Washington UpdateA Summary of Key Legislative and Regulatory Developments Affecting Retirement Savings

The Impending Midterm Elections

As we move into the spring and summer months, the legislative agenda in Washington begins to slow considerably as members of Congress focus on the upcoming mid-term election. For the most part, legislation considered as “must pass” will likely have been enacted into law by now, or else will face the prospect of consideration, if at all, during the lame duck session of Congress that occurs following the outcome of the November election.

MAY 2018

TABLE OF CONTENTS

3 Legislative

4 Legislative Outlook

5 Outlook

6 Regulatory

8 Miscellaneous

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Clearly, the lead-up to the midterm election will also have an immediate effect on the policy agenda in the coming months. With nearly 30 states set to have their congressional primary contests in May and June, we have reached the point where the policymaking process takes a back seat to election-year politics. While Congress will still conduct votes on legislative items, some considered as “must pass,” many of the votes will be symbolic at best, and designed less to achieve a policy objective, and more to force members into casting tough votes they might otherwise want to avoid.

Currently, Republicans enjoy a 238-192 majority in the House (5 seats are vacant), and a 51-49 majority in the Senate (two independent senators caucus with the Democratic Party). While it is too early to predict with accuracy the composition of the 116th Congress, a possible outcome is a split in control with the Republicans retaining control of the Senate, and the Democratic party regaining control of the House. Obviously, there are a number of possible outcomes that could occur as of today, and in future updates, we hope to bring more clarity to the race for control of Congress as more information on the races becomes available.

Retirement Focus Retirement-focused legislation is not immune from the legislative calendar during an election year. While several important retirement-centered legislative initiatives have been introduced in the 115th Congress, and by senior members of Congress, the prospect for their enactment is invariably tied closely not only to their content, but also to the legislative calendar. As mentioned above, with the primary season in full swing, little of anything, including retirement-focused legislation, will get accomplished prior to November 6, 2018, the date for this year’s midterm congressional election.

Yet, legislation introduced early this year can form the basis for movement later this year (during the lame duck session) or reintroduction in the next Congress, especially if it is shown to be bipartisan in nature. Below, we highlight the most prominent retirement-focused legislative vehicles that have been introduced, since our last update, in the Congress, and provide a brief description thereto. These bills pass the test for bipartisanship, and could be ripe for passage at the appropriate time. Other bills that have also been introduced, some on a bipartisan basis, are also briefly discussed below.

At stake in this year’s midterm election is control of Congress, and both the policy and the legislative agenda leading up to the 2020 Presidential campaign. Tradition holds (not always) that the party that controls the White House during a President’s first term will lose congressional seats in the midterm election, and if this tradition holds this election cycle, it could affect control in what will become the 116th Congress in January 2019.

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S. 2526 and H.R. 5282, the Retirement Enhancement and Savings ActOn March 8, 2018, Senate Finance Committee Chair Orrin Hatch (R-UT) and Ranking Member Ron Wyden (D-OR) reintroduced the Retirement Enhancement and Savings Act (RESA), (S. 2526), followed on March 14 with introduction of a companion bill (H.R. 5282) in the House by Representatives Mike Kelly (R-PA) and Ron Kind (D-WI). The legislation as introduced this year is similar in many respects to that which was introduced in 2016, with the exception for the removal of provisions that were subsequently enacted as part of H.R. 1, the Tax Cuts and Jobs Act of 2017, or the Bipartisan Budget Act of 2018.

RESA is primarily a private-sector retirement-focused bill (it does include broader provisions such as those pertaining to the U.S. Tax Court), with its key provisions including the following:• Would amend ERISA and the Internal

Revenue Code (“Code”) to allow unrelated employers to participate in open Multiple Employer Plans (MEPs)

• Would change the automatic enrollment and automatic escalation provisions under the current nondiscrimination safe harbor, to eliminate the 10 percent cap for those years following the first year in which the employee is automatically enrolled

• Would require a benefit statement provided to a defined contribution plan participant to annually include a lifetime income disclosure statement

• Allows plan fiduciaries for defined contribution plans to rely on representations from insurance companies, regarding their status under state insurance laws, in meeting their fiduciary duty in selecting an annuity provider

Legislative• Would provide for an increased

start-up tax credit for small business to encourage plan formation (up to $5,000)

• Would eliminate the age 70 ½ limitation for making nonrollover contribution to a traditional IRA (would still need to have earned income to make such a contribution)

• Would require account balances in a defined contribution plan and/or an IRA to be distributed within five years of the death of the plan participant or IRA owner, unless the beneficiary is: – The spouse of the participant

or IRA owner– A child who has not yet reached the

age of majority– Disabled– Chronically ill, or– Not more than 10 years younger

than the participant or IRA owner, or

– Has less than $450,000 (indexed) in aggregate savings across all of the decedent’s IRA’s and defined contribution plans, calculated at the time of death.

