Keeping Up With DC Marcia S. Wagner, Esq.

2 1. Broader “Fiduciary” Definition 2. Target Date Funds 3. Automatic IRA Legislation

3 Broader “Fiduciary” Definition

4 ERISA and Conflicts Fiduciary standards under ERISA are the highest known to the law. ◦ Conflicts can not be mitigated through disclosure. ◦ Must eliminate conflict or meet conditions of a PTE. Administration’s campaign to reduce conflicts. ◦ Proposal to change “fiduciary” definition to include more consultants and advisors. ◦ Would impose ERISA fiduciary standard on consultants and advisors who do not meet current “fiduciary” definition. ◦ Would require new segment of providers to eliminate conflicts or comply with PT exemption.

5 DOL’s Agenda on “Fiduciary” Definition DOL Unified Agenda (Dec. 7, 2009) ◦ Announces that it will be publishing proposed reg’s on “fiduciary” definition. ◦ Will change “investment advice” definition used to determine fiduciary status of provider. DOL Fact Sheet on Proposal ◦ Need to re-examine types of advisory relationships that should be subject to fiduciary standards. ◦ Fact Sheet specifically cites pension consultants and financial asset appraisers. ◦ DOL is concerned that current definition allows advisers from whom plans expect impartial advice to evade fiduciary responsibility. ◦ Current definition has a 5-part test for fiduciary “investment advice.”

6 What Does It Mean to be a Fiduciary? Statutory definition – ERISA 3(21)(A)(ii) ◦ Any person who renders investment advice for compensation is a fiduciary. DOL definition of “investment advice” : ◦ Advice on value or advisability of investments, ◦ that is provided a regular basis, ◦ pursuant to a mutual agreement or understanding, ◦ that such services will serve as a primary basis for investment decisions, and ◦ that individualized advice will be based on the particular needs of the plan. DOL definition of investment advice is more narrow than federal securities law definition.

7 Potential Implications Implications of broader “fiduciary” definition. ◦ Dovetails with initiatives to improve transparency. ◦ Broader definition increases impact of DOL’s other mandates, including PT rules. If regulatory change goes into effect, potential impact on providers: ◦ Need to adopt fee-leveling. ◦ Need to change nature of services so that they are not deemed to include fiduciary advice. ◦ Eliminate conflicts.

8 New Fiduciary Standards Under Dodd-Frank Act of 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act of ◦ Requires SEC to study standards of conduct for brokers and RIAs. ◦ Empowers SEC to impose fiduciary standard on brokers. Financial advisors who are non-fiduciary brokers are currently subject to a duty of suitability only. ◦ SEC rulemaking may impose new disclosure obligations and fiduciary standards on brokers. ◦ DOL rulemaking may also impact brokers advising plans in a non-fiduciary capacity.

9 Target Date Funds

10 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%.

11 Administration’s Proposals for TDFs Improving transparency of TDFs and other default retirement investments. DOL and SEC at Senate Special Committee on Aging hearing on TDFs (Oct. 28, 2009). DOL’s new guidance on TDFs. ◦ DOL announces proposal for QDIA regulations. ◦ Investor Bulletin jointly released by DOL and SEC. ◦ “Best practices” fiduciary checklist is pending. SEC proposal for TDF advertising materials. ◦ If name has target date, “tag line” disclosure needed. ◦ Advertising must include glide path information.

12 Conflicts of Interest in TDFs Conflicts arise when a “fund of funds” invests in affiliated underlying funds. ◦ Fees are payable to underlying fund managers. ◦ TDF uses affiliated underlying funds for every single asset class. Conflicts regarding mix of funds also exist. ◦ Equity funds typically pay higher fees. ◦ Certain 2010 TDFs invested up to 68% of assets in underlying equity funds. TDF-related conflicts found in mutual funds would not be permitted if fund managers were subject to ERISA.

13 Fund Managers Are Exempt from ERISA ERISA Section 401(b)(1) When a plan invests in a security issued by a mutual fund, “the assets of such plan shall be deemed to include such security but shall not, solely by reason of such investment, be deemed to include any assets” of such fund. ERISA Section 3(21) A plan’s investment in a mutual fund “shall not by itself cause such [fund] or such [fund’s] investment adviser” to be deemed a fiduciary. Combined effect of these provisions is to create a carve-out from ERISA’s fiduciary requirements for fund managers.

14 Are Mutual Fund Managers Ever Subject to ERISA? Fund managers are not automatically deemed to be fiduciaries. ◦ But can they be ERISA fiduciaries in certain circumstances? ERISA Section 401(b)(1) When a plan invests in a security issued by a mutual fund, “the assets of such plan shall be deemed to include such security but shall not, solely by reason of such investment, be deemed to include any assets” of such fund. ERISA Section 3(21) A plan’s investment in a mutual fund “shall not by itself cause such [fund] or such [fund’s] investment adviser” to be deemed a fiduciary.

15 Request for DOL Guidance Firm requested clarification on scope of exemption for TDF mutual fund managers. ◦ Adv. Op A on behalf of Avatar Associates. ◦ DOL declined to rule that the TDF mutual fund managers should be viewed as fiduciaries. Implications of DOL guidance ◦ Plan sponsors are alone in their fiduciary obligation. Fiduciary duty to evaluate plan’s QDIA. ◦ Participants responsible for default allocation choice. ◦ Plan sponsors must ensure QDIA is prudent choice. ◦ Must ensure TDF’s underlying investments are appropriate and monitor TDF on ongoing basis.

16 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. Senator Kohl’s proposal differs from DOL approach to improve disclosures to employers and participants.

17 Automatic IRA Legislation

18 Automatic IRA Legislation Proposed Automatic IRA Act of 2010 introduced in both Senate and House. Senate version introduced on Aug. 6, ◦ After phase-in period over 4 years, employers with 10 or more employees must set up Auto IRAs. ◦ Covers all employees who are age 18 with 3 months of service. ◦ Choice of Traditional or Roth IRA (Roth is default).

19 Senate Version of Automatic IRA Legislation (cont’d) Investment provisions ◦ Investment firms not required to sell Auto IRAs. ◦ 3 investment options only, which must be low-cost. Noncompliance results in $100-per-employee penalty. New tax credit for small employers of $250 for start-up costs. ◦ $1,000 maximum start-up tax credit for small employers establishing 401(k) plans.

20 House Version of Automatic IRA Legislation House version introduced on Aug. 10, Differences from Senate version. ◦ All employers with 10 or more employees are immediately covered (and no phase-in over 4 years). ◦ Default choice for employee is Traditional IRA (and not Roth IRA). ◦ 3 investment options for Auto IRAs are somewhat different than in Senate version.

21 Keeping Up With DC Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, MA Tel: (617) Fax: (617) Website: A