough for it to offset their tax liability would still receive its full value.
“Automatic 401(k)” and Multiemployer Pension Plan Relief
Under Biden’s plan, almost all workers without a pension or 401(k)-type plan would have access to an “automatic 401(k),” which is intended to provide the opportunity to easily save for retirement at work.
Biden’s proposal could involve a mandate for employers to provide auto-enrollment plans with subsidies for small businesses to set them up, or possibly a government-provided DC plan option, building on state-run auto-enrollment savings programs. Biden also wants to pass the Butch Lewis Act, which would provide federally backed loans to underfunded multiemployer defined benefit pension plans.
The Trump administration included a provision in the SECURE Act for Pooled Employer Plans (PEPs), designed to widen employer and participant access to retirement vehicles. By combining unrelated employer-sponsored plans, PEPs would help make it easier for small and mid-size employers to offer them, and for more participants to save. The measure is pending clarifications on PEP qualifications, so employer consideration could be delayed.
Of course, the balance of power in congress is up for grabs, too, and the results will have something to say about how easily either presidential candidate will be able to fully implement his agenda. And with the pandemic and other pressing issues, priorities can also shift. One thing that won’t change anytime soon is the dire need for meaningful retirement planning opportunities and direction across a wide swath of American households.
Jennifer DeLong is Head of Defined Contribution at AllianceBernstein (AB).
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.