Important Pension Changes From D.C. - What Do You Need to Know? Marcia S. Wagner, Esq.

Transforming the Retirement System Regulatory landscape is changing. DOL is rolling out new rules for 2012. Fee disclosures for plan sponsors Participant-level fee disclosures Participant investment advice Proposed Rulemaking DOL Interaction with White House Working with White House’s Middle Class Task Force Coordinated actions to improve retirement security

1. Fee Disclosures to Participants 2. Participant Investment Advice 3 1. Fee Disclosures to Participants 2. Participant Investment Advice 3. 408(b)(2) Disclosures 4. Broader “Fiduciary” Definition 5. Default Investments - TDFs 6. Lifetime Income Options

DOL Finalizes Participant Fee Disclosure Regulations DOL issues final reg’s on Oct. 14, 2010. DOL press release explained that existing law did not require plans to provide necessary information. New rule requires comparison of plan’s investments. Types of plans covered New reg’s apply to DC plans with participant- directed investments. Covers plan even if not designed to comply with ERISA Section 404(c). Coverage of participants New reg’s apply to all eligible employees.

Annual and Quarterly Disclosure of Plan-Related Information Must disclose general info about plan. Must include explanation of general admin. service fees and individual expenses on annual basis. Must disclose dollar amount of fees/expenses charged to participant accounts on quarterly basis. Disclosure only required for fees/expenses not embedded in expenses of investments. If service provider only receives indirect compensation from investments, provider’s fees are not subject to this disclosure requirement. But must disclose that a portion of general admin. service fees is paid from expenses of investments.

Annual Disclosure of Investment-Related Information Must disclose fee and performance-related info for plan’s investment alternatives. This disclosure must be in comparative format. Must be provided on annual basis. Required information for disclosure in comparative format includes: Name and type of investment option Investment performance data Benchmark performance data Total annual operating expenses for each investment and any extra shareholder-type fees. Internet website address

Other Requirements Info that must be available upon request Prospectuses, shareholder reports and financial statements provided to plan. Form of disclosure Must be understood by average participant. Impact on sponsor’s other fiduciary duties No relief for duty to prudently select/monitor plan’s providers and investments. New reg’s modify ERISA 404(c) disclosures. Effective date Plan years beginning on or after Nov. 1, 2011. Initial disclosures due August 30, 2012 for calendar year plans.

Fee Disclosures to Participants Practical Implications To-Do List: Discuss with plan’s recordkeeper the impact of the new rules on existing fee disclosures. Meet with participants and review investment and fee information through educational sessions. If plan sponsor has fee-related concerns, remind plan sponsor that its fiduciary review process can be enhanced.

1. Fee Disclosures to Participants 2. Participant Investment Advice 3 1. Fee Disclosures to Participants 2. Participant Investment Advice 3. 408(b)(2) Disclosures 4. Broader “Fiduciary” Definition 5. Default Investments - TDFs 6. Lifetime Income Options

How Can Inv. Advice Be Conflicted? Non-fiduciary provider receives variable compensation from plan’s investments. Broker-dealer receives different 12b-1 fees. Fund platform offers proprietary funds to plan clients. Provider has incentive to steer participants. Cannot provide fiduciary advice to participants. Conflicted advice triggers prohibited transaction (PT). PT occurs even if advice provided in good faith.

DOL Final Rules for Participant Advice Pension Protection Act included statutory exemption for participant-level advice. Fiduciary Adviser must be RIA, bank, insurer or broker- dealer. Eligible Investment Advice Arrangement must have: (1) Fee-Leveling (Fiduciary Adviser’s fees do not vary) (2) Computer Model certified by expert. Other conditions for exemption. Authorization from separate plan fiduciary. Annual review by independent auditor. Advance notice to participants with disclosures for fees and material affiliations of parties (i.e., conflicts).

Fee-Leveling Arrangement Fiduciary Adviser’s fee must not vary. Fiduciary Adviser’s employee/rep must receive level compensation. Fiduciary Adviser’s affiliate may receive variable compensation. Example: ABC Fund Platform for Plan Clients Plan invests in ABC Funds and third party funds. ABC Fund Manager cannot give participant advice (due to incentive to steer participants to ABC Funds). New affiliate, ABC Fiduciary Adviser, is created to provide advice to participants. DOL imposes fee-leveling on ABC Fiduciary Adviser. But ABC Fund Manager can earn compensation that varies with participants’ allocation decisions.

