Important Pension Changes From D.C. - What Do You Need to Know ?

Important Pension Changes From D.C. - What Do You Need to Know? Marcia S. Wagner, Esq.

Transforming the Retirement System • Regulatory landscape is changing • DOL rolled out new rules in 2012: • Fee disclosures for plan sponsors • Participant-level fee disclosures • Participant investment advice • 2013 DOL initiatives include: ‒ Tips on selection of target date funds ‒ Inclusion of lifetime income streams in benefit statements ‒ Proposal on conflicts of interest (reproposed definition of fiduciary) • DOL Interaction with White House • Working with White House’s Middle Class Task Force • Coordinated actions to improve retirement security • Judicial change regarding same-sex marriage

1. Fee Disclosures to Participants2. 408(b)(2) Disclosures3. Broader “Fiduciary” Definition4. Default Investments - TDFs 5. Lifetime Income Options6. Overturn of DOMA

DOL Finalizes Participant Fee Disclosure Regulations • DOL issued final regs on Oct. 14, 2010. • DOL press release explained that existing law had not required plans to provide needed information. • New rule requires comparison of plan’s investments. • Types of plans covered • New regs apply to DC plans with participant-directed investments. • Covers plan even if plannot designed to comply with ERISA Section 404(c). • Coverage of participants • New regs apply to all eligible employees.

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.

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

Other Requirements • Info that must be available upon request • Prospectuses, shareholder reports and financial statements provided to plan. • Form of disclosure • 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 regs modify ERISA 404(c) disclosures. • Effective date • Plan years beginning on or after Nov. 1, 2011. • Initial disclosures were due August 30, 2012 for calendar year plans.

Fee Disclosures to ParticipantsPractical Implications To-Do List: • Discuss with plan’s recordkeeper the impact of the new rules on existing fee disclosures. • Meet with participants and review investment and fee information through educational sessions. • If plan sponsor has fee-related concerns, remind plan sponsor that its fiduciary review process can be enhanced

1. Fee Disclosures to Participants2. 408(b)(2) Disclosures3. Broader “Fiduciary” Definition4. Default Investments - TDFs 5. Lifetime Income Options6. Overturn of DOMA

Timing of 408(b)(2) Disclosures Required Deadlines • Disclosure must be made reasonably in advance of starting or renewing services. • Changes to info must be made no later than 60 days after provider becomes aware of change. • Final rule allows recordkeeping platforms and fiduciaries of look-through investments to report changes annually. • Erroneous info will not result in violation if provider has acted in good faith and with diligence. • Errors and omissions must be disclosed within 30 days after coming to light.

Prohibited Transactions and 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, and decide whether to terminate service arrangement, with presumption being termination. Marketing Tip – if 408(b)(2) notice is incomplete, remind plan sponsors of this vendor termination presumption.

Best Practices for Fiduciary Review of Fees • ERISA 408(b)(2) effectively “raises the bar” for fiduciary review of plan fees. • Consider adopting best practices for evaluating fee disclosures. • Establish prudent review process. • Basic Procedural Steps and Principles • Focus on provider’s qualifications and provider’s quality of services (in addition to considering fees). • Conduct reviews regularly. • Consider provider’s total compensation. • Evaluate fees in propercontext. • Document reviews.

Best Practices – Value Proposition and FPS • Consider provider’s value proposition. • Don’t look for provider with cheapest fees. • Make inquiries about service offering. • Evaluate fees in light of services provided. • Adopt a fee policy statement (FPS). • FPS offers procedural discipline for plan fiduciary’s review of fees. • Reviews under FPS should be coordinated with IPS. • FPS itself can help demonstrate procedural prudence.

DOL Campaign to Expose Conflicts • DOL Strategy • Roll out new fee disclosure rules. • Impose fiduciary status on more providers. • Force non-fiduciary advisors to make disclaimers. • DOL releases proposed regson Oct. 21, 2010. • Broadens “investment advice fiduciary” definition. • Withdrawn on September 19, 2011. • To be re-proposed with more input from public. • If you provide investment advice, you are automatically deemed a fiduciary. • DOL current investment advicedefinition based on 5-factor test no longer to apply

Overview of DOL’s Initial Proposal • Existing Definition • Advice may be investment advice if it is a primary basis for plan decisions and given on regular basis. • DOL’s Initial Proposal • Include any advice that may be considered by plan. • May include casual advice or one-time advice. • Non-fiduciary advisors must make disclaimer: (1) advisor is acting as seller of securities. (2) advisor’s interests are adverse to client. (3) advice is not impartial.

