Republicans will control Washington in 2025 – What does it mean for Defined Contribution Plans?

Share

In November’s highly anticipated election, Americans voted to put Republicans in charge of the White House, Senate and House of Representatives for at least the next two years. The impact of this political shift will likely affect many areas , but for today, we are going to discuss some inferences as to what this means for America’s Defined Contribution (DC) plan retirement industry. Of course, many questions won’t likely be answered until well into 2025.

The players have not yet all been confirmed, but the personnel that will shape America’s retirement industry is becoming clearer. President Trump nominated Congresswoman, Lori Chavez-DeRemer (R-OR) to lead the DOL and former Congressman Billy Long (R-MO) to lead the IRS. Poised to chair the SEC is Paul Atkins, a former SEC member and cryptocurrency advocate. In the Senate, John Thune (R-SD) will be the Majority Leader and Tim Scott (R-SC) will lead the Banking Committee, while Bill Cassidy (R-LA) will lead the Health, Education, Labor and Pensions (HELP) Committee. The House of Representatives voted to retain Mike Johnson (R-LA) as Speaker. The House of Representative’s Finance Committee will be led by French Hill (R-AR), and Tim Walberg (R-MI) will chair the Committee on Education and the Workforce.

Considering this group of leaders collectively--and their public statements--we can infer that we are likely to see retirement-related policies that support using cryptocurrency and other alternative assets in managed investment products and oppose ESG funds or investment in China. These leaders, with some exceptions, generally oppose the DOL’s proposed fiduciary rule and support Trump’s plan to extend the tax rates from the 2017 Tax Cuts and Jobs Act (TCJA) that are expiring at the end of 2025.

While legislation to enact the investment-related positions would be important, the event with the greatest potential impact on the retirement industry and that could be concerning is the creation of a 2025 tax bill. Currently there are two competing goals within the Republican party: (1) The Trump administration’s desire to maintain the expiring tax rates from the TCJA which is a view shared by most Republicans in Congress, versus (2) a substantial minority of Republicans who view shrinking the national debt as the immediate pressing issue. This view was confirmed by Congressman Tom Massie (R-KY) who told Politico on December 18, “I honestly don’t know why people up here are talking about tax cuts… We need to be cutting spending, not taxes.”

Lowering tax rates typically decreases tax revenue which exacerbates debt problems. So, to bring all Republicans on board, leadership is likely to combine tax cuts with significant spending reductions. The question is where will Congress find enough spending cuts to get deficit hawks to vote for a bill that reduces tax revenue. The risk for us is that the “pay-for” becomes the retirement industry. According to the Joint Committee on Tax, the single largest tax expenditure in fiscal 2024 was tax benefits for employer-sponsored defined contribution plans, which reduced tax revenue by $251 billion. This is exactly what Speaker Paul Ryan (R-WI) targeted in 2017, during the first Trump administration, by proposing that substantially all contributions to DC plans must be made to Roth accounts. The plan was to offset the budgetary costs of other tax cuts by largely eliminating the current-year tax deferral for 401(k) participants. Had this proposal become law, the disruption to our industry would have been massive.

Speaker Ryan’s “Roth-ification” approach was eventually rejected by President Trump, who Tweeted: “There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!” This message forced Republicans to look elsewhere for offsetting reductions. In 2025, the big questions are whether Congress will target this same tax expenditure once again? And if it does, will President Trump again protect the tax advantages of America’s retirement system? The answer to both questions will likely become clear before year end. Because our industry garners the largest share of tax expenditures, we have a bullseye on our backs. We were in this same position less than eight years ago and were able to shift that bullseye in a different direction. Our goal in 2025 is to recreate that same outcome.