Marcia S. Wagner, Esq.

 Outlook on U.S. Private Retirement System
◦
Retirement security remains a major priority.
◦
Pushing for reform through Congress and DOL.
 White House Task Force on the Middle Class
◦
Newly created by President Obama in 2009.
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Chaired by Vice President Biden, and includes
Secretaries of Labor and Treasury.
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Used to coordinate Administration’s agenda.
 Improving the DC Savings System
◦
Obama Administration’s proposals target 401(k) plans and providers.
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Blurring of lines between White House and DOL.
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Coordinated actions to improve retirement security.
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1. Broader “Fiduciary” Definition
2. Fee Disclosures to Participants
3. 408(b)(2) Disclosures
4. Default Investments - TDFs
5. Lifetime Income Options
6. Automatic IRA Legislation
7. A Game Plan for Clients
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
Fiduciary standards under ERISA are the highest known to the law.
◦
Conflicts can not be mitigated through disclosure.
◦
Must eliminate conflict or meet conditions of a PTE.
 DOL’s current definition for investment advice is based on 5-factor test:
◦
Advice on value or advisability of investments,
◦ that is provided on a regular basis,
◦ pursuant to a mutual agreement or understanding,
◦ that such services will serve as a primary basis for investment decisions, and
◦ that individualized advice will be based on the particular needs of the plan.
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
Two Specific Changes Are Proposed
DOL releases proposed reg’s on Oct. 21, 2010.
◦
Proposed reg’s broaden existing regulatory definition of “investment advice fiduciary.”
 Existing definition of investment advice requires:
◦
Mutual understanding or agreement that advice will serve as primary basis for plan investment decisions.
◦
Advice provided on regular basis.
 DOL proposal for new investment advice definition merely requires:
◦
Any understanding or agreement that advice may be considered for plan investment decisions.
◦
Advice no longer needs to be provided on regular basis.
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
Proposed reg’s introduce new safe harbor.
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Non-fiduciary advisor must be able to demonstrate that plan client knows, or reasonably should know….
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…that advice is being made by advisor in its capacity as purchaser or seller of securities, and…
◦
…that advisor is not providing impartial investment advice.
 2 specific activities are exempted under safe harbor.
◦
Non-fiduciary “investment education” under DOL
Interpretive Bulletin 96-1.
◦
Platform provider’s marketing of investment alternatives to plan (and providing related info) if it discloses that it is not providing impartial advice.
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
Financial advisors - brokers
◦
Brokers would need to change their service model and re-define their role.
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If serving non-fiduciary role, must disclose they are not providing impartial advice.
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If serving fiduciary role, must avoid variable compensation (and prohibited transactions).
 Other service providers
◦
Platform providers must disclose they do not provide impartial advice (to avoid fiduciary status).
◦
TPAs that provide advisory services in exchange for variable compensation must also provide disclaimer.
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
Proposal is consistent with Administration’s aim to reduce conflicts.
◦
If adopted, many advisors would be forced to adopt fee-leveling or change nature of advisory services.
 Proposed reg’s expected to draw heavy comments.
◦
February 3, 2011 deadline for submitting written comments to DOL.
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Public hearing on March 1, 2011.
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 Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010.
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Empowers SEC to impose fiduciary standard on brokers with respect to retail clients.
◦
After completing its study on standards of care for brokers and RIAs on Jan. 21, 2011, SEC staff’s report recommends uniform fiduciary standard.
 Financial advisors who are non-fiduciary brokers are currently subject to a duty of suitability only.
◦
SEC rulemaking may impose new disclosure obligations and fiduciary standards on brokers.
◦
SEC changes would be separate and in addition to
DOL changes to ERISA “fiduciary” definition.
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1. Broader “Fiduciary” Definition
2. Fee Disclosures to Participants
3. 408(b)(2) Disclosures
4. Default Investments - TDFs
5. Lifetime Income Options
6. Automatic IRA Legislation
7. A Game Plan for Clients
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 DOL issues final reg’s on Oct. 14, 2010.
◦
Generally consistent with 2008 proposed reg’s.
◦
DOL press release explained that existing law did not require plans to provide necessary information.
 Types of plans covered
◦
New reg’s apply to DC plans with participantdirected investments.
◦
Covers plan even if not designed to comply with
ERISA Section 404(c).
 Coverage of participants
◦
New reg’s apply to all eligible employees.
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 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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 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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 Info that must be available upon request
◦
Prospectuses, shareholder reports and financial statements provided to plan.
 Form of disclosure
◦
Separate or combined with SPD and/or statements.
◦
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 reg’s modify ERISA 404(c) disclosures.
 Effective date
◦
Plan years beginning on or after Nov. 1, 2011
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
Administrative service providers
◦
New reg’s will impact TPAs and bundled providers.
◦
Automatic delivery of fund prospectuses will no longer be required under ERISA 404(c).
 Financial advisors
◦
No special disclosure requirement for fees of brokers receiving indirect compensation only.
◦
RIA fees presumably must be disclosed on annual and quarterly basis as “general administrative” fee.
◦
Plan participants are likely to scrutinize plan’s investments and fees, impacting sponsors and advisors.
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1. Broader “Fiduciary” Definition
2. Fee Disclosures to Participants
3. 408(b)(2) Disclosures
4. Default Investments - TDFs
5. Lifetime Income Options
6. Automatic IRA Legislation
7. A Game Plan for Clients
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
Plan sponsor is looking for provider of administrative services.
 Provider offers two options:
◦
Services ordered a la carte: $10,000.00
◦
Pre-packaged services and menu: $ 4,000.00
 Plan sponsor may incorrectly conclude pre-packaged option is best for participants.
◦
Doesn’t realize that provider receives “hidden” compensation from funds and fund managers.
◦
Full compensation may be more than $10,000.
◦
Hidden cost is actually shifted to participants.
 Provider has incentive to steer uninformed clients to more profitable option.
