Washington Update: What Do You Need to Know?

42
Washington Update: What Do You Need to Know? Marcia S. Wagner, Esq.

description

Washington Update: What Do You Need to Know?. Marcia S. Wagner, Esq. Priority Objectives from Washington. 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 - PowerPoint PPT Presentation

Transcript of Washington Update: What Do You Need to Know?

Page 1: Washington Update:  What Do  You Need to Know?

Washington Update: What Do You Need to Know?

Marcia S. Wagner, Esq.

Page 2: Washington Update:  What Do  You Need to Know?

2

Priority Objectives from WashingtonOutlook 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.◦ Chaired by Vice President Biden, and includes Secretaries

of Labor and Treasury.◦ Used to coordinate Administration’s agenda.

Improving the DC Savings System ◦ Obama Administration’s proposals target 401(k) plans

and providers.◦ Blurring of lines between White House and DOL.◦ Coordinated actions to improve retirement security.

Page 3: Washington Update:  What Do  You Need to Know?

3

1. Broader “Fiduciary” Definition2. Fee Disclosures to Participants3. 408(b)(2) Disclosures4. Default Investments - TDFs5. Lifetime Income Options6. Automatic IRA Legislation7. A Game Plan for Clients

Page 4: Washington Update:  What Do  You Need to Know?

4

ERISA and ConflictsFiduciary 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.

Page 5: Washington Update:  What Do  You Need to Know?

5

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.

Page 6: Washington Update:  What Do  You Need to Know?

6

Safe Harbor for Avoiding Fiduciary StatusProposed reg’s introduce new safe harbor.

◦ Non-fiduciary advisor must be able to demonstrate that plan client knows, or reasonably should know….

◦ …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.

Page 7: Washington Update:  What Do  You Need to Know?

7

Potential Impact on ProvidersFinancial advisors - brokers

◦ Brokers would need to change their service model and re-define their role.

◦ If serving non-fiduciary role, must disclose they are not providing impartial advice.

◦ 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.

Page 8: Washington Update:  What Do  You Need to Know?

8

Outlook for DOL Proposed Reg’sProposal 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.◦ Public hearing on March 1, 2011.

Page 9: Washington Update:  What Do  You Need to Know?

9

New Fiduciary Standards Under Dodd-Frank Act of 2010

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.◦ 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.

Page 10: Washington Update:  What Do  You Need to Know?

10

1. Broader “Fiduciary” Definition2. Fee Disclosures to Participants3. 408(b)(2) Disclosures4. Default Investments - TDFs5. Lifetime Income Options6. Automatic IRA Legislation7. A Game Plan for Clients

Page 11: Washington Update:  What Do  You Need to Know?

11

DOL Finalizes Participant Fee Disclosure Regulations

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 participant-directed

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.

Page 12: Washington Update:  What Do  You Need to Know?

12

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.

Page 13: Washington Update:  What Do  You Need to Know?

13

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.

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

Page 14: Washington Update:  What Do  You Need to Know?

14

Other RequirementsInfo 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

Page 15: Washington Update:  What Do  You Need to Know?

15

Potential Impact on ProvidersAdministrative 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.

Page 16: Washington Update:  What Do  You Need to Know?

16

1. Broader “Fiduciary” Definition2. Fee Disclosures to Participants3. 408(b)(2) Disclosures4. Default Investments - TDFs5. Lifetime Income Options6. Automatic IRA Legislation7. A Game Plan for Clients

Page 17: Washington Update:  What Do  You Need to Know?

17

When Are Service Providers Conflicted?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.

Page 18: Washington Update:  What Do  You Need to Know?

18

Retirement Security InitiativeImproving 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.

Page 19: Washington Update:  What Do  You Need to Know?

19

Covered Providers and DisclosuresCovered 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.

Page 20: Washington Update:  What Do  You Need to Know?

20

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.

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.

Page 21: Washington Update:  What Do  You Need to Know?

21

Timing of Disclosures UnderInterim 408(b)(2) Regulations

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.

Page 22: Washington Update:  What Do  You Need to Know?

22

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.

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.

Page 23: Washington Update:  What Do  You Need to Know?

23

1. Broader “Fiduciary” Definition2. Fee Disclosures to Participants3. 408(b)(2) Disclosures4. Default Investments - TDFs5. Lifetime Income Options6. Automatic IRA Legislation7. A Game Plan for Clients

Page 24: Washington Update:  What Do  You Need to Know?

24

Background on Target Date FundsPopular 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%.

Page 25: Washington Update:  What Do  You Need to Know?

25

Recent Developments for TDFsDOL 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.

SEC proposal for TDF advertising materials.◦ 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.

Page 26: Washington Update:  What Do  You Need to Know?

26

DOL’s Proposed Changes to QDIA Reg’sBackground 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).

Page 27: Washington Update:  What Do  You Need to Know?

27

DOL’s Proposed Changes to Participant-Level Fee Disclosure Reg’s

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.

Page 28: Washington Update:  What Do  You Need to Know?

28

Conflicts of Interest in TDFsConflicts 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.◦ Must ensure TDFs (and underlying funds) are

appropriate plan investments.

Page 29: Washington Update:  What Do  You Need to Know?

29

Congressional Proposal for TDFsSenator 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.

Page 30: Washington Update:  What Do  You Need to Know?

30

1. Broader “Fiduciary” Definition2. Fee Disclosures to Participants3. 408(b)(2) Disclosures4. Default Investments - TDFs5. Lifetime Income Options6. Automatic IRA Legislation7. A Game Plan for Clients

Page 31: Washington Update:  What Do  You Need to Know?

31

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.

Page 32: Washington Update:  What Do  You Need to Know?

32

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.

Page 33: Washington Update:  What Do  You Need to Know?

33

Lifetime Income Hearing bySenate 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.

Page 34: Washington Update:  What Do  You Need to Know?

34

Joint Hearing by DOL, IRS and Treasury in September 2010

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.

Page 35: Washington Update:  What Do  You Need to Know?

35

1. Broader “Fiduciary” Definition2. Fee Disclosures to Participants3. 408(b)(2) Disclosures4. Default Investments - TDFs5. Lifetime Income Options6. Automatic IRA Legislation7. A Game Plan for Clients

Page 36: Washington Update:  What Do  You Need to Know?

36

Automatic IRA Legislation ProposedAutomatic 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 start-

up costs, and $1,000 tax credit for 401(k) plans.

Page 37: Washington Update:  What Do  You Need to Know?

37

Automatic IRA Legislation ProposedHouse 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.

Page 38: Washington Update:  What Do  You Need to Know?

38

1. Broader “Fiduciary” Definition2. Fee Disclosures to Participants3. 408(b)(2) Disclosures4. Default Investments - TDFs5. Lifetime Income Options6. Automatic IRA Legislation7. A Game Plan for Clients

Page 39: Washington Update:  What Do  You Need to Know?

39

Final and Proposed Rules Will Impact Many Plan Clients

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.

Page 40: Washington Update:  What Do  You Need to Know?

40

Fee Disclosures to ParticipantsMany 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.

Page 41: Washington Update:  What Do  You Need to Know?

41

Target Date DisclosuresProvide 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).

Page 42: Washington Update:  What Do  You Need to Know?

42

Washington Update: What DoYou Need to Know?

Marcia S. Wagner, Esq.

99 Summer Street, 13th FloorBoston, MA 02110

Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.erisa-lawyers.com

[email protected] A0054233