1. What is New in DC: The Most Critical Items to the Obama Administration
Marcia S. Wagner, Esq.

2. What’s up in Washington?
Outlook on U.S. Private Retirement System
Retirement security is a major priority.
Pushing for reform through Congress and DOL.
White House Task Force on the Middle Class
Newly created by President Obama in 2009.
Chaired by Vice President Biden, and includes Secretaries of Labor and Treasury.
Used to coordinate Administration’s agenda.
Diverse, broad initiatives set by White House
Expected to impact plan sponsors, participants and providers.

3. Improving the DC Savings System
Obama Administration’s proposals target 401(k) plans and providers.
Proposals are in the form of DOL regulations.
Blurring of lines between White House and DOL.
Coordinated actions to improve retirement security.
Washington is focusing on:
1. Broader “fiduciary” definition
2. Fee disclosures to participants
3. Participant investment advice
(b)(2) disclosures from service providers
5. Default investments
6. Lifetime income options
7. Automatic IRA legislation

4. 1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3
1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3. Participant Investment Advice (b)(2) Disclosures 5. Default Investments 6. Lifetime Income Options 7. Automatic IRA legislation

5. 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.
DOL releases proposed reg’s on October 21, 2010.
Proposed reg’s broaden existing regulatory definition of “investment advice fiduciary.”

6. Existing Definition of Investment Advice
DOL’s current definition for investment advice is based on 5-factor test:
Advice on value or advisability of investments,
that is provided on 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. 2 Specific Changes to Existing Definition
Existing definition of investment advice requires:
Mutual understanding or agreement that advice will serve as primary basis for plan investment decisions.
Advice provided on regular basis.
DOL proposal for new investment advice definition merely requires:
Any understanding or agreement that advice may be considered for plan investment decisions.
Advice no longer needs to be provided on regular basis.

8. Safe Harbor for Avoiding Fiduciary Status
Proposed reg’s introduce new safe harbor.
Non-fiduciary advisor must be able to demonstrate that plan client knows, or reasonably should know….
…that advice is being made by advisor in its capacity as purchaser or seller of securities, and…
…that advisor is not providing impartial investment advice.
2 specific activities are exempted under safe harbor.
Non-fiduciary “investment education” under DOL Interpretive Bulletin 96-1.
Platform provider’s marketing of investment alternatives to plan (and providing related info) if it discloses that it is not providing impartial advice.

9. Potential Impact on Providers
Financial advisors - brokers
Brokers would need to change their service model and re-define their role.
If serving non-fiduciary role, must disclose they are not providing impartial advice.
If serving fiduciary role, must avoid variable compensation (and prohibited transactions).
To eliminate conflict of interest, broker could dual-register as RIA and charge a level, asset-based fee.
Other service providers
Platform providers must disclose they do not provide impartial advice (to avoid fiduciary status).
TPAs that provide advisory services in exchange for variable compensation must also provide disclaimer.

10. Outlook for DOL Proposed Reg’s
Proposal is consistent with Administration’s aim to reduce conflicts.
If adopted, many advisors would be forced to adopt fee-leveling or change nature of advisory services.
Proposed reg’s expected to draw heavy comments.
Written comments may be submitted to DOL on or before January 20, 2011.

11. New Fiduciary Standards Under Dodd-Frank Act of 2010
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
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.
SEC changes would be separate and in addition to DOL changes to ERISA “fiduciary” definition.

12. 1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3
1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3. Participant Investment Advice (b)(2) Disclosures 5. Default Investments 6. Lifetime Income Options 7. Automatic IRA legislation

13. DOL Finalizes Participant Fee Disclosure Regulations
DOL issues final reg’s on Oct. 14, 2010.
Generally consistent with 2008 proposed reg’s.
DOL press release explained that existing law did not require plans to provide necessary information.
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.

14. 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.