For further information on these bills, the legislative text can be accessed at the following links:

https://www.congress.gov/115/bills/s2526/BILLS-115s2526is.pdf

https://www.congress.gov/115/bills/hr5282/BILLS-115hr5282ih.pdf

H.R. 10 — the CHOICE Act and H.R. 2823, the Affordable Retirement Advice for Savers Act (Legislative Responses to the Department of Labor Fiduciary Rule)Since our last update, a significant development has occurred regarding the Department of Labor’s (DOL) fiduciary rule that may alter any legislative response thereto. As discussed below, the U.S.

Court of Appeals for the Fifth Circuit Court has issued a ruling that vacates the DOL Fiduciary Rule in its entirety, and should that decision not be appealed, may obviate the need for legislative response.

That said, there still remain several active bills that seek to amend or repeal the DOL Fiduciary rule. All were introduced within, or passed, by at least one Chamber prior to the 5th Court’s decision. Their fate going forward, in light of the 5th Court’s decision, is unknown. Yet, they remain active until they are either enacted or the 115th Congress adjourns sine die later this year. Below are brief descriptions of the bills (not inclusive of all fiduciary bills that have been introduced) and where they stand in the legislative process: • H.R. 10 – the CHOICE Act –

legislation to amend numerous provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Included therein is section 841, language to provide that the DOL Final Rule “shall have no force and effect.” H.R. 10 passed the House on June 8, 2017, but has not been considered in the Senate.1

• H.R. 2823, the Affordable Retirement Advice for Savers Act – legislation to repeal the DOL Fiduciary Rule (and its applicable exemption changes), impose a best interest standard on advisors under a modified definition of “investment advice,” and would be a statutory provision applicable under both ERISA and the Internal Revenue Code. H.R. 2823 was approved by the Education and the Workforce Committee on October 25, 2017, and was recently discharged from the Ways and Means Committee on March 3, 2018. It now awaits floor consideration in the House.2

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MORGAN STANLEY | 2018

With tax reform having been enacted into law in late 2017, and the Omnibus spending bill (H.R. 1625, The Consolidated Appropriations Act, 2018) signed into law on March 23, 2018, very few legislative vehicles remain upon which to move RESA prior to midterm election. While there is always a possibility that RESA moves through Congress as a stand-alone measure, a more likely path forward is via other “must-pass” legislation, and the earliest we may see such legislation is in September. With the federal government’s current fiscal year ending on September 30, Congress will be forced to act to keep the federal government funded when the new fiscal year begins on October 1. Legislation to address government funding may present an opportunity to add things thereto, and thus RESA could be an item that is considered for inclusion therein. It remains to be seen how expansive such a bill will be and whether it would include items extraneous to federal spending.

Also, should a second tax bill emerge this summer (to lower the corporate tax rate further and make permanent many of the individual provisions from the Tax Cuts and Jobs Act that are set to expire at the end of 2025), it could also present an opportunity to include RESA’s provisions. However, our view is that the prospects for such a tax bill moving through the Senate this fall is slim at best, and discount its prospects as highly unlikely.

Legislative OutlookAs for legislation to singularly address

the DOL fiduciary rule (H.R. 2823/S. 1321), it is unlikely that the Senate would be able to move forward, on what is likely to be a partisan basis, regardless of what the ultimate outcome is of the 5th Circuit Decision. As for the CHOICE Act mentioned above, while it is much broader in scope than simply DOL Fiduciary Rule repeal, it has its own fatal issues, and has little chance for passage in the Senate. In both cases, Republicans simply lack the votes necessary at this time to avoid a filibuster in the Senate.

Other Legislation —Retirement Focused So far this Congress, numerous bills have been introduced in both the Senate and the House beyond RESA, beyond the provisions included with the Tax Cuts and Jobs Act, or beyond those pertaining to addressing the DOL Fiduciary Rule.

