2021 Public Policy Outlook: What Financial Planners Need to Know about Upcoming Government Actions
Department of Labor retirement rule and COVID-19 pandemic recovery package headline major policy implications ahead for the financial planning profession.
The Biden Administration and Congress are off to a fast start putting together a massive COVID-19 relief package, and have begun discussions around a separate economic recovery bill. Meanwhile, the Department of Labor (DOL) announced that it has let a Trump-era retirement investment advice rule take effect.
Elsewhere in Washington, the events surrounding the GameStop trading mania and what it revealed about market manipulation, payment for order flow, short sellers and other market issues has Congress thinking about possible market reforms including the possibility of a financial transaction tax. In addition, the Senate is conducting the nomination hearings of Gary Gensler as Chair of the U.S. Securities and Exchange Commission (SEC) and Rohit Chopra as director of the Consumer Financial Protection Bureau (CFPB).
Top of Mind for Financial Planners: Biden Administration Keeps Trump-Era Retirement Investment Advice Rule
To the surprise of many, the DOL let a fiduciary exemption — finalized in the waning weeks of the Trump administration — go into effect as scheduled on February 16, 2021.
- Breaking it Down: The new rule, “Improving Investment Advice for Workers and Retirees,” creates an exemption which allows fiduciaries to receive compensation from certain third parties when making recommendations, provided they adhere to certain “impartial conduct standards.”
- Five-Part Fiduciary Test: DOL also said the 1975 “five-part” test for discerning whether a recommendation falls under the Employee Retirement Income Security Act fiduciary regulation was automatically reinstated when a federal appeals court struck down the Obama administration’s own rule for fiduciaries in 2018.
- Rollover Recommendations: The new rule rescinds guidance from the George W. Bush administration that most rollover recommendations were not considered fiduciary advice.
- The five-part test determining fiduciary status includes whether a recommendation is part of an ongoing relationship, but the new rule’s guidance clarified that even a first-time recommendation could be part of an ongoing relationship if the advisor and client intend to meet again.
- Alignment with Reg BI: The new rule also makes additional demands on financial professionals and their respective financial institutions, including that they both agree to act as a fiduciary in writing and complete a series of disclosures on fees and conflicts akin to what’s demanded by the SEC’s Reg BI.
- Forthcoming Guidance Could Strengthen Rule: Although the final rule is in effect, DOL officials stressed that professionals could continue to operate under already-issued temporary guidance through the end of December 2021.
- At the same time, the DOL said it would release “related guidance” in the days ahead for investors, plans and providers alike.
- In a sign that the SEC and DOL will work together to strengthen investment advice standards, Acting SEC Chair Allison Herren Lee said about the DOL announcement: “We look forward to working with the Department of Labor to improve existing regulations and ensure that investors get advice that serves their best interest, whether in retirement or securities accounts.”
What to Watch for in the Pandemic Relief Bill as it Moves Through Congress
View the latest updates as of March 15, 2021.
The House of Representatives, in the early hours of February 27, 2021, approved President Biden’s $1.9 trillion coronavirus relief plan (“American Rescue Plan”), sending it to the Senate, where it is expected to undergo some modifications. The bill passed the House with no Republican votes and two Democrats voting against it. The Senate will consider the fiscal package under reconciliation procedures, which allows passage with a simple majority vote.
The package builds on the three primary aid measures adopted in 2020: the year-end spending and aid bill; the Coronavirus Aid, Relief, and Economic Security (CARES) Act; and the Families First Coronavirus Response Act. While much of the public attention has been on the increase in the minimum wage (passed in the House but will be removed by the Senate), key provisions impacting individuals and families include:
- Unemployment Benefits: Extends the expanded unemployment benefits with a $400 weekly supplement (up from $300) through August 29, 2021 (vs. March 31, 2021, currently).
- Stimulus Payments: $1,400 direct payments to individuals, phasing out between $75,000 and $100,000 in income.
- Married couples would receive $2,800, subject to phaseout between $150,000 and $200,000. The provision also provides an additional $1,400 per dependent, also subject to phaseout.
- Dependents would include full-time students younger than 24 and adult dependents. Eligibility and benefit levels would be based on 2019 or 2020 income-tax filings. Individuals will not be required to repay any overpayment when filing their 2021 taxes next year.
- Emergency Paid Leave: Extends emergency paid leave tax credits through September 30 for employer-provided paid sick and family leave, which were established under the Families First Coronavirus Response Act.
- Child Care Tax Credits: Tax credits for families to offset up to $8,000 in annual child care costs.
- Expansion of the child tax credit by increasing the maximum credit to $3,600 for each child younger than 6 and $3,000 for other children. The increased credit amount would be phased out an adjusted gross income level of $75,000 for individuals and $150,000 for joint filers.
- Employee Retention Credit: Employee retention credit established by the CARES Act would be extended through December 31, 2021.