15. 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

16. Other Requirements Info that must be available upon request
Prospectuses, shareholder reports and financial statements provided to plan.
Form of disclosure
Separate or combined with SPD and/or statements.
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

17. Potential Impact on Providers
Administrative service providers
New reg’s will impact TPAs and bundled providers.
Automatic delivery of fund prospectuses will no longer be required under ERISA 404(c).
Financial advisors
No special disclosure requirement for fees of brokers receiving indirect compensation only.
RIA fees presumably must be disclosed on annual and quarterly basis as “general administrative” fee.
Plan participants are likely to scrutinize plan’s investments and fees, impacting sponsors and advisors.

18. 1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3
1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3. Participant Investment Advice (b)(2) Disclosures 5. Default Investments 6. Lifetime Income Options 7. Automatic IRA legislation

19. How Can Inv. Advice Be Conflicted?
Advisor recommends funds for 401(k) menu.
Plan sponsor then asks advisor to give fiduciary “investment advice” to participants.
Fiduciary duty requires any investment advice to be in the best interest of participants.
Potential incentive to steer participants to funds with highest fee for advisor (i.e., variable compensation).
ERISA’s prohibited transaction rules.
Unlawful to give conflicted fiduciary advice.
Advice is tainted even if given in good faith.
DOL reg’s for PPA exemption are (1) proposed, (2) finalized, (3) withdrawn, and (4) re-proposed on Feb. 26, 2010.

20. Exemption for Participant Advice
ERISA allows participant-level advice if conditions of PT exemption are met.
Pension Protection Act of 2006 included statutory exemption as a matter of law.
Industry awaits DOL’s interpretive regulations.
Regulatory “rollercoaster ride” ensues:
RFI soliciting info for anticipated reg’s in Dec
Proposed reg’s issued in Aug. 2008, expanding scope of PT exemption.
Reg’s are finalized in last days of Bush Administration.
Obama Administration immediately delays effective date of final reg’s.
Reg’s are withdrawn in Nov
New reg’s are re-proposed on March 2, 2010.

21. Pension Protection Act of 2006
PPA statutory exemption for Fiduciary Advisers (e.g., RIAs, banks, insurers, B-Ds).
Eligible Investment Advice Arrangement must have (1) fee-leveling or (2) computer model certified by independent expert.
Annual audits, notice to participants are required.
DOL’s Field Assistance Bulletin
Interpretive guidance on “fee-leveling.”
DOL states that PPA statutory exemption is clear.
Individual advisor and firm (but not firm’s affiliates) are subject to fee-leveling.
If firm has affiliated funds, advisor can recommend that participants invest in affiliated funds!

22. First Iteration of Reg’s (Withdrawn)
Highly unusual rulemaking by DOL in 2 parts.
1) Proposed interpretive guidance with respect to PPA statutory exemption (with no big surprises).
2) Proposed “class” exemption with softer conditions for providing conflicted participant-level advice!
Fee-leveling (proposed class exemption):
Only individual advisor is subject to fee-leveling!
Firm itself can receive variable compensation (e.g., 12b-1 fees) when advising participants!
Computer model (proposed class exemption):
Once computer model advice has been provided, advisor can follow up with individualized advice.
Follow-up advice is not subject to fee-leveling!

23. Second Iteration of Reg’s (New)
First iteration was finalized on Jan. 21, 2009.
Reg’s in their entirety (including non-controversial interpretive portion) withdrawn on Nov. 20, 2009.
Second iteration unveiled on Feb. 26, 2010.
Similar to interpretive portion under first iteration.
(1) Fee-leveling for individual advisor and firm.
(2) Computer model advice can not be followed by individualized advice.
Computer model can consider (1) fees/expenses, and (2) asset class performance, but not individual fund performance.
- Favors index funds?
- Comment period for reg’s ended on May 5th.

