1. Marcia S. Wagner, Esq. State & Federal Threats to the Private Retirement Plan System

2. 0 Cutting back tax incentives Proposals for competing systems Impact of healthcare reform 2

3. Limiting Tax Cost of Retirement Plans Impact of retirement plans on federal deficit ◦ DC/401(k) $61 billion (2015) $414 billion (2015 – 2019) ◦ DB $42 billion (2015) 235 billion (2015 – 2019) Tax reform Pension system reform 3

4. Limiting Contributions & Benefits 2014 Plan limitations that can be reduced to limit deficit: ◦ Annual additions from all sources - $52,000 ◦ Elective deferrals - $17,500 ◦ Plan sponsor deduction - 25% participant compensation ◦ Compensation limit to determine benefits/contributions - $260,000 Proposed Tax Reform Act of 2014 − Freezes DC limits until 2024 ‒ $63.4 billion revenue gain over 10 years ‒ Additional $144 billion from treating half of 401(k) deferrals as Roth 4

5. Administration Proposal to Cap Lifetime Contributions Obama FY 2015 proposed $3.2 million cap on aggregate lifetime contributions Cap to vary based on age Annual calculations Intent: limit payouts to $210,000/year Double tax if prohibited amount not withdrawn 5

6. Administration Proposal to Limit Value of Tax Deductions Obama proposal limiting tax deductions for plan contributions ◦ Maximum tax rate: 39.6% ◦ Tax deduction for 401(k) contributions limited to 28% ◦ 11.6% tax on employer & employee plan contributions - High earners only - Basis adjustment for extra tax 6

7. Tax Reform Proposals National Commission on Fiscal Responsibility. 20/20 Cap: limits contributions to lesser of $20,000 or 20% compensation Maximum contribution: $20,000 Brookings Institution Tax all employer and employee contributions Contribution limits would not change Flat rate refundable tax credit deposited to retirement savings account 7

8. Consequences of Cutting Tax Incentives Employer Reaction ◦ Fewer new plans ◦ Termination of existing plans ◦ Reduced employer contributions High Earners ◦ Diversion of retirement funds to insurance and tax-exempt bonds Low Wage Workers ◦ Lower contributions 8

9. Summing Up Tax Reform Reducing tax incentives will shrink system Lower contributions result at all income levels if tax exclusions reduced 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 Proposed Tax Reform Act of 2014 Contains provision similar to Administration’s general limit 9

10. . Cutting back tax incentives Proposals for competing systems Impact of healthcare reform 10

11. Background Current private pension system ◦ Half workers have no plan ◦ Plans have low savings rates and hidden costs ◦ Fewer than half of workforce will have adequate retirement income Role of policymakers ◦ Consensus on need for default mechanisms ◦ Beyond auto-enrollment and auto-escalation:  Required contributions  Pooling of assets  Government control of investments  Subsidized investment returns 11

12. Administration Initiatives to Increase Retirement Savings Through IRAs Administration pushing automatic IRAs featuring: ◦ 3% default contribution rate ◦ Choice of traditional pre-tax IRA or after- tax Roth ◦ Multiple alternatives for selecting IRA provider ◦ Government designated default investments 12

13. MyRA Initiative ◦ Starter program does not require legislative authorization ◦ Contributions to Roth accounts ◦ Permits small investments ($25 / $5) ◦ Low rate of return from Treasury bonds ◦ Maximum $15,000 balance 13

14. Pension System Reform - Federal Level USA Retirement Funds USA Retirement Funds proposed by Sen. Tom Harkin in 2014 Harkin “report” in July 2012 proposes new retirement system -Automatic/universal enrollment required by employers with no plan -Regular stream of income starting at retirement age -No lump sum withdrawals -Financed by employee payroll contributions & government credits - Privately managed investment by new entities: USA Retirement Funds -Limited employer involvement; no fiduciary responsibility -Unspecified level of required employer contributions. -Employees can increase/decrease contributions or opt out. 14

