Important Pension Changes From D.C. - What Do You Need to Know ? Marcia S. Wagner, Esq. 1.

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

Marcia S. Wagner, Esq.

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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

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

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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.

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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.

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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

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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.

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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

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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.

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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.

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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 proper context.– Document reviews.

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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.

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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 regs on 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 advice definition based on 5-factor test no longer to apply

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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.

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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.

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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.

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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%.

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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.

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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.

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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.

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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.

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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

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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).

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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

Marcia S. Wagner, Esq.

99 Summer Street, 13th FloorBoston, MA 02110

Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com

[email protected]

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Important Pension Changes From D.C. - What Do You Need to Know ? Marcia S. Wagner, Esq. 1.

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