24. 1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3
1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3. Participant Investment Advice (b)(2) Disclosures 5. Default Investments 6. Lifetime Income Options 7. Automatic IRA legislation

25. When Are Service Providers Conflicted?
Plan sponsor is looking for provider of administrative services.
Provider offers two options:
Services ordered a la carte: $10,000.00
Pre-packaged services and menu: $ 4,000.00
Plan sponsor may incorrectly conclude pre-packaged option is best for participants.
Doesn’t realize that provider receives “hidden” compensation from funds and fund managers.
Full compensation may be more than $10,000.
Hidden cost is actually shifted to participants.
Provider has incentive to steer uninformed clients to more profitable option.

26. Retirement Security Initiative
Improving transparency of 401(k) fees.
Administration’s goal is to make sure workers and plan sponsors are getting services at a fair price.
Pushing to finalize DOL’s 2007 proposed reg’s this year.
GAO reports provide political momentum.
Private Pensions: Changes Needed to Provide 401(k) Plan Participants and the DOL Better Information on Fees (Nov. 2006).
Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors (July 2008).
Private Pensions: Conflicts of Interest Can Affect Defined Benefit and Defined Contribution Plans (March 2009).

27. DOL’s Reg. Project Three-pronged project to improve disclosure.
Form 5500: Reg’s finalized and effective from plan year.
Service providers: Interim final 408(b)(2) reg’s published on July 16, 2010.
Participants: Final reg’s released on Oct. 14, 2010.
Rationale for proposed 408(b)(2) reg’s.
DOL efforts to educate plan sponsors about 401(k) plan fees started with Nov’ 97 hearing.
Plan sponsors still not asking the right questions.
DOL will now require providers to furnish the info sponsors should be requesting.

28. Current Requirements for Service Providers
PT rules under ERISA prohibit use of plan assets with respect to many activities.
Fortunately, PT exemption allows use of plan assets to pay for services if:
(1) Contract or arrangement is reasonable, (2) Services are necessary for plan operation, and (3) No more than reasonable compensation.
Current DOL regulations.
Plan must be able to terminate the contract without penalty on reasonably short notice.
Statute and current reg’s do not impose significant burden on service providers.

29. Interim Final 408(b)(2) Regulations
Covered Plans
All pension plans, including defined contribution and defined benefit plans.
Welfare plans and IRA-based plans are not subject to disclosure under the final rule.
Covered Service Providers
Fiduciaries (including fiduciaries to investment products and registered investment advisers).
Providers of recordkeeping and brokerage services.
Providers of accounting, actuarial, legal and other professional services if they receive indirect fees.

30. Required Disclosures Under Interim 408(b)(2) Regulations
Service provider must disclose compensation in writing.
Disclosure must be provided before entering into contract.
Formal contract and disclosure of conflicts of interest are no longer required.
Indirect compensation requires more detailed disclosure.
Service-by-service disclosure of fees is generally not required.

31. Compensation Disclosure Under Interim 408(b)(2) Regulations
Format and manner of disclosure.
Dollar amount, formula, percentage of plan assets, per capita charge, or any other reasonable method.
Whether fees will be billed or deducted and any other manner of receipt must be disclosed.
Compensation paid among providers affiliates and subcontractors.
Generally, compensation of affiliate or subcontractor does not have to be separately disclosed.
However, commissions, soft dollars and 12b-1 fees must be separately disclosed and the payers and recipients identified.

32. Platform Providers and Interim 408(b)(2) Regulations
Special Rules for Platform Providers
Applies to recordkeepers and brokers that make designated investment alternatives available to plan.
Provider must provide basic fee information for each alternative.
Required information includes expense ratios, ongoing expenses (e.g., wrap fees), and transaction fees (e.g., sales charges, redemption fees).
Disclosure obligation can be met by passing through fund prospectus.

33. Timing of Disclosures Under Interim 408(b)(2) Regulations
Timing requirements for disclosures.
Disclosure must be made reasonably in advance of entering into, extending or renewing the service contract.
Changes to information must be made no later than 60 days after the service provider becomes aware of the change.
Erroneous information will not result in a violation if the service provider has acted in good faith and with reasonable diligence.
Errors and omissions must be disclosed within 30 days after coming to light.

