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

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 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.

6
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.

7
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.

8

• Increasing Savings
• Protecting Returns
• Decumulation Planning
• Tax Reform

9
Introduction

• Policymakers focusing on protection for
  investment returns.
• Regulatory Agenda
• Improving fee transparency.
• Encouraging participant-level advice.
• Broadening fiduciary definition.

10
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.

11
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.
• Tussey v. ABB, Inc.
• Plan sponsor held liable for excessive fees.
• 408(b)(2) Fee Disclosures
• Will force plan sponsors to monitor and benchmark
  all compensation
• May support new theories of 401(k) litigation.
• Monetary settlements to date have been
  significant.

12
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.
• DOL expected to work with private sector.

13
Proposal to Broaden Fiduciary Definition

• ERISAs Functional Definition
• If fiduciary advice provided, fiduciary status
  arises. A 5-factor test.
• It is fiduciary advice only if it is a 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.
• Effect of Expanded Definition
• Fiduciaries may not receive variable fees.
• Plan expense accounts levelize fee
  arrangements.

14
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 .

15

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

16
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.

17
Removing Regulatory Obstacles to Annuities in
Plans

• 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.
• 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.

18
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).

19
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.

20
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.

21

• Increasing Savings
• Protecting Returns
• Decumulation Planning
• Tax Reform

22
Tax Cost of Retirement Plans

• Impact of Pan Contributions on Federal Deficit
• 70.2 Billion Annually
• 361 Billion 2011 2015
• Tax Reform
• Pension System Reform

23
Tax Reform

• 2013 Plan Limitations that Can Be Reduced to
  Limit Deficit
• Annual Additions from All Sources - 51,000
• Elective Deferrals - 17,500
• Plan Sponsor Deduction - 25 Participant
  Compensation
• Limit on Compensation Base to Determine
  Benefits/Contributions - 255,000

24
Tax Reform (contd)

•  National Commission on Fiscal Responsibility
• 20/20 Cap Limits Contributions to Lesser of
  20,000 or 20 Compensation
• Brookings Institution
• Tax All Employer and Employee Contributions
• Refundable Tax Credit Deposited to Retirement
  Savings Account
• Obama Administration - 7 Tax on Employer
  Employee Contributions
• High Earners Only

25
Pension System Reform State-Sponsored Initiatives

• Secure Plan Proposal by National Conference on
  Public Employee Retirement Systems
• State sponsored cash balance plans for
  private-sector
• 6 annual credits
• Minimum 3 interest credits
• Participation voluntary but withdrawal
  liability assessed on terminating employers
• Seeks to benefit from economies of
  scale
• Funding shortfall would be state
  responsibility
•  

26
Pension System Reform State-Sponsored
Initiatives (contd)

• California Secure Choice Retirement Savings
  Program
• Mandatory payroll deduction auto-IRA
  program
• Auto enrollment at 3 unless employee opts
  out
• Required for enterprises with 5 or more
  workers if no current plan
• State chooses investment managers
• Guaranteed rate of return
• Signed by governor but implementation
  subject to IRS and DOL approval
•  
• Other State Initiatives
• Massachusetts enactment of defined
  contribution multiple employer plan for
  non-profits
• At least 11 other states said to be
  considering plans for private-sector employees

27
Pension System Reform Federal Level

• New retirement system proposed in report issued
  by U.S. Sen. Tom Harkin
• Automatic and universal enrollment required by
  employers that do not offer a plan
• Regular stream of income starting at
  retirement age
• No lump sum withdrawals
• Financing through payroll system by employee
  contributions/government credits
• Privately managed investment by new entities
  called USA Retirement Funds
• Limited employer involvement and no fiduciary
  responsibility
• Unspecified level of required
  employer contributions
• Employees can increase/decrease
  contributions or opt out
• Similarities to proposals for state-covered
  pensions of private-sector workers
• Text of bill expected in 2013

28
Systemic Reform - Other Proposals

• Unitary Defined Contribution System espoused by
  John Bogle, Vanguard founder
• Consolidation of all retirement savings programs
• Federal Retirement Board controls system
• Limit distributions and loans to
  prevent system leakage
• Limit number of investment options
  concentrating on low-cost funds
• ERISA fiduciary standards extended
  to service providers / money managers
• Spark Institute Universal Small Employer
  Retirement Savings Program
• Eligibility limited to employers with
  fewer than 100 employees
• Pre-approved prototype
• Auto-enrollment and escalation of
  contribution levels
• No discrimination testing
• Contribution limits lower than
  401(k) but higher than IRA
• Investment options to meet specific
  criteria
• Recordkeeping/5500 performed at
  service provider level

29
Systemic Reform Other Proposals (contd)

• Proposals by Academics
• Teresa Ghilarducci (The New School)
• - eliminate current tax breaks and
  use savings to make 5 contribution to all
• employees
• - mandatory contributions and guaranteed
  investment return equating to defined
• benefit approach, supplementing Social
  Security
• - participants in existing plans could
  continue in such plans if contributions are 5,
• no early withdrawals, mandatory conversion
  to annuity on retirement
• - people not in employer plans would be
  mandated into Guaranteed Retirement
• Accounts (GRAs) with mandatory 2.5
  employer and employee contributions
• investments pooled and professionally
  managed to reduce fees.
• Meir Statman (Santa Clara University)
  mandatory employer and employee
• contributions but investment
  controlled by account owner equating to defined
• contribution approach, like the
  current British and Australian retirement
  structures.

30
Summing Up

• Significant Transformation of Private Retirement
  System Possible
• Tax Reform
• Reducing tax incentives will shrink
  system
• Lower contributions at all income levels
  result if tax exclusions cut back
• Obama proposal for general limit on
  benefit from tax exclusions
• Does not focus directly on 401(k)
  contributions
• Provides political cover
• Same effect on contributions as direct
  cutback on excludible amount

31
Summing Up (contd)

• Systemic Changes
• Intended to create access for low-wage
  employees
• Government will replace private employers
  in system
• Mandated benefits
• Guaranteed benefits and/or
  investment results
• Creation of new interest group
  to lobby for expansion of benefits
• Government influence in choosing investment
  managers or control of
• investments could drive many out of the
  retirement industry.
• State-level programs may cause breakdown
  in uniformity of pension laws,
• effective since enactment of ERISA
• Inflection Point regarding the types of
  Retirement Schemes Nation wants and needs
• Interesting Times

32
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
• A0091230.PPT