We highlight some of these bills below, including new legislation introduced since our last Washington Update (italicized in bold): • Legislation to address financial

problems facing the multiemployer pension system: – S. 2147/H.R. 444 — Legislation

to create a Pension Rehabilitation Trust Fund to make loans to multiemployer defined benefit plans

– S. 489 — The Pension Accountability Act

– S. 1105/H.R. 2713 — The Miners Pension Protection Act

• Legislation to address leakage from retirement plans– S. 2472 — The Retirement Savings

Lost and Found Act– H.R. 3910 — Legislation to make

portable — lifetime income and managed account options within defined contribution plans

– H.R. 2020 — The Savings Enhancement by Alleviating Leakage in 401(k) Savings Act

• Legislation pertaining to savings including Individual Retirement Accounts (IRAs)– S. 1817 — the Public Good IRA

Rollover Act of 2017– H.R. 4189 — the IRA Preservation

Act of 2017– S. 1861 — the Automatic IRA Act

of 2017 (a companion to H.R. 3499 which was introduced at an earlier date)

• Legislation to create a Universal Savings Account– H.R. 5118, USA Accounts:

Investing in America’s Future Act of 2018

– H.R. 937/S. 323 — the Universal Savings Account Act

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MORGAN STANLEY | 2018

While there remains keen interest on the part of policymakers in addressing retirement issues, ranging from defined contribution plans, to IRAs, to the solvency of the multiemployer defined benefit system, the prospects for achieving positive legislative outcomes for these measures may be limited this election year. The most pressing retirement-focused issue facing Congress in the immediate future pertains to the solvency of multiemployer pension plans. In that regard, included within the recently enacted Bipartisan Budget Act of 2018 (P.L. 115-123, signed into law on February 9, 2018) was a provision to create a “Joint Select Committee on Solvency of Multiemployer Pension Plans.” The Joint Committee has until November 30, 2018, to provide recommendations and legislative language to improve the solvency of the multiemployer pension system (and the Pension Benefit Guaranty Corporation). An expedited process for committee and floor consideration would follow the Committee’s completion of its work, should it be successful. This in turn could provide an opportunity, and a legislative vehicle, to which other pension-related provisions could be attached (such as RESA described above), later this year. Stay tuned, as the Joint Committee only recently held its organizing meeting on March 13, 2018.

Outlook

An expedited process for committee and floor consideration would follow the Committee’s completion of its work, should it be successful.

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WASHINGTON UPDATE

RegulatoryDepartment of Labor — Fiduciary RuleOn March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit issued a ruling, in Chamber of Commerce v. U.S. Department of Labor, which vacated the DOL Fiduciary Rule.3 This decision by the Fifth Circuit will become final on May 7, 2018, if no appeal, or request for a rehearing is filed challenging the decision. While the Fifth Circuit case was not the only litigation involving the DOL Fiduciary Rule, it appears at this time that there will be no conflicting Circuit Court decisions that could form the basis of an appeal to the Supreme Court. While the U.S. Court of Appeals for the Tenth Circuit also issued a decision on March 13, 2018, in the matter of Market Synergy Group, Inc. v. U.S. Department of labor et al,4 which upheld the Fiduciary Rule (as it pertained to the treatment of fixed indexed annuities), the narrow decision in that case does not appear to conflict with the much broader Fifth Circuit Court decision that vacated the rule in its entirety. Also, on March 25, 2018, a suit in the U.S. Court of Appeals for the D.C. Circuit in The National Association for Fixed Annuities v. United States Department of Labor was, in light of the 5th Circuit decision, voluntarily withdrawn by the parties.

Securities and Exchange CommissionIn addition to, and regardless of the development involving the 5th Circuit Decision vacating the DOL Fiduciary Rule, the Securities and Exchange Commission held a public meeting on April 18, 2018, and approved the Commission moving forward with a proposal relating to standards of conduct for brokers and advisers. Specifically, the Commission voted 4-1 to:• “...Propose new and amended rules and

forms to require registered investment advisers and registered broker-dealers to provide a brief relationship summary to retail investors”

• “...Propose a rule to establish a standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer;” and

• “...Propose a Commission interpretation of the standard of conduct for investment advisers.”

The SEC published the proposed rule in the Federal Register on May 9, 2018, with a 90-day comment period for interested parties to provide comments thereto.

A copy of the proposed rule changes can be accessed via the link below:

https://www.sec.gov/rules/proposed/2018/34-83062.pdf

https://www.sec.gov/rules/proposed/2018/34-83063.pdf

https://www.sec.gov/rules/proposed/2018/ia-4889.pdf

The actions by the SEC confirm the recent comments of Chairman Jay Clayton, that the agency would move forward with its own fiduciary rule regardless of the recent decision in the 5th Circuit Court of Appeals related to the DOL Fiduciary Rule.5 It is important to note that last fall, in testimony before the Senate Banking Committee, Chairman Clayton reiterated the importance of SEC and DOL working “closely and constructively” in regulating the standards of conduct for financial professionals providing advice to retail customers. In light of the 5th Circuit’s decision, Chairman Clayton’s comments thereafter, and the publication of the SEC’s proposed rule(s), it will be important to monitor the two agencies for indications that they intend to work in a coordinated and cooperative fashion in the coming months.

