a washington update the politics of retirement marcia s. wagner, esq
TRANSCRIPT
A Washington Update
The Politics of Retirement
Marcia S. Wagner, Esq.
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
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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 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
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Introduction
– Policymakers focusing on protection for investment returns.
– 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.
– Tussey v. ABB, Inc.
• Plan sponsor held liable for excessive fees.
– 408(b)(2) Fee Disclosures
• Will force plan sponsors to monitor and benchmark all compensation
• 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.
– 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. A 5-factor test.
• It is fiduciary advice only if it is a 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.
– Effect of Expanded Definition
• Fiduciaries may not receive variable fees.
• Plan expense accounts – levelize fee arrangements.
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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
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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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Removing Regulatory Obstacles to Annuities in Plans
– 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.
– 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
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Tax Cost of Retirement Plans
– Impact of Pan Contributions on Federal Deficit
• $70.2 Billion Annually
• $361 Billion 2011 – 2015
– Tax Reform
– Pension System Reform
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Tax Reform
– 2013 Plan Limitations that Can Be Reduced to Limit Deficit:
• Annual Additions from All Sources - $51,000
• Elective Deferrals - $17,500
• Plan Sponsor Deduction - 25% Participant Compensation
• Limit on Compensation Base to Determine Benefits/Contributions - $255,000
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Tax Reform (cont’d)
– National Commission on Fiscal Responsibility
• 20/20 Cap: Limits Contributions to Lesser of $20,000 or 20% Compensation
– Brookings Institution
• Tax All Employer and Employee Contributions
• Refundable Tax Credit Deposited to Retirement Savings Account
– Obama Administration - 7% Tax on Employer & Employee Contributions
• High Earners Only
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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
• 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 (cont’d)
– 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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Pension System Reform: Federal Level
– New retirement system proposed in “report” issued by U.S. Sen. Tom Harkin
• Automatic and universal enrollment required by employers that do not offer a plan
• Regular stream of income starting at retirement age
• No lump sum withdrawals
• Financing through payroll system by employee contributions/government credits
• Privately managed investment by new entities called “USA Retirement Funds”
• Limited employer involvement and no fiduciary responsibility
°Unspecified level of required employer contributions
• Employees can increase/decrease contributions or opt out
– Similarities to proposals for state-covered pensions of private-sector workers
– Text of bill expected in 2013
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Systemic Reform - Other Proposals
– Unitary Defined Contribution System espoused by John Bogle, Vanguard founder
• Consolidation of all retirement savings programs
• Federal Retirement Board controls system
°Limit distributions and loans to prevent system leakage
°Limit number of investment options concentrating on low-cost funds
• ERISA fiduciary standards extended to service providers / money managers
– Spark Institute Universal Small Employer Retirement Savings Program
• Eligibility limited to employers with fewer than 100 employees
• Pre-approved prototype
°Auto-enrollment and escalation of contribution levels
°No discrimination testing
°Contribution limits lower than 401(k) but higher than IRA
• Investment options to meet specific criteria
• Recordkeeping/5500 performed at service provider level
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Systemic Reform – Other Proposals (cont’d)
– Proposals by Academics
• Teresa Ghilarducci (The New School)
- eliminate current tax breaks and use savings to make 5% contribution to all employees
- mandatory contributions and guaranteed investment return equating to defined benefit approach, supplementing Social Security - participants in existing plans could continue in such plans if contributions are 5%, no early withdrawals, mandatory conversion to annuity on retirement - people not in employer plans would be mandated into Guaranteed Retirement Accounts (“GRAs”) with mandatory 2.5% employer and employee contributions; investments pooled and professionally managed to reduce fees.
• Meir Statman (Santa Clara University) – mandatory employer and employee contributions but investment controlled by account owner equating to defined contribution approach, like the current British and Australian retirement structures.
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Summing Up
–Significant Transformation of Private Retirement System Possible
–Tax Reform
• Reducing tax incentives will shrink system
° Lower contributions at all income levels result if tax exclusions cut back
• 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 (cont’d)
– Systemic Changes • Intended to create access for low-wage employees
• Government will 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 and needs
• Interesting Times ……
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Thank you.
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Marcia S. Wagner, Esq.99 Summer Street, 13th Floor, Boston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250Website: www.wagnerlawgroup.com
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