Broader “Fiduciary” DefinitionPractical Implications • Non-Fiduciary Advisors • Would need to change service model. • Must disclose they are not providing impartial advice. • Or they could accept fiduciary status and become subject to ERISA. • Reproposed Rule Due in 2013 • Renamed as proposal on conflicts of interest. • New definition to include individualized advice only. • Will be similar in approach to DOL’s initial proposal. • DOL is coordinating with SEC regarding prohibited transaction exemptions to accompany expanded fiduciary exposure.

Broader “Fiduciary” DefinitionPractical Implications • DOL proposal likely to pressure advisors to provide fiduciary services for level fees. • Advisors unwilling to serve plan clients on these terms may be forced out of retirement space. • Advisors, especially non-fiduciaries, should re-evaluate business model for plan clients. • Explore working with recordkeeping platforms that have ability to offer level payouts. • Explore use of ERISA fee recapture accounts to ensure advisor retains level fee only. • Consider becoming “dual registrant” and charge level asset-based fee as RIA. • No easy “one size fits all” solution for firms.

Background on Target Date Funds • Popular default investment vehicle for 401(k) plans. • Typically, formed as open-end investment companies registered under Investment Co. Act. • Defining characteristic – “glidepath” which determines overall asset mix of fund. • Performance issues in 2008 raise concerns, especially for near-term TDFs. • Average loss for TDFs with a 2010 target date was -25%. • Individual TDF losses as high as -41%.

Recent Developments for TDFs • SEC proposal for TDF advertising materials issued June 2010: • If fund name refers to target date, “tag line” disclosure needed. • Advertising must include glidepath information. • Two part DOL proposal on TDF disclosures for participants issued November 2010: • QDIA regs issued under PPA of 2006 expanded. • Participant-level fee disclosure regs that were finalized on Oct. 14, 2010 and became effective in 2012.

Part I - DOL Proposed Changes to QDIA Regs • Background on QDIA Regs • Participant, not sponsor, deemed to direct investment to default fund if QDIA requirements are met. • Default investment must be a QDIA, and QDIA notices must be provided to participants. • Proposal would change QDIA notice for TDFs. • Explanation and illustration of TDF’s glide path. • Relevance of target date (e.g., 2030) in TDF name. • Disclaimer that TDF may lose money after retirement. • New rule would change QDIA notice even if default investment not a TDF.

Part II- DOL Proposed Changes to Participant-Level Fee Disclosure Regs • Background (recap) • Effective 2012, new rules require disclosure of plan-related fees and annual comparative chart for plan’s investments. • DOL proposes change to annual comparative chart for TDFs (even if not a QDIA) • Must include appendix with additional TDF info. • Same info as required for QDIA notice. • Proposal not finalized. • Informal follow-up guidance from DOL • TDF prospectus is unlikely to satisfy QDIA notice and annual comparative chart requirements, as proposed. • DOL will not provide “model” target date disclosures.

Conflicts of Interest in TDFs • Conflicts arise when a “fund of funds” invests in affiliated underlying funds. • Conflicts are permitted because fund managers are carved out from ERISA’s fiduciary requirements. • Are fund managers ever subject to ERISA? • Firm requested clarification on scope of carve-out. • In Adv. Op. 2009-04A (Avatar Associates), DOL declined to rule that the TDF managers are fiduciaries. • Implications of DOL guidance • Plan sponsors are alone in their fiduciary obligation. • Must ensure TDFs (and underlying funds) are appropriate plan investments.

DOL Tips for Selecting TDF DOL issues tips in February 2013 • Start evaluation process by examining TDF prospectus • Question TDF providers • Match TDF features (e.g. glidepath) to plan objectives / demographics • Check time of most conservative investment allocation • Determine if TDF fees justified (overall fee and underlying fund fees) • Consider suitability of custom TDF • Communicate TDF investment philosophy to employees • Periodically check for changes in TDF characteristics

TDF as Default Investment Practical Implications • Provide meaningful TDF disclosures to participants as a “best practice” right now. • Provide key information about TDF’s glidepath, landing point and potential volatility. • Also facilitate sponsor’s prudent review of the plan’s TDF series. • Assist in the fiduciary review of the “fund of funds” structure, glidepath, underlying funds and risk. • Special review of TDFs for participants in or nearing retirement (e.g., 2015 TDF).

Retirement Security and Annuitization • Obama Administration believes lifetime income options facilitate retirement security. • Initiative to reduce barriers to annuitization of 401(k) plan assets. • 2010 RFI focuses on these issues: ◦ participant education, ◦ disclosure, ◦ tax rules, ◦ selection of annuity providers, ◦ 404(c) and ◦ QDIAs. • Recognition that utility of default annuities may be limited because of each retiree’s unique needs and difficulty in reversal once annuitized.

