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A Washington Update


Increasing Savings. Protecting Returns. Decumulation Planning. Tax Reform. Industry Groups. Today s discussion will focus on three areas where policymakers are ... – PowerPoint PPT presentation

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Title: A Washington Update

The Politics of Retirement
  • A Washington Update
  • Marcia S. Wagner, Esq.

  • 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

  1. Increasing Savings
  2. Protecting Returns
  3. Decumulation Planning
  4. Tax Reform
  5. Industry Groups

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

Automatic Enrollment and Escalation
  • Negative Elections
  • IRS issued guidance in late 1990s.
  • 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

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.

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.

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.

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.

  1. Increasing Savings
  2. Protecting Returns
  3. Decumulation Planning
  4. Tax Reform
  5. Industry Groups

  • 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.

Fee Transparency
  • Policymakers want plans to get fair price for
  • 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
  • Must compare investment options and provide
    quarterly fee disclosures.
  • Disclosures are expected to drive down fees.

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
  • 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

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.

Proposal to Broaden Fiduciary Definition
  • ERISAs Functional Definition
  • If fiduciary advice provided, fiduciary status
  • It is fiduciary advice only if it is primary
    basis for plan decisions and given on regular
  • Ellis v. Rycenga Homes
  • DOLs Initial Proposal
  • It is fiduciary advice if it may be considered
    for plan decision.
  • One-time, casual advice may trigger fiduciary
  • Re-proposed definition pending.

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 recordkeepers indirect
    compensation for gross-to-net pricing.
  • May be used to levelize advisors compensation.

Summing Up
  • Administration has launched initiatives.
  • Fee disclosures for plan sponsors and
  • 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 .

  1. Increasing Savings
  2. Protecting Returns
  3. Decumulation Planning
  4. Tax Reform
  5. Industry Groups

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.

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
  • Limit investment to 100,000 or 25 of account.
  • Must start no later than age 85.

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
  • 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.

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).

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
  • 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.

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
  • But debate on use of annuities as QDIA likely to

  1. Increasing Savings
  2. Protecting Returns
  3. Decumulation Planning
  4. Tax Reform
  5. Industry Groups

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
  • Annual Additions from All Sources - 50,000.
  • Elective Deferrals - 17,000.
  • Plan Sponsor Deduction 25 Compensation of All
  • Compensation Counted to Determine
    Benefits/Contributions - 250,000.

Tax Reform
  • National Commission on Fiscal Responsibility
    (20/20 Cap) Lesser of 20,000 of 20
  • Brookings Institution
  • Make All Employer and Employee Contributions
  • Refundable Tax Credit Deposited to Retirement
    Savings Acct.
  • Obama Administration 7 on Employer and
    Employee Tax Contributions for High Earners Only.

State-Sponsored Plans for Private-Sector
  • Secure Plan Proposal.
  • Proposed by National Conference on Public
    Employee Retirement Systems.
  • Provide coverage for employees of small
  • Seeks to benefit from economies of scale.
  • Cash balance plan 6 annual credits minimum 3
    interest credits.
  • Funding shortfall would ultimately fall on
  • Define Contribution Initiatives.
  • Fiduciary Implications.
  • Potential state liability for selection of
    investment alternatives.
  • State must ensure that plan avoids prohibited
  • Bonding.
  • Administrative duties allocated between state and

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

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
  • Limit or Eliminate Roth Conversions.
  • Enactment of MAP-21
  • PBGC premium increases for defined benefit
    pension plans under MAP-21
  • Specific premium increases replace
    Administrations 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
  • Abnormally low interest rates increase funding
  • 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
  • Senator Hatch skeptical of changing current
  • 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.

  1. Increasing Savings
  2. Protecting Returns
  3. Decumulation Planning
  4. Tax Reform
  5. Industry Groups

Industry Groups
  • Social Policy Advocate
  • AARP
  • Pension Rights Center
  • Independent Research Organizations
  • EBRI
  • Plan Services Industry
  • Spark Institute
  • Plan Sponsor Groups
  • ABC
  • ERIC
  • Chamber of Commerce
  • Investment Providers
  • ACLI
  • ICI
  • IAA

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_at_wagnerlawgroup.com
  • A0083724
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