Some of the reforms being weighed in Washington as part of a comprehensive tax-reform package could end up having a much more negative impact on the retirement industry than the Department of Labor's fiduciary rule, warns an executive with the largest association for retirement plan advisers.
"I think, in the end, tax reform could be way worse than the fiduciary rule," Brian Graff, executive director of the
National Association of Plan Advisors, told reporters at the group's
annual 401(k) Summit in Las Vegas on Sunday.
"It's very hard to do tax reform without winners and losers," he said. "In fact, it's impossible."
The Republican-controlled Congress and White House are pushing an agenda of broad tax cuts for corporations and individuals. The House of Representatives' proposed cuts would cost the government trillions of dollars in revenue, Mr. Graff said.
However, to follow through on the goal of making proposed tax legislation revenue-neutral, which would avoid increasing the federal budget deficit, Republicans would have to make up for that lost revenue. One area where some politicians are taking a hard look is tweaks to the tax regime that currently governs defined contribution plans, Mr. Graff said.
Some of the items that could be on the table are a freezing or reduction of 401(k) contribution limits, a sort of double taxation on the retirement savings of individuals in higher tax brackets, and elimination of 403(b) and 457 plans, Mr. Graff said, hedging his comments as nothing more than "rampant, educated speculation."
"At this point, if they do tax reform there is no chance, there is no pathway, where we get through this process unscathed," he said during a keynote address dissecting some of the ongoing political machinations on Capitol Hill. "It seems absurd the notion of cutting the 401(k) limit. But you've got to understand that in the context of tax reform, everything is about tradeoffs."
"There are people in D.C. who don't understand the relative importance of retirement plans," he said.
Separately, health savings accounts have the potential to become "more compelling than a 401(k)" due to incentives, such as the doubling of contribution limits, floated in Republicans' health-care-reform bill, the American Health Care Act, Mr. Graff said.
"We have to think about what this means for our industry," he said.
Mr. Graff also said the fiduciary rule, which raises investment-advice standards in retirement accounts, poses a large risk in its current iteration to brokerage and advisory firms because of its provision allowing a private right of action for investors.
This exposure to class-action litigation, provided under the rule's Best Interest Contract Exemption, is NAPA's biggest concern as pertains to the fiduciary rule, he added, saying, "It's a game-changer from a business standpoint."
The exemption is largely seen as the teeth of the regulation, only allowing advisers and firms to receive variable compensation such as commissions and 12b-1 fees if certain provisions are met, one being signing of a contract allowing for a private right of action.
The rule, including the exemption, has survived a multitude of legal challenges brought against it in federal court.
The Trump administration is currently trying to delay the rule's implementation date, currently set for April 10, by 60 days. Observers believe that, if the administration is successful in achieving the delay, it may seek additional delays afterward and a possible amendment or rescission of the rule.
Any amendments would likely be focused on doing away with the current private right of action for some other "bells and whistles" to protect investors, Mr. Graff said, declining to go into specific detail about what those bells and whistles would look like.
"I don't think there'd be any fix that'd be acceptable in any way if it doesn't address the liability concern," he said.
However, "if you think the fiduciary rule is going away completely, I think that's an unlikely scenario," he added.
