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A Washington Update

The Politics of Retirement

Marcia S. Wagner, Esq.

1

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

2

1. Increasing Savings

2. Protecting Returns

3. Decumulation Planning

4. Tax Reform

5. Industry Groups

3

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

4

Automatic Enrollment and Escalation

– Negative Elections

• IRS issued guidance in late 1990’s.

• 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.

5

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.

6

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.

7

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.

8

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.

9

1. Increasing Savings

2. Protecting Returns

3. Decumulation Planning

4. Tax Reform

5. Industry Groups

10

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.

11

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.

12

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.

13

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.

14

Proposal to Broaden “Fiduciary” Definition

– ERISA’s 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

– DOL’s 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.

15

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 recordkeeper’s indirect compensation for gross-to-net pricing.

• May be used to levelize advisor’s compensation.

16

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 .

17

1. Increasing Savings

2. Protecting Returns

3. Decumulation Planning

4. Tax Reform

5. Industry Groups

18

Administration’s 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.

19

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.

20

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.

21

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).

22

Education and Disclosures for Participants

– GAO Recommendations

• Update DOL’s “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.

23

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.

24

1. Increasing Savings

2. Protecting Returns

3. Decumulation Planning

4. Tax Reform

5. Industry Groups

25

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.

26

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.

27

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

28

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

29

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

o Specific premium increases replace Administration’s proposal to allow PBGC Board to set risk-adjusted rates

o 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

o 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 Reliefo Abnormally low interest rates increase funding requirementso MAP-21 adjusts rates upward if regular rate falls below 25-year average for interest rates,

resulting in lower required contributionso If interest rates increase, larger plan contributions could be due

30

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.

31

1. Increasing Savings

2. Protecting Returns

3. Decumulation Planning

4. Tax Reform

5. Industry Groups

32

Industry Groups

– Social Policy Advocate

• AARP

• Pension Rights Center

– Independent Research Organizations

• EBRI

33

– Plan Services Industry

• ASPPA

• Spark Institute

– Plan Sponsor Groups

• ABC

• ERIC

• Chamber of Commerce

– Investment Providers

• ACLI

• ICI

• IAA

Thank you.

34

Marcia S. Wagner, Esq.99 Summer Street, 13th Floor, Boston, MA 02110

Tel: (617) 357-5200 Fax: (617) 357-5250Website: www.wagnerlawgroup.com

marcia@wagnerlawgroup.com

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