- Health Insurance: Subsidizes 85% of premiums for individuals eligible for COBRA continuation coverage if they lose their job. The premium assistance under the measure would be available through September 30, 2021, for individuals who were involuntarily separated from their jobs or had their hours reduced.
- This would not be available once an individual becomes eligible for coverage under another group health plan or Medicare.
- The employee would pay 15% of the premium and the employer or health plan could claim a refundable tax credit against its Medicare payroll tax liability for paying the remaining amount.
- Small Business Support:
- Increases funding and expanded eligibility for the Paycheck Protection Program (PPP).
- Expands PPP loan forgiveness.
- Establishes $25 billion for a Restaurant Revitalization Fund to be administered by the Small Business Administration.
- Pension Plan Support: Establishes a fund for the Pension Benefit Guaranty Corporation to provide financial assistance to struggling multiemployer pension plans. It would appropriate “such amounts as are necessary” from the general fund to cover the costs of the assistance, which plans wouldn’t have to repay.
- The assistance would cover all benefits due from the bill’s enactment through 2051, with generally no reduction to a beneficiary’s accrued benefit.
- Homeowner Assistance: Establishes a $9.96 billion Homeowner Assistance Fund to be administered by the Treasury Department for the benefit of homeowners behind in mortgage, utilities or insurance payments.
The bill now goes to the Senate, where Majority Leader Schumer has said it will pass before mid-March.
New Agency Heads and Next Economic Recovery Package
Upcoming Confirmation Hearings for SEC and CFPB Heads:
On March 2, 2021, the Senate hosted a confirmation hearing for Gary Gensler, Biden’s pick to be SEC Chair. The hearings to confirm Rohit Chopra, the administration’s nominee to lead the CFPB, were held at the same time. Full Senate approval is expected later in March or early April 2021.
- Gensler served as chairman of the Commodity Futures Trading Commission, under President Obama (2009-2014) and as the Under Secretary of the Treasury for Domestic Finance (1999-2001), and the Assistant Secretary of the Treasury for Financial Markets (1997-1999) during the Clinton Administration. Prior to his career in the federal government, Gensler worked at Goldman Sachs, where he was a partner and co-head of finance.
- Chopra currently serves as a commissioner on the Federal Trade Commission. Prior to that he helped “stand up” the CFPB and later served as its Student Loan Ombudsmen, before joining the Department of Education to work on student loan issues. Prior to joining the government, Chopra worked at McKinsey & Company, the global management consulting firm.
Next Economic Recovery Package to Focus on Infrastructure: The next phase of President Biden’s legislative agenda is taking shape, with an economic-recovery package that may surpass the $1.9 trillion virus-relief plan in size, complexity and overall ambition. The Bill could be unveiled as early as March 2021, kicking off a legislative process that may culminate by August 2021. Although the centerpiece is a massive infrastructure-spending commitment — including roads, bridges and rural broadband internet — there are potential implications for financial planners:
- Senator Ron Wyden (D-OR) intends to propose tax hikes, including equalizing ordinary income and capital-gains levies for those making more than $1 million a year and ending the deferral of capital gains. According to a Democratic aide, Wyden is considering a change to the international tax provisions in the 2017 tax law and a path to closing the carried-interest loophole.
- While Democrats agree on the rough outlines of an infrastructure package, they are still determining if the second big legislative package following coronavirus relief should also include a rollback of some of former President Trump’s tax cuts.
Final Word: Is a Financial Transaction Tax Gaining Steam?
Some Democrats in Washington are seizing on the recent frenetic trading in GameStop to push the financial transaction tax long favored by progressives, setting up a battle with Wall Street firms that bitterly oppose the idea. After a House Financial Services Committee hearing to examine the GameStop issue, Committee Chair Maxine Waters (D-CA) said she is considering such a tax, which came up several times during testimony. The tax failed to gain steam a decade ago because of uncertainty over how it would affect the returns of retail investors and markets recovering from the financial crisis.
One measure now gaining traction, offered by Rep. Peter DeFazio (D-OR), intends to impose a levy on trading firms of 10 cents for every $100 of securities traded, though other proposals have gone as low as 5 cents and as high as 50 cents. A smaller financial transaction tax, such as one targeted to certain securities or with an extended phase-in period, is a possibility according to observers because it could generate revenue to pay for Democrats’ policy priorities.
Wealth Tax Introduced. Senator Elizabeth Warren (D-MA), who has long called for a wealth tax, on March 1, 2021, unveiled legislation that would tax the super-rich on their net worth. The proposal, called the Ultra-Millionaire Tax Act, would put a 2% annual tax on households and trusts between $50 million and $1 billion. It would also put a 1% annual surtax on households and trusts over $1 billion. The lawmaker says the move would level the playing field and narrow the racial wealth gap. The proposed bill may not move further but could spur lawmakers to enact similar taxes in future.