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 is rolling out new rules for 2012.
◦ Fee disclosures for plan sponsors
◦ Participant-level fee disclosures
◦ Participant investment advice

Proposed Rulemaking
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DOL Interaction with White House
◦ Working with White House’s Middle Class Task Force
◦ Coordinated actions to improve retirement security
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Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Default Investments - TDFs
Lifetime Income Options
Automatic IRA Legislation
A Game Plan for Clients
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DOL Finalizes Participant
Fee Disclosure Regulations

DOL issues final reg’s on Oct. 14, 2010.
◦ DOL press release explained that existing law did not
require plans to provide necessary information.
◦ New rule requires comparison of plan’s investments.

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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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.
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Required information for disclosure in
comparative format includes:
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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 reg’s modify ERISA 404(c) disclosures.

Effective date
◦ Plan years beginning on or after Nov. 1, 2011.
◦ Initial disclosures due May 31, 2012 for calendar
year plans.
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Potential Impact
 Automatic delivery of fund prospectuses will
no longer be required under ERISA 404(c).

RIA fees presumably must be disclosed on
annual and quarterly basis as “general
administrative” fee.
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Plan participants are likely to scrutinize
plan’s investments and fees, impacting
sponsors and advisors.
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Educate your plan participants before
disclosure.
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Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Default Investments - TDFs
Lifetime Income Options
Automatic IRA Legislation
A Game Plan for Clients
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How Can Inv. Advice Be Conflicted?
 Non-fiduciary provider receives variable
compensation from plan’s investments.
◦ Broker-dealer receives different 12b-1 fees.
◦ Fund platform offers proprietary funds to plan clients.

Provider has incentive to steer participants.
◦ Can not provide fiduciary advice to participants.
◦ Conflicted advice triggers prohibited transaction (PT).
◦ PT occurs even if advice provided in good faith.
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DOL Final Rules for Participant Advice
 Pension Protection Act included statutory
exemption for participant-level advice.
◦ Fiduciary Adviser must be RIA, bank, insurer or brokerdealer.
◦ Eligible Investment Advice Arrangement must have:
(1) Fee-Leveling (Fiduciary Adviser’s fees do not vary)
(2) Computer Model certified by expert.

Other conditions for exemption.
◦ Authorization from separate plan fiduciary.
◦ Annual review by independent auditor.
◦ Advance notice to participants with disclosures for
fees and material affiliations of parties (i.e., conflicts).
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Fee-Leveling Arrangement
 Fiduciary Adviser’s fee must not vary.
◦ Fiduciary Adviser’s employee/rep must receive level
compensation.
◦ Fiduciary Adviser’s affiliate may receive variable
compensation.

Example: ABC Fund Platform for Plan Clients
◦ Plan invests in ABC Funds and third party funds.
◦ ABC Fund Manager cannot give participant advice
(due to incentive to steer participants to ABC Funds).
◦ New affiliate, ABC Fiduciary Adviser, is created to
provide advice to participants.
◦ DOL imposes fee-leveling on ABC Fiduciary Adviser.
◦ But ABC Fund Manager can earn compensation that
varies with participants’ allocation decisions.
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Computer Model Arrangement
 Advice must be from computer model.
◦ Model must be certified by investment expert.
◦ Must consider participant’s personal info.
◦ Fiduciary Adviser may receive variable compensation.

Does DOL favor index funds?
◦ Proposed rules suggested that model should favor
cheapest menu option in each asset class.
◦ Fortunately, DOL backed away from this approach.
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Can a Computer Model be used for IRAs?
◦ DOL permits it.
◦ But are Computer Models capable of advising IRA
owners?

DOL rules become effective on Dec. 27, 2011.
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8.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Default Investments - TDFs
Lifetime Income Options
Automatic IRA Legislation
A Game Plan for Clients
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When Are Service Providers Conflicted?
 Plan sponsor is looking for provider of
administrative services.
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Provider offers two options:
◦ Services ordered a la carte:
◦ Pre-packaged services and menu:
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$10,000.00
$ 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.
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Provider has incentive to steer uninformed clients
to more profitable option.
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Retirement Security Initiative
 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” interim final reg’s this year.
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Rationale for interim 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 Providers and Disclosures
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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.
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Required to disclose compensation in writing.
◦ Must be provided before entering into contract.
◦ Formal contract not required.
◦ Indirect compensation requires more detailed
disclosure.
◦ Service-by-service disclosure of fees is generally not
required.
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Disclosure of Compensation
 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.
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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).
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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 of 408(b)(2) Disclosures
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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.
◦ 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
Interim 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.
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No fiduciary conflicts permitted.
◦ 408(b)(2) disclosure does not cure self-dealing
violations.
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Outlook
◦ Effective date delayed from July 16, 2011 to
April 1, 2012.
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7.
8.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Default Investments - TDFs
Lifetime Income Options
Automatic IRA Legislation
A Game Plan for Clients
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DOL’s 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 reg’s on Oct. 21, 2010.
◦ Broadens “investment advice fiduciary” definition.
◦ Withdrawn on September 19, 2011.
◦ To be re-proposed with more input from public.
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Overview of Existing Definition
 If you provide investment advice, you are
automatically deemed a fiduciary.
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DOL’s current definition for investment advice
is based on 5-factor test:
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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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Overview of DOL’s Initial Proposal
 Existing Definition
◦ Advice may be investment advice if it is primary
basis for plan decisions and given on regular basis.
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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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Potential Impact on Providers