Computer Model Arrangement Advice must be from computer model. Model must be certified by investment expert. Must consider participant’s personal info. Fiduciary Adviser may receive variable compensation. Does DOL favor index funds? Proposed rules suggested that model should favor cheapest menu option in each asset class. Fortunately, DOL backed away from this approach. Can a Computer Model be used for IRAs? DOL permits it. But are Computer Models capable of advising IRA owners? DOL rules became effective on Dec. 27, 2011.

Participant Investment Advice Practical Implications Most advisors will continue to rely on pre-PPA DOL guidance. Benefit platform providers may find the fee- leveling exemption useful: RIA receives level fees. Affiliated recordkeepers receive variable fees from funds in a plan’s menu. Individual advisors dislike computer model advice: Model portfolio creation is advisor’s job. It should not be delegated to a computer program.

1. Fee Disclosures to Participants 2. Participant Investment Advice 3 1. Fee Disclosures to Participants 2. Participant Investment Advice 3. 408(b)(2) Disclosures 4. Broader “Fiduciary” Definition 5. Default Investments - TDFs 6. Lifetime Income Options

Timing of 408(b)(2) Disclosures Required Deadlines Disclosure must be made reasonably in advance of starting or renewing services. Changes to info must be made no later than 60 days after provider becomes aware of change. Final rule allows recordkeeping platforms and fiduciaries of look-through investments to report changes annually. Erroneous info will not result in violation if provider has acted in good faith and with diligence. Errors and omissions must be disclosed within 30 days after coming to light.

Prohibited Transactions and 408(b)(2) Regulations If provider fails to make disclosure, plan’s payment of fees is a prohibited transaction. Disclosure failures can be cured. Plan must make written request for information, and provider must respond within 90 days. Refusal or inability to comply with request requires plan fiduciary to notify DOL, and decide whether to terminate service arrangement, with presumption being termination. Marketing Tip – if 408(b)(2) notice is incomplete, remind plan sponsors of this vendor termination presumption.

Best Practices for Fiduciary Review of Fees ERISA 408(b)(2) effectively “raises the bar” for fiduciary review of plan fees. Consider adopting best practices for evaluating fee disclosures. Establish prudent review process. Basic Procedural Steps and Principles Focus on provider’s qualifications and provider’s quality of services (in addition to considering fees). Conduct reviews regularly. Consider provider’s total compensation. Evaluate fees in proper context. Document reviews. Best Practices for Plan Sponsors. All plan sponsors are subject to a specific duty to assure that the plan’s fees for investment and administrative services are reasonable. Now that investment and service providers will be obligated to provide comprehensive fee information to plan sponsors under ERISA Section 408(b)(2), plan sponsors will have a corresponding responsibility to review and understand this information. Thus, as a practical matter, the fiduciary bar is being raised as a result of these new disclosures, and plan sponsors will have a duty to review every provider’s 408(b)(2) fee disclosures and use them to evaluate the reasonableness of the provider’s compensation. With that in mind, plan fiduciaries should consider following the best practices for evaluating fee disclosures. One of the keys to making a proper evaluation, is establishing a prudent review process for evaluating the plan’s services and the reasonableness of fees, which will most likely require you to ask for additional information beyond what is included in a provider’s one-time fee disclosures under 408(b)(2).

Best Practices – Value Proposition and FPS Consider provider’s value proposition. Don’t look for provider with cheapest fees. Make inquiries about service offering. Evaluate fees in light of services provided. Adopt a fee policy statement (FPS). FPS offers procedural discipline for plan fiduciary’s review of fees. Reviews under FPS should be coordinated with IPS. FPS itself can help demonstrate procedural prudence. Consider Service Provider’s Value Proposition. Rather than seeking a service provider with low fees, plan fiduciaries should seek out the service provider with the best “value proposition.” In order to evaluate the reasonableness of the service provider’s fees, the plan fiduciary should make appropriate inquiries about the service offering. Is the service provider genuinely committed to helping both the plan fiduciaries and the plan participants on an ongoing basis? If so, is the service provider willing to make that commitment in writing? Consistent with DOL’s guidance, a service provider’s fees should always be evaluated in light of the services provided. Plan fiduciaries should make an effort to work with service providers that are open and forthcoming about the types of services they offer and the fees for such services. Adopt a Fee Policy Statement. It is now standard practice for plans to maintain an investment policy statement or IPS. Like an IPS, plan sponsors should seriously consider establishing and adopting a fee policy statement or FPS. The written procedures maintained in a formal FPS can give plan sponsors the procedural discipline necessary to conduct a proper view of a plan’s fees and services, The plan’s FPS should be customized to the plan’s circumstances and objectives, and the FPS’s procedures should complement the plan’s IPS procedures. That is to say, the plan’s review under the IPS should be coordinated with the plan’s review under the FPS. And like an IPS, a solid FPS can help plan fiduciaries demonstrate that they are acting with the procedural prudence required under the law.

