A Washington Update

1
The Politics of Retirement

• A Washington Update

• Marcia S. Wagner, Esq.

2
Introduction

• Impending Retirement Plan Crisis
• Social Security
• Employer-Sponsored Plans
• Private Savings
• Current Private Pension System
• Half of workers have no plan.
• Plans have low saving rates and hidden costs.
• Fewer than half of workers will have adequate
  retirement income.
• Role of Policymakers

3

1. Increasing Savings
2. Protecting Returns
3. Decumulation Planning
4. Tax Reform
5. Industry Groups

4
Increasing Savings Thru Automatic Features

• Pension Protection Act of 2006
• Auto-Enrollment
• Auto-Escalation
• Plan Sponsor and Advisor Initiatives
• Re-Enrollment
• Re-Allocation
• Automatic IRAs

5
Automatic Enrollment and Escalation

• Negative Elections
• IRS issued guidance in late 1990s.
• Pension Protection Act of 2006 expands IRS
  guidance and offers fiduciary protection.
• Problems
• Most plans set auto-contribution rates at 3.
• 6 safe harbor rate provides free pass from
  discrimination testing.
• But few plans use safe harbor or auto-escalation.
• Automatic enrollment can significantly increase
  savings.

6
Emerging Initiatives and Practices

• Re-Enrollment Program
• Auto-enrollment and auto-escalation typically
  apply to new employees, not incumbent employees.
• Consider re-enrolling all employees with low
  contribution rates to default rate (e.g., 6).
• May be implemented on ad hoc basis.
• Re-Allocation Program
• Consider re-allocating participant accounts and
  new contributions to QDIA (unless they opt out).
• May be implemented at re-enrollment or ad hoc
  basis whenever elections become stale.

7
Automatic IRAs

• Legislative History
• Auto IRAs proposal appears to be partisan.
• But had bi-partisan support in prior years.
• Increasing retirement plan coverage is shared
  policy goal.
• Three Key Features
• Default contribution rate set at 3.
• Post-tax Roth IRA would be default, but employee
  could choose pre-tax Traditional IRA.
• Multiple alternatives available for selecting
  Auto IRA provider.

8
Prospects for Auto IRAs

• Objections to Auto IRAs
• Burdensome mandate for small businesses with more
  than ten employees.
• Federal government control overs assets.
• Role of private sector.
• Partisan politics will continue in short term.
• But bipartisanship support typically emerges on
  retirement issues.

9
Summing Up

• Push for auto investments expected to continue.
• Auto IRA legislation unlikely in current form.
• But some reform can be expected in future.
• Retirement needs of aging middle class will force
  lawmakers to act.
• 5,000 cap on Auto IRA contributions would not
  discourage formation of qualified plans.
• Auto IRAs would help close retirement gap.

10

1. Increasing Savings
2. Protecting Returns
3. Decumulation Planning
4. Tax Reform
5. Industry Groups

11
Introduction

• Policymakers focusing on protection for
  investment returns.
• Disclosing hidden fees.
• Meaningful information for participants.
• Regulatory Agenda
• Improving fee transparency.
• Encouraging participant-level advice.
• Broadening fiduciary definition.

12
Fee Transparency

• Policymakers want plans to get fair price for
  services.
• Plan Sponsor-Level Disclosure Regs
• Effective July 1, 2012.
• Service providers must disclose direct and
  indirect (hidden) compensation.
• Participant-Level Disclosure Regs
• Effective August 30, 2012 (for calendar year
  plans).
• Must compare investment options and provide
  quarterly fee disclosures.
• Disclosures are expected to drive down fees.

13
Fee Litigation and Case Law

• 2006 Wave of 401(k) Fee Litigation
• Alleged breach of fiduciary duty to monitor
  indirect compensation.
• Trial courts cautious and did not dismiss
  lawsuits.
• Hecker v. Deere
• Case dismissed on efficient markets theory.
• 408(b)(2) Fee Disclosures
• May support new theories of 401(k) litigation.
• Monetary settlements to date have been
  significant.