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.
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Re-proposed Rule in 2012
◦ New definition to include individualized advice only.
◦ Will be similar in approach to DOL’s initial proposal.
◦ DOL is coordinating with SEC.
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7.
8.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Default Investments - TDFs
Lifetime Income Options
Automatic IRA Legislation
A Game Plan for Clients
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Background on Target Date Funds
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Popular default investment vehicle for 401(k)
plans.
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Typically, formed as open-end investment
companies registered under the Inv. Co. Act.
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Defining characteristic – “glide path” which
determines the overall asset mix of the fund.
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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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Recent Developments for TDFs
 DOL and SEC at Senate Special Committee on
Aging hearing on TDFs (Oct. 28, 2009).
◦ Investor Bulletin jointly released by DOL and SEC.
◦ DOL’s fiduciary checklist on TDFs is pending.
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SEC proposal for TDF advertising materials.
◦ If name has target date, “tag line” disclosure needed.
◦ Advertising must include glide path information.
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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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DOL’s Proposed Changes to QDIA Reg’s
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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.
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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.
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DOL also proposes general changes to QDIA
notice (even if not a TDF).
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DOL’s Proposed Changes to
Participant-Level Fee Disclosure Reg’s
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Background (recap)
◦ New rules will require disclosure of plan-related fees
and annual comparative chart for plan’s investments.
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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.
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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.
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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.
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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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Congressional Proposal for TDFs
 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.
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Senator Kohl’s proposal differs from DOL
approach to improve disclosures to
employers and participants.
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Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Default Investments - TDFs
Lifetime Income Options
Automatic IRA Legislation
A Game Plan for Clients
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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.
◦ 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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Other Recent Developments
in DC Plan Annuitization
 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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Lifetime Income Hearing by
Senate Special Committee on Aging
 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.
◦ DOL and Senator Kohl clarify that there is no
interest in mandating lifetime income options.
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Joint Hearing by DOL, IRS and Treasury in
September 2010
 Purpose is to investigate 5 focused topics.
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2 areas of general policy-related interest.
◦ Specific concerns raised by participants.
◦ Alternative designs of in-plan and distribution lifetime
income options.
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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.
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Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Default Investments - TDFs
Lifetime Income Options
Automatic IRA Legislation
A Game Plan for Clients
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Automatic IRA Legislation Proposed
 Automatic IRA Act introduced in both Senate
and House in 2010.
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Re-introduced to Senate in 2011.
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Would require employers to make automatic
payroll contributions to employees’ IRAs.
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Originally proposed in 2011 FY Budget by
Obama Administration.
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2011 Bill for Automatic IRAs
 Senator Bingaman (D-NM) introduced bill on
Sept. 14, 2011.
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Phase-in for Covered Employers
◦ 1st Year: Only large employers with 100+ employees
would be covered.
◦ 2nd Year: Employers with 50+ employees
◦ 3rd Year: Employers with 25+employees
◦ 4th Year: Employers with 10+ employees
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Overview of Proposed Legislation
 Automatic IRA Act of 2011
◦ After phase-in period, 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.
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Related Tax Penalties and Incentives
◦ 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.
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Outlook for Automatic IRAs
 Proposal was originally named
Automatic Workplace Pensions initiative.
◦ Included in Administration’s 2011 FY Budget.
◦ Repeated in 2012 FY Budget.
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Automatic IRA legislation remains high
priority for Obama Administration.
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6.
7.
8.
Fee Disclosures to Participants
Participant Investment Advice
408(b)(2) Disclosures
Broader “Fiduciary” Definition
Default Investments - TDFs
Lifetime Income Options
Automatic IRA Legislation
A Game Plan for Clients
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Final and Proposed Rules
Will Impact Many Plan Clients
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408(b)(2) Fee Disclosures
◦ Providers must furnish detailed fee disclosures by
April 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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Fee Disclosures to Participants

Many participants may be caught off guard
by fee disclosures under the new rules.
◦ New rules become effective May 31, 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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Target Date Disclosures

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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Broader “Fiduciary” Definition

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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Important Pension Changes From D.C.
- What Do You Need to Know?
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
A0064360
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