The Politics of Retirement

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. Increasing Savings • Protecting Returns • Decumulation Planning • 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 IRAs

5. Automatic IRAs • Legislative History • Auto IRAs proposal appears to be partisan. • But had bi-partisan support in prior years. • Increasing retirement plan coverage is shared policy goal. • Three Key Features • Default contribution rate set at 3%. • Post-tax Roth IRA would be default, but employee could choose pre-tax Traditional IRA. • Multiple alternatives available for selecting Auto IRA provider.

6. Prospects for Auto IRAs • Objections to Auto IRAs • Burdensome mandate for small businesses with more than ten employees. • Federal government control overs assets. • Role of private sector. • Partisan politics will continue in short term. • But bipartisanship support typically emerges on retirement issues.

7. 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.

8. Increasing Savings • Protecting Returns • Decumulation Planning • Tax Reform

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

10. 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 are expected to drive down fees.

11. 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.

12. 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.

13. Proposal to Broaden “Fiduciary” Definition • ERISA’s Functional Definition • If fiduciary advice provided, fiduciary status arises. A 5-factor test. • It is 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 • It is 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.

14. 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 .

15. Increasing Savings • Protecting Returns • Decumulation Planning • Tax Reform

16. 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.

17. Removing Regulatory Obstacles to Annuities in Plans • 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. • Limit investment to $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.

18. 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).

19. 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.

20. 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.

21. Increasing Savings • Protecting Returns • Decumulation Planning • Tax Reform

22. 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

23. 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

24. 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 - 7% Tax on Employer & Employee Contributions • High Earners Only

25. 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

26. 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

27. Pension System Reform: Federal Level • New retirement system proposed in “report” issued by U.S. Sen. Tom Harkin • Automatic and universal enrollment required by employers that do not offer a plan • Regular stream of income starting at retirement age • No lump sum withdrawals • Financing through payroll system by employee contributions/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 • Text of bill expected in 2013

28. Systemic Reform - Other Proposals • Unitary Defined Contribution System espoused by John Bogle, Vanguard founder • Consolidation of all retirement savings programs • Federal Retirement Board controls system °Limit distributions and loans to prevent system leakage °Limit number of investment options concentrating on low-cost funds • ERISA fiduciary standards extended to service providers / money managers • Spark Institute Universal Small Employer Retirement Savings Program • Eligibility limited to employers with fewer than 100 employees • Pre-approved prototype °Auto-enrollment and escalation of contribution levels °No discrimination testing °Contribution limits lower than 401(k) but higher than IRA • Investment options to meet specific criteria • Recordkeeping/5500 performed at service provider level

29. Systemic Reform – Other Proposals (cont’d) • Proposals by Academics • Teresa Ghilarducci(The New School) - eliminate current tax breaks and use savings to make 5% contribution to all employees - mandatory contributions and guaranteed investment return equating to defined benefit approach, supplementing Social Security - participants in existing plans could continue in such plans if contributions are 5%, no early withdrawals, mandatory conversion to annuity on retirement - people not in employer plans would be mandated into Guaranteed Retirement Accounts (“GRAs”) with mandatory 2.5% employer and employee contributions; investments pooled and professionally managed to reduce fees. • Meir Statman (Santa Clara University) – mandatory employer and employee contributions but investment controlled by account owner equating to defined contribution approach, like the current British and Australian retirement structures.

30. 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

31. 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 ……

32. Thank you. Marcia S. Wagner, Esq. 99 Summer Street, 13th Floor, Boston, MA 02110 Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com marcia@wagnerlawgroup.com A0091230.PPT