14
Encouraging Participant Advice

• Many participants unwilling or unable to make
  investment decisions.
• Advisors receiving variable fees (e.g., 12b-1)
  generally cannot provide fiduciary advice.
• DOL provides fiduciary relief.
• Advice based on computer model.
• Level fee for affiliate providing advice.
• Fiduciary relieve unhelpful to many advisors.
• DOL expected to work with private sector.

15
Proposal to Broaden Fiduciary Definition

• ERISAs Functional Definition
• If fiduciary advice provided, fiduciary status
  arises.
• It is fiduciary advice only if it is primary
  basis for plan decisions and given on regular
  basis.
• Ellis v. Rycenga Homes
• DOLs Initial Proposal
• It is fiduciary advice if it may be considered
  for plan decision.
• One-time, casual advice may trigger fiduciary
  status.
• Re-proposed definition pending.

16
Emerging Practices and Levelizing Fees

• Fiduciaries must not receive variable fees.
• Non-fiduciary advisors may receive 12b-1 fees.
• DOL proposal to broaden fiduciary definition
  would stop receipt of variable fees.
• Plan Expense Accounts
• Typically, funded by recordkeepers indirect
  compensation for gross-to-net pricing.
• May be used to levelize advisors compensation.

17
Summing Up

• Administration has launched initiatives.
• Fee disclosures for plan sponsors and
  participants.
• Tried to encourage participant-level advice.
• Pushing boundaries of fiduciary status.
• Pressure on Fees
• Interest in levelized fee arrangements.
• Downward pressure on 401(k) pricing .

18

1. Increasing Savings
2. Protecting Returns
3. Decumulation Planning
4. Tax Reform
5. Industry Groups

19
Administrations Goals

• Help retirees take plan distributions without
  outliving them.
• Motivate retirees to annuitize accounts.
• Retirement paycheck for life.
• Encourage plan sponsors to voluntarily offer
  annuity options.
• Permit longevity annuities.
• Remove regulatory hurdles.
• Facilitate default annuities.
• Promote education and disclosures.

20
Longevity Annuities

• IRS proposal would relax required minimum
  distribution (RMD) rules for plans.
• Longevity annuities provide income stream for
  later in life.
• But RMD rules mandate start at age 70 ½.
• Proposed Regulations
• Exception from RMD rules for longevity annuity
  investments.
• Limit investment to 100,000 or 25 of account.
• Must start no later than age 85.

21
New Tax Rules Favoring Annuities

• Rollovers to DB Plans
• Rev. Rul. 2012-4
• 401(k) accounts may be rolled over and converted
  to DB plan annuity benefits.
• Provides favorable annuity rates for
  participants.
• Relief for DC Plans With Deferred Annuities
• Rev. Rul. 2012-3
• 401(k) plans typically exempt from onerous death
  benefit rules.
• Ruling confirms that 401(k) plans with deferred
  annuities can still avoid them.

22
Default Annuities

• Should annuity option be default for plan?
• Possible Approach Amend QDIA Rules
• Permit annuity option to qualify as QDIA.
• Critics argue annuities not appropriate for all.
• Default annuity investments not easily reversed.
• Possible Approach 2-Year Trial Period
• Retirees receive annuity during trial period
  (unless they opt out).

23
Education and Disclosures for Participants

• GAO Recommendations
• Update DOLs investment education guidance to
  cover decumulation.
• But DOL is concerned about conflicts.
• Guidance likely to restrict sales pitches.
• Lifetime Income Disclosure Act
• Would require plan to show account balances as if
  converted into guaranteed monthly payments.
• Would also encourage participants to think about
  retirement paycheck for life.

24
Summing Up

• Consensus emerging on lifetime income options.
• Proposal for longevity annuities to be finalized
  in near future.
• Recent IRS annuity rulings are plan-friendly.
• Guidance on decumulation education expected from
  DOL.
• But debate on use of annuities as QDIA likely to
  follow.