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Department of TreasuryOn February 7, 2018, the Treasury Department released its second quarter update to the 2017-2018 Priority Guidance, containing guidance projects the Department hopes to complete during the 12-month period from July 1, 2017, through June 30, 2018. While the chances for completion of these items by June 30, 2018, is tenuous at best, nonetheless the Plan does provide us with a roadmap of the items with which Treasury will seek to issue regulatory guidance.

With regard to retirement-focused issues, Treasury has identified 23 items upon which the Treasury/IRS intend to work during the current year. In addition, Treasury has further identified 17 items pertaining to “executive compensation, health care and other benefits.” Below is a sampling of the items that are the focus of the Treasury/IRS Plan, along with a link where you can find all of the proposed work items for the coming year:• Regulations updating the rules

applicable to ESOPs• Guidance under 401(a)(9) on the use of

lump sum payments to replace lifetime income being received by retirees under defined benefit plans

• Final regulations (proposed 1/18/2017) regarding qualified nonelective contributions (QNEC) and qualified matching contributions (QMAC)

• Additional guidance on issues relating to lifetime income from retirement plans and IRAs

• Guidance on rules applicable to IRAs under Sections 219, 408, 408A and 4793

• Guidance updating regulations for service credit and vesting under 411; and separately – restrictions on certain mandatory distributions under 411(a)(11)

• Guidance on missing participants• Guidance related to church plans• Final regulations under 409A (first

proposed on 12/8/2008)• Revenue Procedure modifying

the Employee Plans Compliance Resolution System (EPCRS)

The following link provides access to the February 7, 2018, second quarter update to the 2017-2018 Priority Guidance Plan, and includes the above items as remaining retirement and other benefit focused items not enumerated above:

https://www.irs.gov/pub/irs-utl/2017-2018_pgp_2nd_quarter_update.pdf

WASHINGTON UPDATE

1 The Choice Act can be accessed via this link, with Section 841 found on page 465 therein: https://www.congress.gov/115/bills/hr10/BILLS-115hr10rfs.pdf.2 Also, on June 8, 2017, Senator Johnny Isakson (R-GA), introduced S. 1321, the Affordable Retirement Advice Protection Act, legislation similar, but not identical to, H.R. 2823.3 http://www.ca5.uscourts.gov/opinions/pub/17/17-10238-CVO.pdf4 https://www.ca10.uscourts.gov/opinions/17/17-3038.pdf5 https://www.thinkadvisor.com/2018/03/19/clayton-sec-fiduciary-rule-on-track-despite-dol-co/6 https://www.irs.gov/irb/2018-10_IRB#RP-2018-187 The HSA contribution limit for 2018 was originally set at $6,900, but enactment of the Tax Cuts and Jobs Act that included a change in how certain limits are adjusted for inflation, caused the IRS to update the HSA limits to reflect the lower inflation-adjusted amount referenced above.Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates, and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures.dol. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.

© 2018 Morgan Stanley Smith Barney LLC. Member SIPC. KP8997759 CRC 2105664 06/18 CS 9222013 05/18

MiscellaneousRetirement Plan LimitsFor quick reference, the 2018 retirement plan cost of living adjustments are listed below:• Elective deferral (contribution

limit) for 401(k), 403(b), 457 plans — $18,500

• Catch-up contribution limit for 401(k), 403(b), 457 plans — $6,000

• Annual contribution to an IRA — $5,000

• Catch-up contribution limit for IRAs — $1,000

• SIMPLE employee deferral — $12,500• SIMPLE catch-up deferral — $3,000• Annual Defined Contribution

limit — $55,000• Annual Compensation

limit — $275,000• Limit on annual benefit under a

defined benefit plan — $220,000

Estate and Gift Tax Exclusion AmountsFor 2018, the basic exclusion amount for an estate tax return for a 2018 date of death is $11.18 million (inflation adjusted).6

For 2018, the first $15,000 of gifts to any person is not included in the total amount of taxable gifts made during the year.

Health and Savings AccountsFor 2018, the Health Savings Account (HSA) contribution limit for individuals with family coverage under a high deductible health plan is $6,850. The 2018 HSA contribution limit for individuals with self-only high deductible health plan is $3,450.7