1. What The Next Few Years Hold for 401(k) Plans and Retirement Savings and What It Means for Advisors and Their Clients Marcia S. Wagner, Esq. THE WAGNER LAW GROUP A PROFESSIONAL CORPORATION

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  Existing tools to overcome employee inertia Auto-Enrollment Auto-Escalation  Plan Sponsor and Advisor Initiatives Re-Enrollment Re-Allocation

5. 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  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

6. 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

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

8. Introduction  Policymakers focusing on protection for investment returns.  Regulatory Agenda –Improving fee transparency. –Broadening “fiduciary” definition.

9. Fee Transparency  Policymakers want plans to get fair price for services.  Plan Sponsor-Level Disclosure Regs. –Effective July 1, 2012. –Providers must disclose direct & indirect (“hidden”) compensation.  Participant-Level Disclosure Regs. –Effective August 30, 2012 (for calendar year plans). –Compare investment options and provide quarterly fee disclosures.  Disclosures expected to drive down fees.

10. Proposal to Expand Fiduciary Definition  ERISA’s Functional Fiduciary Definition. –Fiduciary status contingent on offering investment advice under 5-factor test –Advice is fiduciary only if it is a primary basis for plan decisions and given on regular basis –Ellis v. Rycenga Homes  DOL’s Initial Proposal –Advice is fiduciary 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 ◦ 2013 DOL opinion approves typical expense account

11. Summing Up  Administration has launched initiatives –Fee disclosures for plan sponsors and participants –Pushing boundaries of fiduciary status  Pressure on Fees –Interest in levelized fee arrangements –Downward pressure on 401(k) pricing

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

13. Administration’s 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.

14. Removing Regulatory Obstacles to Plan Annuities  IRS proposal would relax required minimum distribution (RMD) rules for plans –RMD rules mandate start at age 70 ½ but longevity annuities provide income stream for later in life  Proposed Regulations. –Exception from RMD rules for longevity annuity investments –Investment capped at $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

15. 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 opt out).

16. Education and Disclosures for Participants  GAO Recommendations –Update DOL’s “investment education” guidance to cover decumulation –But DOL is concerned about conflicts –Guidance likely to restrict sales pitches  Lifetime Income Disclosure Act –Plan to show account balances converted into guaranteed monthly amount –Encourages participants to think about retirement paycheck for life

17. DOL Proposal for Lifetime Income Disclosures Advance Notice of Proposed Rulemaking Lifetime income illustration in participant statements. Must provide estimated income streams based on (1) current account and (2) projected account at NRA. Safe Harbor for Projected Account Assume 7% investment return. Assume current contribution level, with 3% increase. Use 3% discount rate to convert to current dollars.

18. Lifetime Income Illustration Illustration for 50-Year Old Participant Account Estimated Monthly Balance Lifetime Payment Current Account (2014) $125,000.00 $ 700.00 Projected Amount (2029) $500,000.00 Projected Account (Current Dollars) $321,000.00 $1,800.00 ● Required Disclosures/Disclaimers - Explanation of assumptions - Estimates are not benefit guarantees

19. 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  Practical impact on participants would be shown by implementation of regulations to be proposed regarding lifetime income disclosures –Debate on use of annuities as QDIA likely to follow

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

21. 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

22. Tax Reform 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

23. Tax Reform (continued)  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

24. Administration Tax Reform Proposals Obama FY 2015 proposed $3.2 million cap on aggregate lifetime contributions − Cap to vary based on age. − Double tax if prohibited amount not withdrawn.  Obama proposal limiting tax deductions for plan contributions 11.6% tax on employer & employee plan contributions High earners only Basis adjustment for extra tax

25. Pension System Reform – Federal Level USA Retirement Funds USA Retirement Funds proposed by Sen. Tom Harkin in January 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 and no fiduciary responsibility -Unspecified level of required employer contributions. -Employees can increase/decrease contributions or opt out.

26. Pension System Reform – Federal Level 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 5% –Government sponsors may adopt SAFE Retirement Plan  Annual purchase of fixed annuities for participants  Insurers to be selected by bidding process  Improve funding and security but pays smaller benefits –Restores jurisdiction over prohibited transactions to IRS

27. 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

28. 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.

29. Summing Up  Significant Transformation of Private Retirement System Possible.  Tax Reform Reducing tax incentives will shrink system Lower contributions result at all income levels if tax exclusions cut 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

30. Summing Up (continued) − 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 °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 / needs Interesting Times ……

31. Marcia S. Wagner, Esq. THE WAGNER LAW GROUP A PROFESSIONAL CORPORATION 99 Summer Street, 13 th Floor Boston, MA 02110 Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com marcia@wagnerlawgroup.com A0118788.PPTX