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
Improving transparency of 401(k) fees.
◦
Administration’s goal is to make sure workers and plan sponsors are getting services at a fair price.
◦
Pushing to finalize DOL’s 2007 proposed reg’s this year.
 Rationale for proposed 408(b)(2) reg’s.
◦
DOL efforts to educate plan sponsors about 401(k) plan fees started with Nov’ 97 hearing.
◦
Plan sponsors still not asking the right questions.
◦
DOL will now require providers to furnish the fee info sponsors should be requesting.
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 Covered Service Providers
◦
Fiduciaries (including ERISA fiduciary or RIA).
◦
Providers of recordkeeping and brokerage services.
◦
Providers of accounting, actuarial, legal and other professional services if they receive indirect fees.
 Required to disclose compensation in writing.
◦
Disclosure must be provided before entering into contract.
◦
Formal contract and disclosure of conflicts not required.
◦
Indirect compensation requires more detailed disclosure.
◦
Service-by-service disclosure of fees is generally not required.
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
Format and manner of disclosure
◦
Dollar amount, formula, percentage of plan assets, per capita charge, or any other reasonable method.
◦
Whether fees will be billed or deducted and any other manner of receipt must be disclosed.
 Compensation shared among related parties
◦
Generally, compensation paid to affiliates or subcontractors does not have to be disclosed.
◦
But must disclose if payment flows to related party on transactional basis (e.g., commissions, 12b-1 fees).
 Special Rules for Platform Providers
◦
Must provide basic fee information for each investment alternative.
◦
Requirement can be met by passing through fund prospectuses.
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 Timing requirements for disclosures.
◦
Disclosure must be made reasonably in advance of entering into, extending or renewing services.
◦
Changes to information must be made no later than 60 days after provider becomes aware of change.
◦
Erroneous information will not result in a violation if provider has acted in good faith and with reasonable diligence.
◦
Errors and omissions must be disclosed within 30 days after coming to light.
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
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.
 No conflicts of interest for fiduciaries.
◦
408(b)(2) disclosure does not cure self-dealing violations.
 Outlook
◦
Effective date delayed from Jul. 16, 2011 to
Jan. 1, 2012, but further changes may be on horizon.
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1. Broader “Fiduciary” Definition
2. Fee Disclosures to Participants
3. 408(b)(2) Disclosures
4. Default Investments - TDFs
5. Lifetime Income Options
6. Automatic IRA Legislation
7. A Game Plan for Clients
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 Popular default investment vehicle for 401(k) plans.
 Typically, formed as open-end investment companies registered under the Inv. Co. Act.
 Defining characteristic – “glide path” which determines the overall asset mix of the fund.
 Performance issues in 2008 raise concerns, especially for near-term TDFs.
◦
Based on SEC analysis, the average loss for TDFs with a 2010 target date was -25%.
◦
Individual TDF losses as high as -41% .
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 DOL and SEC at Senate Special Committee on
Aging hearing on TDFs (Oct. 28, 2009).
◦
Investor Bulletin jointly released by DOL and SEC.
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DOL’s fiduciary checklist on TDFs is pending.
 SEC proposal for TDF advertising materials.
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If name has target date, “tag line” disclosure needed.
◦
Advertising must include glide path information.
 On Nov. 30, 2010, DOL proposes rules on TDF disclosures for participants, amending:
◦
QDIA reg’s issued under PPA of 2006
◦
Participant-level fee disclosure reg’s that were finalized on Oct. 14, 2010 but are not yet effective.
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 Background on QDIA Reg’s
◦
Participant deemed to be directing investment to default choice if QDIA requirements are met.
◦
Default investment must be a QDIA, and QDIA notices must be provided to participants.
 DOL proposes change to 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.
 DOL also proposes general changes to QDIA notice (even if not a TDF).
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 Background (recap)
◦
New rules will 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.
 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 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.
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Must ensure TDFs (and underlying funds) are appropriate plan investments.
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 Senator Kohl announced his intent to introduce new legislation (Dec. 2009).
◦
Concerns over high fees, low performance or excessive risk in many TDFs.
◦
Would impose ERISA fiduciary status on TDF managers when TDF used as QDIA in 401(k) plans.
 Senator Kohl’s proposal differs from DOL approach to improve disclosures to employers and participants.
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1. Broader “Fiduciary” Definition
2. Fee Disclosures to Participants
3. 408(b)(2) Disclosures
4. Default Investments - TDFs
5. Lifetime Income Options
6. Automatic IRA Legislation
7. A Game Plan for Clients
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 Obama Administration believes lifetime income options facilitate retirement security.
◦
Initiative to reduce barriers to annuitization of 401(k) plan assets.
◦
DOL / IRS issued a joint release with requests for information on Feb 2, 2010.
◦
RFI addresses education, disclosure, tax rules, selection of annuity providers, 404(c) and QDIAs.
 The Retirement Security Project
◦
Released 2 white papers on DC plan annuitization.
◦
Proposed use of annuities as default investment.
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 Two types of legislative proposals.
◦
Encourage annuitization with tax breaks: Lifetime
Pension Annuity for You Act, Retirement Security
for Life Act.
◦
Annual disclosure of what 401(k) plan balance would be worth as annuity: Lifetime Income
Disclosure Act.
 IRS addressed qualification requirements for DC plans in PLR 200951039.
◦
Variable group annuity investment options
◦
No “surprise” interpretations on age 70 ½ minimum distribution and QJSA rules.
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 Senate hearing held on June 16, 2010.
◦
The Retirement Challenge: Making Savings Last a
Lifetime.
◦
Start of legislative debate on lifetime income options.
 DOL and Treasury provide early analysis on
RFI concerning lifetime income options.
◦
More than 800 responses to RFI.
◦
Concerns expressed against government takeover of 401(k) plans.
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DOL and Senator Kohl clarify that there is no interest in mandating lifetime income options.
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
Purpose is to investigate 5 focused topics.
 2 areas of general policy-related interest.
◦
Specific concerns raised by participants.
◦
Alternative designs of in-plan and distribution lifetime income options.
 3 areas of specific interest.
◦
Fostering “education” to help participants make informed retirement income decisions.
◦
Disclosure of account balances as monthly income streams.
◦
Modifying fiduciary safe harbor for selection of issuer or product.
34