1. Fee Disclosures to Participants 2. Participant Investment Advice 3 1. Fee Disclosures to Participants 2. Participant Investment Advice 3. 408(b)(2) Disclosures 4. Broader “Fiduciary” Definition 5. Default Investments - TDFs 6. Lifetime Income Options

DOL’s Campaign to Expose Conflicts DOL Strategy Roll out new fee disclosure rules. Impose fiduciary status on more providers. Force non-fiduciary advisors to make disclaimers. DOL releases proposed reg’s on Oct. 21, 2010. Broadens “investment advice fiduciary” definition. Withdrawn on September 19, 2011. To be re-proposed with more input from public. If you provide investment advice, you are automatically deemed a fiduciary. DOL’s current definition for investment advice is based on 5-factor test.

Overview of DOL’s Initial Proposal Existing Definition Advice may be investment advice if it is a primary basis for plan decisions and given on regular basis. DOL’s Initial Proposal Include any advice that may be considered by plan. May include casual advice or one-time advice. Non-fiduciary advisors must make disclaimer: (1) advisor is acting as seller of securities. (2) advisor’s interests are adverse to client. (3) advice is not impartial.

Broader “Fiduciary” Definition Practical Implications Non-Fiduciary Advisors Would need to change service model. Must disclose they are not providing impartial advice. Or they could accept fiduciary status and become subject to ERISA. Re-proposed Rule in 2012 New definition to include individualized advice only. Will be similar in approach to DOL’s initial proposal. DOL is coordinating with SEC.

Broader “Fiduciary” Definition Practical Implications DOL proposal likely to pressure advisors to provide fiduciary services for level fees. Advisors unwilling to serve plan clients on these terms may be forced out of retirement space. Advisors, especially non-fiduciaries, should re-evaluate business model for plan clients. Explore working with recordkeeping platforms that have ability to offer level payouts. Explore use of ERISA fee recapture accounts to ensure advisor retains level fee only. Consider becoming “dual registrant” and charge level asset-based fee as RIA. No easy “one size fits all” solution for firms.

1. Fee Disclosures to Participants 2. Participant Investment Advice 3 1. Fee Disclosures to Participants 2. Participant Investment Advice 3. 408(b)(2) Disclosures 4. Broader “Fiduciary” Definition 5. Default Investments - TDFs 6. Lifetime Income Options

Background on Target Date Funds Popular default investment vehicle for 401(k) plans. Typically, formed as open-end investment companies registered under the Inv. Co. Act. Defining characteristic – “glide path” which determines the overall asset mix of the fund. Performance issues in 2008 raise concerns, especially for near-term TDFs. Based on SEC analysis, the average loss for TDFs with a 2010 target date was -25%. Individual TDF losses as high as -41%.

Recent Developments for TDFs DOL and SEC at Senate Special Committee on Aging hearing on TDFs (Oct. 28, 2009). Investor Bulletin jointly released by DOL and SEC. DOL’s fiduciary checklist on TDFs is pending. SEC proposal for TDF advertising materials. If name has target date, “tag line” disclosure needed. Advertising must include glide path information. On Nov. 30, 2010, DOL proposes rules on TDF disclosures for participants, amending: QDIA reg’s issued under PPA of 2006 Participant-level fee disclosure reg’s that were finalized on Oct. 14, 2010 but are not yet effective.

DOL’s Proposed Changes to QDIA Reg’s Background on QDIA Reg’s Participant deemed to be directing investment to default choice if QDIA requirements are met. Default investment must be a QDIA, and QDIA notices must be provided to participants. DOL proposes change to QDIA notice for TDFs. Explanation and illustration of TDF’s glide path. Relevance of target date (e.g., 2030) in TDF name. Disclaimer that TDF may lose money after retirement. DOL also proposes general changes to QDIA notice (even if not a TDF).