34. Prohibited Transactions and Interim 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.
No conflict of interest for fiduciaries.
408(b)(2) disclosure does not cure self-dealing violations.
Outlook
Effective date of the regulations is July 16, 2011, but further changes may be on the horizon.

35. 1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3
1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3. Participant Investment Advice (b)(2) Disclosures 5. Default Investments 6. Lifetime Income Options 7. Automatic IRA legislation

36. 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%.

37. 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.

38. 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.

39. 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.

40. 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.

41. 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.

42. 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.

43. 1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3
1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3. Participant Investment Advice (b)(2) Disclosures 5. Default Investments 6. Lifetime Income Options 7. Automatic IRA legislation

44. 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 issued a 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.

45. 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.
IRS addressed qualification requirements for DC plans in PLR
Variable group annuity investment options
No “surprise” interpretations on age 70 ½ minimum distribution and QJSA rules.

46. Lifetime Income Hearing by Senate Special Committee on Aging
Senate hearing held on June 16, 2010.
The Retirement Challenge: Making Savings Last a Lifetime.
Start of legislative debate on lifetime income options.
DOL and Treasury provide early analysis on RFI concerning lifetime income options.
More than 800 responses to RFI.
Concerns expressed against government takeover of 401(k) plans.
DOL and Senator Kohl clarify that there is no interest in mandating lifetime income options.

47. 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.

48. 1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3
1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3. Participant Investment Advice (b)(2) Disclosures 5. Default Investments 6. Lifetime Income Options 7. Automatic IRA legislation

49. Automatic IRA Legislation Proposed
Automatic IRA Act of 2010 introduced in both Senate and House.
Senate version introduced on Aug. 6, 2010.
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.
Choice of Traditional or Roth IRA (Roth is default).
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, and $1,000 tax credit for 401(k) plans.

50. Automatic IRA Legislation Proposed
House version introduced on Aug. 10, 2010.
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.

51. 1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3
1. Broader “Fiduciary” Definition 2. Fee Disclosures to Participants 3. Participant Investment Advice (b)(2) Disclosures 5. Default Investments 6. Lifetime Income Options 7. Automatic IRA legislation  Effects on Clients

52. How Can I Use this Information?
Final Rules vs. Proposed Rulemaking
Product changes often based on final rules only.
But leveraging your knowledge of current events in Washington can help plan clients.
Employer’s Duty of Prudence
Prudent review process entails consideration of all relevant factors.
If Washington announces investigations in an area, plan sponsors should investigate for their own plans.
Demonstrating Your Expertise
Use knowledge to distinguish your level of service.
Discuss current DOL priorities: (1) conflicts of interest, (2) default investments, (3) lifetime income.

53. Prepare Your Clients Regulatory change is very likely this year.
Retirement security is a priority.
Regulatory changes not subject to Congressional approval.
Nobody likes transitioning to new rules.
New agreements and forms.
New fiduciary procedures and practices.
Stay ahead of the curve.
Ensure clients will not be surprised when change is required.
Incorporate “best practices” now, ahead of when Washington is likely to mandate them in future.

54. What are the “best practices”?
Facilitate prudent review of target date funds.
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., 2010 TDF).
Better education for participants, especially on risk.
Help plan sponsors evaluate “hidden” fees.
Duty to ensure fees paid from plan are reasonable.
All fees must be considered in light of services.
Fee monitoring should be a fiduciary review process, like monitoring the plan’s investment menu.
Required for Form 5500 reporting purposes (beginning with 2009 plan year).

55. What are the best practices? (continued)
Clarifying fiduciary vs. non-fiduciary services.
Policy goal to impose fiduciary standards when there is expectation of impartial advice.
If fiduciary advice (especially to participants) is not intended, be sure to clarify that it is education only.

56. Website: www.erisa-lawyers.com
What is New in DC: The Most Critical Items to the Obama Administration
Marcia S. Wagner, Esq.
99 Summer Street, 13th Floor
Boston, MA 02110
Tel: (617) Fax: (617)
Website: A