15. Proposed Expansion of Federal Thrift Savings Plan Federal Thrift Savings Plan would be opened to workers without private plan access Disincentive created to establish private employer plans Question whether administrative costs to be passed on to participants, employers or taxpayers ◦ Enrollment ◦ Processing elections ◦ Fund transfers ◦ Accounting 15

16. 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 ° Employer fiduciary responsibility Participation voluntary but withdrawal liability assessed on terminating employers Seeks to benefit from economies of scale Funding shortfall would be state responsibility 16

17. ) Pension System Reform: State- Sponsored Initiatives (continued) 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. 17

18. Proposals from Academia Ghilarducci proposal ◦ Eliminate all tax deductions and exclusions ◦ New retirement accounts to be funded with 5% contributions from employers/employees ◦ Pooled investments ◦ Government guarantees return equal to GDP ◦ Distributions limited to annuity beginning at retirement 18

19. SPARK Institute USERSP Proposal Spark Institute Universal Small Employer Retirement Savings Program Eligibility limited to employers with less than 100 employees Pre-approved prototype Auto-enrollment and auto-escalation of contribution levels No discrimination testing Contribution limits lower than 401(k) but higher than IRA Investment options to meet specific criteria ○ Heavy reliance on QDIAs and TDFs ○ Employer duty to monitor Recordkeeping/5500 performed at provider level 19

20. SAFE Retirement Act SAFE Retirement Act - 2013 proposal by Sen. Orrin Hatch Starter 401(k) Plans  Up to $8,000 participant contributions annually  Reduced administration and no discrimination testing  Auto deferrals from 3% to 15%  Employer contributions not required  Tax credit to encourage plan adoption  No pooling of assets  Form of payout controlled by participant 20

21. Summing Up Proposed systemic changes intended to create access for low wage employees Government would replace private employers in system °Mandated benefits °Guaranteed benefits and/or investment results °Creation of new interest group to lobby for expansion of benefits State-level programs may cause breakdown in uniformity of pension laws in effect since ERISA enactment 21

22. Summing Up (Continued) Government influence could drive many advisers out of the retirement industry ◦ Control over choosing investment managers ◦ Influence over allocation of investment assets  Increased possibility of asset misallocation  Funding of favored industries and regions  Heavy investment in government bonds  MyRA example Interesting times 22

23. . Cutting back tax incentives Proposals for competing systems Impact of healthcare reform 23

24. Impact of Healthcare Reform Indirect effects of health care law ◦ Employees ◦ Employers ◦ Plan service providers 24

25. Effect of PPACA on Employees Earlier plan distributions, because employees will not be tied to their jobs in order to maintain health insurance ◦ New investment and liquidity strategies needed Older generation of workers to be replaced more quickly by younger less experienced employees ◦ Lower salaries will result in smaller plan contributions ◦ Some industries could experience higher pay and larger contributions ◦ New generation will be less vested making plans less expensive Low-paid workers will choose health insurance over 401(k) contributions ◦ ADP/ACP problems and issues with discrimination testing may result 25

26. Effect of PPACA on Employers PPACA-mandated healthcare benefits likely to reduce level of employer support for 401(k) plans ◦ Knock on effect of smaller match; smaller employee contributions ◦ Shrinking employee contributions exacerbates discrimination issues PPACA disincentive to maintain 401(k) plan ◦ $ 3000 per head penalty for unaffordable health insurance avoided if cost of single-person coverage not in excess of 9.5% W-2 wages ◦ 401(k) reduction of wages makes avoiding penalty harder PPA 90-day rule for health plan availability can compromise overall plan administration ◦ Delay greater than 90 days for entry into all benefit plans no longer possible ◦ May necessitate enrollment at different times 26

27. PPACA Effect on Retirement Industry Increased competition in healthcare marketplace ◦ Government-regulated exchanges ◦ Reduced brokers’ commissions ◦ Potential expansion of healthcare brokers into retirement plan industry New legislatively-mandated retirement plan models ◦ Reduces/eliminates role of employer ◦ Marketing focus redirected to employees 27

28. Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, Massachusetts 02110 Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com marcia@wagnerlawgroup.com A0129360.PPTX State & Federal Threats to the Private Retirement Plan System