DOL’s Proposed Changes to Participant-Level Fee Disclosure Reg’s Background (recap) New rules will require disclosure of plan-related fees and annual comparative chart for plan’s investments. DOL proposes change to annual comparative chart for TDFs (even if not a QDIA). Must include appendix with additional TDF info. Same info as required for QDIA notice. Informal follow-up guidance from DOL TDF prospectus is unlikely to satisfy QDIA notice and annual comparative chart requirements, as proposed. DOL will not provide “model” target date disclosures.

Conflicts of Interest in TDFs Conflicts arise when a “fund of funds” invests in affiliated underlying funds. Conflicts are permitted because fund managers are carved out from ERISA’s fiduciary requirements. Are fund managers ever subject to ERISA? Firm requested clarification on scope of carve-out. In Adv. Op. 2009-04A (Avatar Associates), DOL declined to rule that the TDF managers are fiduciaries. Implications of DOL guidance Plan sponsors are alone in their fiduciary obligation. Must ensure TDFs (and underlying funds) are appropriate plan investments.

Congressional Proposal for TDFs Senator Kohl announced his intent to introduce new legislation (Dec. 2009). Concerns over high fees, low performance or excessive risk in many TDFs. Would impose ERISA fiduciary status on TDF managers when TDF used as QDIA in 401(k) plans.

Default Investments – TDFs Practical Implications Provide meaningful TDF disclosures to participants as a “best practice” right now. Provide key information about TDF’s glide path, landing point and potential volatility. Also facilitate sponsor’s prudent review of the plan’s TDF series. Assist in the fiduciary review of the “fund of funds” structure, glide path, underlying funds and risk. Special review of TDFs for participants in or nearing retirement (e.g., 2015 TDF).

1. Fee Disclosures to Participants 2. Participant Investment Advice 3 1. Fee Disclosures to Participants 2. Participant Investment Advice 3. 408(b)(2) Disclosures 4. Broader “Fiduciary” Definition 5. Default Investments - TDFs 6. Lifetime Income Options

Retirement Security and Annuitization Obama Administration believes lifetime income options facilitate retirement security. Initiative to reduce barriers to annuitization of 401(k) plan assets. DOL / IRS issue joint release with requests for information on Feb 2, 2010. RFI addresses education, disclosure, tax rules, selection of annuity providers, 404(c) and QDIAs. The Retirement Security Project Released 2 white papers on DC plan annuitization. Proposed use of annuities as default investment. Utility of default annuities limited because of different needs to retirees and difficulty in reversal.

Other Recent Developments in DC Plan Annuitization Two types of legislative proposals. Encourage annuitization with tax breaks: Lifetime Pension Annuity for You Act, Retirement Security for Life Act. Annual disclosure of what 401(k) plan balance would be worth as annuity: Lifetime Income Disclosure Act.

Joint Hearing by DOL, IRS and Treasury in September 2010 Purpose is to investigate 5 focused topics. 2 areas of general policy-related interest. Specific concerns raised by participants. Alternative designs of in-plan and distribution lifetime income options. 3 areas of specific interest. Fostering “education” to help participants make informed retirement income decisions. Disclosure of account balances as monthly income streams. Modifying fiduciary safe harbor for selection of issuer or product.

IRS TAX RELIEF for Lifetime Income Options Proposed Regs and Rulings on Required Minimum Distributions PLR 200951039: no surprises as to age 70 ½ interpretations. Proposed Reg. (Feb. 2012): longevity annuity beginning at age 80 or 85 will not violate required minimum distribution rules. Annuity premium lesser of $100,000 or 25% of account balance. Proposed Reg. (Feb. 2012): split distribution options consisting of annuity and lump sum approved. Rev. Rul. 2012-4: participants can rollover 401(k) balance to same employer DB plan and convert to annuity from DB plan. Rev. Rul. 2013-3: deferred annuities in 401(k) plan will not trigger IRS death benefits for surviving spouse.

Lifetime Income Options Practical Implications Anticipate future legislation or regulation. Most likely: DC plans must disclose monthly or yearly lifetime income that account balance can provide through annuity purchase. Also possible: DC plans must offer life annuities as benefit distribution option. Be prepared to explain concept of longevity annuities.

Website: www.wagnerlawgroup.com Important Pension Changes From D.C. - What Do You Need to Know? Marcia S. Wagner, Esq. 99 Summer Street, 13th Floor Boston, MA 02110 Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com marcia@wagnerlawgroup.com A0078215