The Politics of Retirement
A Washington Update
Marcia S. Wagner, Esq.
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Not FDIC Insured • Not Bank Guaranteed • May Lose Value
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
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1. Increasing Savings
2. Protecting Returns
3. Decumulation Planning
4. Tax Reform
5. Industry Groups
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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
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Automatic Enrollment and Escalation
– Negative Elections
• IRS issued guidance in late 1990’s.
• Pension Protection Act of 2006 expands IRS guidance and offers fiduciary protection.
– Problems
• Most plans set auto-contribution rates at 3%.
• 6% safe harbor rate provides “free pass” from discrimination testing.
• But few plans use safe harbor or auto-escalation.
– Automatic enrollment can significantly increase savings.
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Emerging Initiatives and Practices
– Re-Enrollment Program
• Auto-enrollment and auto-escalation typically apply to new employees, not incumbent
employees.
• Consider re-enrolling all employees with low contribution rates to default rate (e.g., 6%).
• May be implemented on ad hoc basis.
– Re-Allocation Program
• Consider re-allocating participant accounts and new contributions to QDIA (unless they opt
out).
• May be implemented at re-enrollment or ad hoc basis whenever elections become stale.
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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.
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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.
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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.
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1. Increasing Savings
2. Protecting Returns
3. Decumulation Planning
4. Tax Reform
5. Industry Groups
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Introduction
– Policymakers focusing on protection for investment returns.
• Disclosing hidden fees.
• Meaningful information for participants.
– Regulatory Agenda
• Improving fee transparency.
• Encouraging participant-level advice.
• Broadening “fiduciary” definition.
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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.
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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.
– 408(b)(2) Fee Disclosures
• May support new theories of 401(k) litigation.
• Monetary settlements to date have been significant.
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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.
– Fiduciary relieve unhelpful to many advisors.
– DOL expected to work with private sector.
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Proposal to Broaden “Fiduciary” Definition
– ERISA’s Functional Definition
• If fiduciary advice provided, fiduciary status arises.
• It is fiduciary advice only if it is 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.
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Emerging Practices and Levelizing Fees
– Fiduciaries must not receive variable fees.
• Non-fiduciary advisors may receive 12b-1 fees.
• DOL proposal to broaden “fiduciary” definition would stop receipt of variable fees.
– Plan Expense Accounts
• Typically, funded by recordkeeper’s indirect compensation for gross-to-net pricing.
• May be used to levelize advisor’s compensation.
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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 .
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1. Increasing Savings
2. Protecting Returns
3. Decumulation Planning
4. Tax Reform
5. Industry Groups
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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.
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Longevity Annuities
– 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.
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New Tax Rules Favoring Annuities
– 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.
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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).
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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.
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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.
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1. Increasing Savings
2. Protecting Returns
3. Decumulation Planning
4. Tax Reform
5. Industry Groups
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Tax Reform
– Impact of Plan Contributions on Federal Deficit
• $70.2 Billion Annually.
• $361 Billion 2011 – 2015.
– Plan Limitations That Can Be Reduced to Lessen Deficit
• Annual Additions from All Sources - $50,000.
• Elective Deferrals - $17,000.
• Plan Sponsor Deduction – 25% Compensation of All Participants.
• Compensation Counted to Determine Benefits/Contributions - $250,000.
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Tax Reform
– National Commission on Fiscal Responsibility (20/20 Cap) – Lesser of $20,000 of 20%
Compensation.
– Brookings Institution
• Make All Employer and Employee Contributions Taxable.
• Refundable Tax Credit Deposited to Retirement Savings Acct.
– Obama Administration – 7% on Employer and Employee Tax Contributions for High
Earners Only.
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State-Sponsored Plans for Private-Sector
– Secure Plan Proposal.
• Proposed by National Conference on Public Employee Retirement Systems.
• Provide coverage for employees of small employers.
• Seeks to benefit from economies of scale.
• Cash balance plan: 6% annual credits; minimum 3% interest credits.
• Funding shortfall would ultimately fall on states.
– Define Contribution Initiatives.
– Fiduciary Implications.
• Potential state liability for selection of investment alternatives.
• State must ensure that plan avoids prohibited transactions.
• Bonding.
• Administrative duties allocated between state and employer
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Harkin Universal Pension Proposal
– New retirement system proposed in “report” issued by U.S. Sen. Tom Harkin
• Automatic and universal enrollment
• Regular stream of income starting at retirement age
• Financing through payroll system by employee contributions/government credits
• Privately managed by new entities to be called “USA Retirement Funds”
• Limited employer involvement and no fiduciary responsibility
• Employees could increase/decrease contributions or opt out
– Similarities to proposals for state-covered pensions of private-sector workers
– Less likely to be enacted than Automatic IRAs
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Other Revenue Raisers
– Minimum Required Distributions to be Accelerated.
• Shrink Distribution Period for Inherited 401(k)s and IRAs.
• Administration want to waive MRD for small accounts.
– Limit or Eliminate Roth Conversions.
– Enactment of MAP-21
• PBGC premium increases for defined benefit pension plans under MAP-21
o
o
o
Specific premium increases replace Administration’s proposal to allow PBGC Board to set
risk-adjusted rates
Flat rate per participant premium increases from current $35 level to $42 in 2013 and $49 in
2014, to be indexed for inflation in subsequent years
Varriable rate premium per $1,000 of vested unfunded benefits increases from current $9
level to $13 (plus inflation) for 2014 and $18 (plus inflation) for 2015
• Defined Benefit Plan Funding Relief
o
o
o
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Abnormally low interest rates increase funding requirements
MAP-21 adjusts rates upward if regular rate falls below 25-year average for interest rates,
resulting in lower required contributions
If interest rates increase, larger plan contributions could be due
Republican Reaction to Tax Proposals
– Republican budget does not directly address.
– Romney Campaign favors lower tax rates and broader base but no focus on retirement
plans expenditure.
– Senator Hatch skeptical of changing current limits.
– Summing Up
– Soak the rich schemes may defeat themselves.
– 20/20 Cap may be enacted.
– Consequences of lowered contributions
• Private Retirement Plan System gets smaller
• Reduced Role for Employers.
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1. Increasing Savings
2. Protecting Returns
3. Decumulation Planning
4. Tax Reform
5. Industry Groups
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Industry Groups
– Social Policy Advocate
– Plan Services Industry
• ASPPA
• AARP
• Pension Rights Center
• Spark Institute
– Plan Sponsor Groups
• ABC
• ERIC
• Chamber of Commerce
– Investment Providers
• ACLI
• ICI
• IAA
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– Independent Research Organizations
• EBRI
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
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