IRS Tax Relief for Lifetime Income Options • IRS proposal would relax required minimum distribution (“RMD”) rules ‒ Longevity annuities provide income stream for later in life. ‒ But RMD rules mandate benefit commencement at age 70 ½. • 2012 Proposed Regulations • Exception from RMD rules for longevity annuity investments. ◦ Investment capped at $100,000 or 25% of account. ◦ Payment must start no later than age 85. ‒ Split distribution consisting of annuity and lump sum approved. •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 but limited to DB plan of same employer. • Relief for DC Plans With Deferred Annuities - Rev. Rul. 2012-3 • 401(k) plans typically exempt from onerous spousal death benefit rules. ‒ Ruling confirms that 401(k) plans with deferred annuities can still avoid them.

DOL Proposal for Disclosure of Account’s Annuity Value • DOL 2013 Proposed Rulemaking would require benefit statements to include: ◦ Participant’s current account balance and balance projected to retirement; ◦ Lifetime income streams derived from account balance and projection. • Critical parts of benefit statement proposal are the methodology and assumptions used to project account balances and convert them to lifetime payments. ‒ General rule would allow development of best practices. ‒ Safe harbors may force plans to rely on specific DOL assumptions: ◦ Contributions will continue to normal retirement age at current annual dollar amount increased by 3% per year; ◦ Investment returns of 7% per year; and ◦ Discount rate of 3% to bring calculation back to current dollars.

DOMA Ruled Unconstitutional • U.S. v. Windsor holds definition of “marriage” cannot be restricted to legal union between one man and one woman. • Same-sex couples residing in states recognizing same-sex marriage gain right to be treated as married for federal tax and ERISA purposes. • IRS Revenue Ruling 2013-17 extends recognition to same same-sex married partners residing in a state that does not recognize validity of same-sex marriages. ‒ Eliminates need to track same-sex couples from state to state to determine if married. ‒ IRS position not applicable to state taxation or other state laws in state not recognizing same-sex marriage. ‒ Ruling not applicable to civil unions or domestic partnerships. • DOL Technical Release 2013-04 follows IRS uniformity rule by recognizing same-sex marriages that are valid in state where celebrated, regardless of couple’s current state of domicile.

Effective Date of New Same-Sex Rule • Uniformity ruling to be applied prospectively as of September 16, 2013. ‒ If plan provides for default distribution to spouse of participant, plan must pay benefit to same-sex spouse if participant dies on or after September 16. ‒ Applicability of Windsor before September 16, 2013 remains unclear. • IRS to provide future guidance on retroactivity. • Surviving same sex-spouse could sue for benefits even if IRS or DOL rule that Windsor not retroactive.

Windsor Effect on Retirement Plans • Spousal Death Benefit – same-sex spouse to receive benefit unless spouse provides written consent as to non-spouse beneficiary. • Spousal Annuity - same-sex spouse entitled to 50% or 75% J&S annuity. • Plan Loans – same-sex spouse must consent to plan loan unless plan provides that same-sex spouse is participant’s designated beneficiary. • QDROs – domestic relations orders now enforceable by same-sex spouse if state will grant order. • Hardship Distributions – rules allowing distributions for medical expenses, tuition or funeral expenses of spouses will apply to same-sex spouses. • Required Minimum Distributions – same-sex spouse of participant in tax-qualified retirement plan may defer payment of death benefits. • Rollovers – same-sex spouse entitled to receive death benefit no longer limited to rolling over only to inherited IRA.

Windsor Effect on Welfare Plans • Health Plan Coverage – Same-sex spouse coverage now tax-free. • Pre-tax Reimbursement Arrangements - Pre-tax dollars can now be used for health, dental and other medical expenses of a same sex spouse under flexible benefit plans. • COBRA – Same-sex spouse will be entitled to up to 36 months of health coverage if participant terminates employment or if there is a divorce or legal separation. • Dependent Care – Pre-tax dollars can now be used to pay for the care of a same-sex dependent of a same-sex spouse.

Practical Steps Pending Further Guidance • Communicate the Supreme Court’s decision to employees. • Identify all past and present employees who are in a same-sex marriage. • Identify those plan provisions that may be affected by a changed definition of the terms “spouse”, “marriage” and “husband and wife”. • Prepare plan amendments removing any requirement limiting spouse/marriage to members of the opposite sex.

Important Pension Changes From D.C. - What Do You Need to Know?Marcia S. Wagner, Esq.99 Summer Street, 13th FloorBoston, MA 02110Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.commarcia@wagnerlawgroup.com A010390

Important Pension Changes From D.C. - What Do You Need to Know ?