1. The Politics of Retirement A Washington Update Marcia S. Wagner, Esq.

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 Pension Protection Act of 2006 Auto-Enrollment Auto-Escalation Plan Sponsor and Advisor Initiatives Re-Enrollment Re-Allocation Automatic IRA push by Administration Key Features ◦Default contribution rate set at 3% ◦ Employees to choose pre-tax traditional IRA or after-tax Roth ◦ Multiple alternatives available for selecting Auto IRA provider

5. 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.

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

7. Introduction Policymakers focusing on protection for investment returns. Regulatory Agenda –Improving fee transparency. –Encouraging participant-level advice. –Broadening “fiduciary” definition.

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

9. Fee Litigation and Case Law 2006 Wave of 401(k) Fee Litigation –Alleged breach of fiduciary duty to monitor indirect compensation. –Trial courts cautious and did not dismiss lawsuits. Hecker v. Deere –Case dismissed on “efficient markets” theory. Tussey v. ABB, Inc. –Plan sponsor held liable for excessive fees. 408(b)(2) Fee Disclosures –Will force plan sponsors to monitor and benchmark all compensation –May support new theories of 401(k) litigation. –Monetary settlements to date have been significant.

10. Encouraging Participant Advice Many participants unwilling or unable to make investment decisions. Advisors receiving variable fees (e.g., 12b-1) generally cannot provide fiduciary advice. DOL provides fiduciary relief. Advice based on computer model. Level fee for affiliate providing advice. DOL expected to work with private sector in providing exemptions.

11. Proposal to Expand “Fiduciary” Definition ERISA’s Functional Definition. –If fiduciary advice provided, fiduciary status arises. 5-factor test governs. –Constitutes fiduciary advice only if it is a primary basis for plan decisions and given on regular basis. –Ellis v. Rycenga Homes. DOL’s Initial Proposal. –Constitutes fiduciary advice 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 holds that typical expense account does not violate ERISA prohibited transaction rules.

12. Summing Up Administration has launched initiatives. –Fee disclosures for plan sponsors and participants. –Tried to encourage participant-level advice. –Pushing boundaries of fiduciary status. Pressure on Fees. –Interest in levelized fee arrangements. –Downward pressure on 401(k) pricing.

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

14. 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.

15. Removing Regulatory Obstacles to Plan Annuities IRS proposal would relax required minimum distribution (RMD) rules for plans. Longevity annuities provide income stream for later in life. –But RMD rules mandate start at age 70 ½. 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.

16. 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 they opt out).

17. 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. –Would require plan to show account balances as if converted into guaranteed monthly payments. –Would also encourage participants to think about retirement paycheck for life. DOL 2013 Proposed Rulemaking would require benefit statements to include: ˗ Participant’s current account balance and balance projected to retirement; and ˗ Lifetime income streams derived from account balance and projection.

18. 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. –But debate on use of annuities as QDIA likely to follow

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

20. Tax Cost of Retirement Plans Impact of Pan Contributions on Federal Deficit –$70.2 Billion Annually –$361 Billion 2011 – 2015 Tax Reform Pension System Reform

21. Tax Reform 2013 Plan Limitations that Can Be Reduced to Limit Deficit: –Annual Additions from All Sources - $51,000. –Elective Deferrals - $17,500. –Plan Sponsor Deduction - 25% Participant Compensation. –Limit on Compensation Base to Determine Benefits/Contributions - $255,000. Obama FY 2014 proposed $3 million cap on aggregate lifetime contributions. − Cap to vary based on age. − Double tax if prohibited amount not withdrawn.

22. Tax Reform (cont’d) National Commission on Fiscal Responsibility. 20/20 Cap: Limits Contributions to Lesser of $20,000 or 20% Compensation. Brookings Institution. Tax All Employer and Employee Contributions. Refundable Tax Credit Deposited to Retirement Savings Account. Obama Administration proposals to raise revenue. 11.6% tax on employer & employee plan contributions. High earners only. Basis adjustment for extra tax. Repeal of dividends paid deduction for ESOP sponsors. $25 billion in PBGC premium increases.

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

24. Pension System Reform: State- Sponsored Initiatives (cont’d) 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.

25. Pension System Reform: Proposals at Federal Level USA Retirement Funds proposed by Sen. Tom Harkin Sen. Harkin issues “report” in July 2012 that proposes new retirement system: -Automatic and universal enrollment required by employers with no plan. -Regular stream of income starting at retirement age. -No lump sum withdrawals. -Financed by employee contributions through payroll & government credits -Privately managed investment by new entities called “USA Retirement Funds”. -Limited employer involvement and no fiduciary responsibility. -Unspecified level of required employer contributions. -Employees can increase/decrease contributions or opt out. Similarities to proposals for state-covered pensions of private-sector workers. Would include enhancements to Social Security. Text of bill expected in 2013.

26. Pension System Reform: Proposals at Federal Level SAFE Retirement Act proposed 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. Summing Up Significant Transformation of Private Retirement System Possible. Tax Reform. Reducing tax incentives will shrink system. ° Lower contributions at all income levels result if tax exclusions cut back. 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

28. Summing Up (cont’d) − Systemic Changes Intended to create access for low-wage employees Government will 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 and needs Interesting Times ……

29. Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, MA 02110 Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com marcia@wagnerlawgroup.com A101432