1. Broader “Fiduciary” Definition
2. Fee Disclosures to Participants
3. 408(b)(2) Disclosures
4. Default Investments - TDFs
5. Lifetime Income Options
6. Automatic IRA Legislation
7. A Game Plan for Clients
35

 Automatic IRA Act of 2010 introduced in both
Senate and House.
 Senate version introduced on Aug. 6, 2010.
◦
After phase-in period over 4 years, employers with 10 or more employees must set up Auto IRAs.
◦
Covers all employees who are age 18 with 3 months.
◦
Choice of Traditional or Roth IRA (Roth is default).
◦
Investment firms not required to sell Auto IRAs.
◦
3 investment options only, which must be low-cost.
◦
Noncompliance results in$100-per-employee penalty.
◦
New tax credit for small employers of $250 for startup costs, and $1,000 tax credit for 401(k) plans.
36

Automatic IRA Legislation Proposed
 House version introduced on Aug. 10, 2010.
 Differences from Senate version.
◦
All employers with 10 or more employees are immediately covered (and no phase-in over 4 years).
◦
Default choice for employee is Traditional IRA (and not
Roth IRA).
◦
3 investment options for Auto IRAs are somewhat different than in Senate version.
 White House’s 2012 budget proposal includes
“Automatic Workplace Pensions” initiative.
◦
Automatic IRA legislation remains high priority for
Obama Administration.
37

1. Broader “Fiduciary” Definition
2. Fee Disclosures to Participants
3. 408(b)(2) Disclosures
4. Default Investments - TDFs
5. Lifetime Income Options
6. Automatic IRA Legislation
7. A Game Plan for Clients
38

 408(b)(2) Fee Disclosures
◦
Providers must furnish detailed fee disclosures by Jan.
1, 2012.
◦
Will also impact plan sponsors directly.
 Plan sponsors have duty to ensure plan’s fees are reasonable under ERISA.
◦
Duty will extend to fee information included in providers’ 408(b)(2) disclosures.
◦
Sponsors are likely to need assistance in light of complexity of plan arrangements.
◦
Advisors can assist in prudent evaluation of fees and, if necessary, in search for alternative arrangements.
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 Many participants may be caught off guard by fee disclosures under the new rules.
◦
New rules become effective January 1, 2012 for calendar year plans.
 Advisors can help plan sponsors prepare.
◦
Discuss with plan’s recordkeeper and determine impact of new rules on existing fee disclosures.
◦
Meet with participants and review fee information through educational sessions.
◦
If sponsor has fee-related concerns, remind sponsor that its fiduciary review process can be enhanced.
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 Provide meaningful TDF disclosures to participants as a “best practice” right now.
◦
Provide key information about TDF’s glide path, 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, glide path, underlying funds and risk.
◦
Special review of TDFs for participants in or nearing retirement (e.g., 2015 TDF).
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A0049764
Marcia S. Wagner, Esq.
99 Summer Street, 13 th Floor
Boston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250
Website: www.erisa-lawyers.com
marcia@wagnerlawgroup.com
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