What The Next Few Years Hold for 401(k) Plans and Retirement Savings and What It Means for Advisors and Their Clients

1
What The Next Few YearsHold for
401(k) Plansand Retirement Savings and What It
Means forAdvisors and Their Clients

• Marcia S. Wagner, Esq.
• THE
• WAGNER LAW GROUP
• 
  A PROFESSIONAL CORPORATION

2
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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• Increasing Savings
• Protecting Returns
• Decumulation Planning
• Tax Reform

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Increasing Savings Thru Automatic Features

• Existing tools to overcome employee inertia
• Auto-Enrollment
• Auto-Escalation
• Plan Sponsor and Advisor Initiatives
• Re-Enrollment
• Re-Allocation

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Administration Initiatives to Increase Retirement
Savings Through IRAs

• Administration pushing automatic IRAs featuring
• 3 default contribution rate
• Choice of traditional pre-tax IRA or after-tax
  Roth
• Multiple alternatives for selecting IRA provider
• Government designated default investments
• MyRA Initiative
• Starter program does not require legislative
  authorization
• Contributions to Roth accounts
• Permits small investments (25 / 5)
• Low rate of return from Treasury bonds
• Maximum 15,000 balance

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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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• Increasing Savings
• Protecting Returns
• Decumulation Planning
• Tax Reform

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Introduction

• Policymakers focusing on protection for
• investment returns.
• Regulatory Agenda
• Improving fee transparency.
• 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.
• Providers must disclose direct indirect
  (hidden) compensation.
• Participant-Level Disclosure Regs.
• Effective August 30, 2012 (for calendar year
  plans).
• Compare investment options and provide quarterly
  fee disclosures.
• Disclosures expected to drive down fees.

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Proposal to Expand Fiduciary Definition

• ERISAs Functional Fiduciary Definition.
• Fiduciary status contingent on offering
  investment advice under 5-factor test
• Advice is fiduciary only if it is a primary basis
  for plan decisions and given on regular basis
• Ellis v. Rycenga Homes
• DOLs Initial Proposal
• Advice is fiduciary if it may be considered for
  plan decision
• One-time, casual advice may trigger fiduciary
  status
• Re-proposed definition pending
• Effect of Expanded Definition.
• Fiduciaries may not receive variable fees
• Plan expense accounts levelize fee
  arrangements
• ? 2013 DOL opinion approves typical expense
  account

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Summing Up

• Administration has launched initiatives
• Fee disclosures for plan sponsors and
  participants
• Pushing boundaries of fiduciary status
• Pressure on Fees
• Interest in levelized fee arrangements
• Downward pressure on 401(k) pricing

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• Increasing Savings
• Protecting Returns
• Decumulation Planning
• Tax Reform

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Administrations 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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Removing Regulatory Obstacles to Plan Annuities

• IRS proposal would relax required minimum
  distribution (RMD) rules for plans
• RMD rules mandate start at age 70 ½ but longevity
  annuities provide income stream for later in life
• Proposed Regulations.
• Exception from RMD rules for longevity annuity
  investments
• Investment capped at 100,000 or 25 of account
• Must start no later than age 85
• 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 opt out).

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Education and Disclosures for Participants

• GAO Recommendations
• Update DOLs investment education guidance to
  cover decumulation
• But DOL is concerned about conflicts
• Guidance likely to restrict sales pitches
• Lifetime Income Disclosure Act
• Plan to show account balances converted into
  guaranteed monthly amount
• Encourages participants to think about retirement
  paycheck for life

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DOL Proposal for Lifetime Income Disclosures

• Advance Notice of Proposed Rulemaking
• Lifetime income illustration in participant
  statements .
• Must provide estimated income streams based on
• (1) current account and (2) projected
  account at NRA.
• Safe Harbor for Projected Account
• Assume 7 investment return.
• Assume current contribution level, with 3
  increase.
• Use 3 discount rate to convert to current
  dollars.

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Lifetime Income Illustration

• Illustration for 50-Year Old Participant
• Account
  Estimated Monthly
• Balance Lifetime Payment
• Current Account (2014) 125,000.00
  700.00
• Projected Amount (2029) 500,000.00
• Projected Account (Current Dollars)
  321,000.00 1,800.00
• ? Required Disclosures/Disclaimers
• - Explanation of assumptions
• - Estimates are not benefit guarantees

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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
• Practical impact on participants would be shown
  by implementation of regulations to be proposed
  regarding lifetime income disclosures
• Debate on use of annuities as QDIA likely to
  follow

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• Increasing Savings
• Protecting Returns
• Decumulation Planning
• Tax Reform

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Tax Cost of Retirement Plans

• Impact of retirement plans on federal deficit
• DC / 401(k)
• 61 billion (2015)
• 414 billion (2015 2019)
• ? DB
• 42 billion (2015)
• 235 billion (2015 2019)
• Tax reform
• Pension system reform