25

1. Increasing Savings
2. Protecting Returns
3. Decumulation Planning
4. Tax Reform
5. Industry Groups

26
Tax Reform

• Impact of Plan Contributions on Federal Deficit
• 70.2 Billion Annually.
• 361 Billion 2011 2015.
• Plan Limitations That Can Be Reduced to Lessen
  Deficit
• Annual Additions from All Sources - 50,000.
• Elective Deferrals - 17,000.
• Plan Sponsor Deduction 25 Compensation of All
  Participants.
• Compensation Counted to Determine
  Benefits/Contributions - 250,000.

27
Tax Reform

• National Commission on Fiscal Responsibility
  (20/20 Cap) Lesser of 20,000 of 20
  Compensation.
• Brookings Institution
• Make All Employer and Employee Contributions
  Taxable.
• Refundable Tax Credit Deposited to Retirement
  Savings Acct.
• Obama Administration 7 on Employer and
  Employee Tax Contributions for High Earners Only.

28
State-Sponsored Plans for Private-Sector

• Secure Plan Proposal.
• Proposed by National Conference on Public
  Employee Retirement Systems.
• Provide coverage for employees of small
  employers.
• Seeks to benefit from economies of scale.
• Cash balance plan 6 annual credits minimum 3
  interest credits.
• Funding shortfall would ultimately fall on
  states.
• Define Contribution Initiatives.
• Fiduciary Implications.
• Potential state liability for selection of
  investment alternatives.
• State must ensure that plan avoids prohibited
  transactions.
• Bonding.
• Administrative duties allocated between state and
  employer

29
Harkin Universal Pension Proposal

• New retirement system proposed in report issued
  by U.S. Sen. Tom Harkin
• Automatic and universal enrollment
• Regular stream of income starting at
  retirement age
• Financing through payroll system by
  employee contributions/government credits
• Privately managed by new entities to be
  called USA Retirement Funds
• Limited employer involvement and no
  fiduciary responsibility
• Employees could increase/decrease
  contributions or opt out
•  
• Similarities to proposals for state-covered
  pensions of private-sector workers
•  
• Less likely to be enacted than Automatic IRAs

30
Other Revenue Raisers

• Minimum Required Distributions to be Accelerated.
• Shrink Distribution Period for Inherited 401(k)s
  and IRAs.
• Administration want to waive MRD for small
  accounts.
• Limit or Eliminate Roth Conversions.
• Enactment of MAP-21
• PBGC premium increases for defined benefit
  pension plans under MAP-21
• Specific premium increases replace
  Administrations proposal to allow PBGC Board to
  set risk-adjusted rates
• Flat rate per participant premium increases from
  current 35 level to 42 in 2013 and 49 in 2014,
  to be indexed for inflation in subsequent years
• Varriable rate premium per 1,000 of vested
  unfunded benefits increases from current 9 level
  to 13 (plus inflation) for 2014 and 18 (plus
  inflation) for 2015
• Defined Benefit Plan Funding Relief
• Abnormally low interest rates increase funding
  requirements
• MAP-21 adjusts rates upward if regular rate falls
  below 25-year average for interest rates,
  resulting in lower required contributions
• If interest rates increase, larger plan
  contributions could be due

31
Republican Reaction to Tax Proposals

• Republican budget does not directly address.
• Romney Campaign favors lower tax rates and
  broader base but no focus on retirement plans
  expenditure.
• Senator Hatch skeptical of changing current
  limits.
• Summing Up
• Soak the rich schemes may defeat themselves.
• 20/20 Cap may be enacted.
• Consequences of lowered contributions
• Private Retirement Plan System gets smaller
• Reduced Role for Employers.

32

1. Increasing Savings
2. Protecting Returns
3. Decumulation Planning
4. Tax Reform
5. Industry Groups

33
Industry Groups

• Social Policy Advocate
• AARP
• Pension Rights Center
• Independent Research Organizations
• EBRI

• Plan Services Industry
• ASPPA
• Spark Institute
• Plan Sponsor Groups
• ABC
• ERIC
• Chamber of Commerce
• Investment Providers
• ACLI
• ICI
• IAA

34
Thank you.

• Marcia S. Wagner, Esq.
• 99 Summer Street, 13th Floor, Boston, MA 02110
• Tel [phone] Fax [phone]
• Website www.wagnerlawgroup.com
• marcia_at_wagnerlawgroup.com
• A0077774