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Tax Reform

• 2014 Plan limitations that can be reduced
  to limit deficit
• Annual additions from all sources - 52,000
• Elective deferrals - 17,500
• Plan sponsor deduction - 25 participant
  compensation
• Compensation limit to determine
  benefits/contributions - 260,000
• Proposed Tax Reform Act of 2014
• - Freezes DC limits until 2024
• ? 63.4 billion revenue gain over 10
  years
• ? Additional 144 billion from treating
  half of 401(k) deferrals as Roth

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Tax Reform (continued)

• National Commission on Fiscal Responsibility.
• 20/20 Cap limits contributions to lesser of
  20,000 or 20 compensation
• Maximum contribution 20,000
• Brookings Institution
• Tax all employer and employee contributions
• Contribution limits would not change
• Flat rate refundable tax credit deposited to
  retirement savings account

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Administration Tax Reform Proposals

• ? Obama FY 2015 proposed 3.2 million cap on
  aggregate
• lifetime contributions
• - Cap to vary based on age.
• - Double tax if prohibited amount not
  withdrawn.
• Obama proposal limiting tax deductions for
  plan contributions
• 11.6 tax on employer employee plan
  contributions
• High earners only
• Basis adjustment for extra tax

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Pension System Reform Federal LevelUSA
Retirement Funds

• ? USA Retirement Funds proposed by Sen. Tom
  Harkin in January 2014
• Harkin report in July 2012 proposes new
  retirement system
• - Automatic/universal enrollment required by
  employers with no plan
• - Regular stream of income starting at retirement
  age
• - No lump sum withdrawals
• - Financed by employee payroll contributions
  government credits
• Privately managed investment by new entities
  USA Retirement Funds
• - Limited employer involvement and no fiduciary
  responsibility
• - Unspecified level of required
  employer contributions.
• - Employees can increase/decrease
  contributions or opt out.

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Pension System Reform Federal LevelSAFE
Retirement Act

• SAFE Retirement Act - 2013 proposal by Sen.
  Orrin Hatch
• Starter 401(k) Plans
• Up to 8,000 participant contributions annually
• Reduced administration and no discrimination
  testing
• Auto deferrals from 3 to 5
•  
• Government sponsors may adopt SAFE Retirement
  Plan
• Annual purchase of fixed annuities for
  participants
• Insurers to be selected by bidding process
• Improve funding and security but pays smaller
  benefits
• Restores jurisdiction over prohibited
  transactions to IRS

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Pension System Reform State-Sponsored
Initiatives

• Secure Plan Proposal by National Conference on
  Public Employee Retirement Systems
• State sponsored cash balance plans for
  private-sector
• 6 annual credits
• Minimum 3 interest credits
• Employer fiduciary responsibility
• Participation voluntary but withdrawal
  liability assessed on terminating employers
• Seeks to benefit from economies of
  scale
• Funding shortfall would be state
  responsibility

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Pension System Reform State-Sponsored
Initiatives (continued)

• California Secure Choice Retirement Savings
  Program
• - Mandatory payroll deduction auto-IRA
  program
• Auto enrollment at 3 unless employee opts
  out
• Required for enterprises with 5 or more
  workers if no current plan
• State chooses investment managers
• Guaranteed rate of return
• - Signed by governor but implementation subject
  to IRS and DOL approval
•  
• Other State Initiatives
• - Massachusetts enactment of defined
  contribution multiple employer plan
• for non-profits
• - At least 11 other states said to be
  considering plans for private-sector
• employees.

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Summing Up

• Significant Transformation of Private Retirement
  System Possible.
• Tax Reform
• Reducing tax incentives will shrink
  system
• Lower contributions result at all
  income levels if tax exclusions cut
• ? Obama proposal for general limit on benefit
  from tax exclusions.
• Does not focus directly on 401(k)
  contributions
• Provides political cover
• Same effect on contributions as direct
  cutback on excludible amount

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Summing Up (continued)

• - Proposed Systemic Changes intended to create
  access for low-wage employees
• Government would replace private
  employers in system
• Mandated benefits
• Guaranteed benefits and/or
  investment results
• Creation of new interest group
  to lobby for expansion of benefits
• Government influence in choosing
  investment managers or control of
• investments could drive many out of the
  retirement industry.
• State-level programs may cause breakdown
  in uniformity of pension laws,
• effective since enactment of ERISA
• - Inflection Point regarding the types of
  retirement schemes nation wants / needs
• Interesting Times

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Marcia S. Wagner, Esq.

• THE
• WAGNER LAW GROUP
  
• A PROFESSIONAL CORPORATION
• 99 Summer Street, 13th Floor
• Boston, MA 02110
• Tel [phone] Fax [phone]
• Website www.wagnerlawgroup.com
• marcia_at_wagnerlawgroup.com
• A0118788.PPTX