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Spring 2013 Retirement Plan Legislative Update

April 24, 2013

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RetirementWhat’s on the Horizon

Chad BreunigSenior Vice President

Director of Fiduciary and Regulatory Support Services

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Topics

• Federal Budget

• Regulatory Environment

• Courts and Settlements

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Federal Budget

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What is the environment?

• Result of election - mixed White House/Senate/House

– Bigger issues take longer

– Lesser issues tend to not get addressed (retirement?)

• Big Issues

– Spending cuts

– Tax increases

• Other Issues

– Expanding retirement plan coverage

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Federal Budget Fallout• What is the Issue?

– Federal government needs more revenue

– Challenge is finding new tax resources

– Tax “shelters” are prime candidates

• What is the Outlook?– Something has to change for budget purposes

• Re-write of tax code gaining momentum

• Flat taxes with minimal deductions/exemptions– Mortgage and charitable deductions with caps

– Retirement (401ks, IRAs, etc.) is a big question mark

– Need “national policy” justification– Retirement deductions will be hot topic

• “Easy” source of revenue

• Caps to complete elimination being considered

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Federal Budget Fallout• What is the White House saying?

– Administration issued Revenue Proposals for 2014

– Impacts to retirement

• Expanding retirement coverage

• Limits on pre-tax accruals

• Changes to RMD requirements

• Limits on tax value of certain deductions

– Just proposals, still need legislative or regulatory action

• Any tax “increases” are political hot buttons

• Republicans will resist

• Ultimate result may be compromise

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Expansion of Retirement Plan Coverage

• What is the issue?

– Current retirement structure does not cover enough workers

– Estimated that only 50% of workers covered by plan

• What is being discussed?

– Obama revenue proposals for 2014

• Automatic IRAs

– Companies at least 2 years old with more than 10 employees

– If don’t offer a plan, must offer automatic IRA

– Roth (default) or traditional

– Tax credit for expenses (capped at $500)• Increased tax incentives for start up costs

– National Retirement Fund (Senator Harkin)

• Universal pension benefit for all employees

• Pooled assets managed by private firms

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Expansion of Retirement Plan Coverage

• What is the outlook?

– Inclusion in Obama’s revenue proposals brings focus

– HOWEVER, changes will require significant legislative action

• No bi-partisan support at the moment

• Other priorities

• Momentum is growing but will take time

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Limits on Pre-Tax Accruals

• What is the issue?– Federal government needs money

– Wealthy do not need tax incentives for retirement savings

• What is being discussed?– A taxpayer who has accumulated amounts within the tax-favored retirement system

(i.e., IRAs, section 401(a) plans, section 403(b) plans, and funded section 457(b) arrangements maintained by governmental entities) in excess of the amount necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan under current law (currently an annual benefit of $205,000 payable in the form of a joint and 100% survivor benefit commencing at age 62 and continuing each year for the life of the participant and, if later, the life of the participant’s spouse) would be prohibited from making additional contributions or receiving additional accruals under any of those arrangements. Currently, the maximum permitted accumulation for an individual age 62 is approximately $3.4 million.

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Limits on Pre-Tax Accruals

• What?

– Must include ALL retirement savings

– Calculate what type of annuity that would produce

• Joint and 100% survivor benefit

• Starting at age 62– If greater than $205,000 per year (indexed for inflation)

– No additional tax deferred accruals or contributions permitted

• What?!

– If have a present value of all retirement benefits greater than $3.4 million (if 62 in 2013), you are capped

– If earnings go above the cap, ok

– If the $205,000 per year goes up, can contribute more

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Limits on Pre-Tax Accruals

• Sounds complicated, how would that be implemented?

– No idea

• What is the outlook?

– In the budget so there is focus

• Attacks the “wealthy” so that is politically popular

• Follows through on a campaign promise

– Requires significant legislative action

• Very politically charged

• Republicans will push back

– Way too complicated to work

• Who calculates the limit? Individual? Employer? Service provider?

– Tax incentives for retirement savings will change but this can’t be it

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Changes to MRD Requirements

• What is the issue?– MRD rules established to prevent tax deferred treatment on amounts not needed in

retirement

– Result has been negative impacted non-wealthy who don’t know how to calculate

• What is being discussed?– If aggregate retirement savings is less than $75,000, MRD rules do not apply

– Additional complexities for defined benefit payments that are in progress

• What is the outlook?– Good idea, MRD rules are very antiquated

– Fairly complex requirement because have to look at all assets

– If can’t calculate MRD, how do they know if they have more than $75,000?

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Limits on Tax Value of Certain Deductions

• What is the issue?– Trying to increase taxes on “wealthy”

• What is being discussed?– Reduce the value of exclusions and deductions for those in the 33, 35 and 39.6 tax

bracket

– Includes retirement plan and IRA contributions

• What is the outlook?– General theme of budget is that “wealthy” are being targeted

– Finding ways to generate revenue without “increases” taxes

– Again, politically charged issue, Republicans will resist

– There will be some impact on retirement savings

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Regulatory Update

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What is the environment?

• Obama winning White House means status quo

• Biggest potential impact: Department of Labor

– Phyllis Borzi currently heads up EBSA

– Track record of aggressive regulation

• Definition of Fiduciary

– Borzi had withdrawn certain initiatives due to election

– Now that election is over, initiatives will be restarted

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Definition of Fiduciary

• What is the Issue?

– Fiduciary test under ERISA is 30+ years old

• Make recommendations

• on a regular basis

• pursuant to a mutual understanding that the advice

• will serve as a primary basis for investment decisions, and

• will be individualized to the particular needs of the plan.

– DOL believes certain activities should be considered fiduciary in nature

• Appraisals

• “One-time” advice

• IRAs

• Traditional investment education

• Distribution consulting

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Definition of Fiduciary

• Why do we care?

– Potentially increases your fiduciary responsibility

• “Plan administrator” (i.e., plan sponsor is ultimate fiduciary)

• Ultimate fiduciary must monitor other fiduciaries

• Need to know what is considered a fiduciary activity in order to monitor it

– May harm participants

• Services that become fiduciary in nature increase liability risk

• Providers may be less likely to or not able to provide needed education

• Participants become less informed instead of more

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Definition of Fiduciary

• What is the Outlook?

– Rule will be released in July

– Promised to look a lot like the prior versions

• Greatly expanding definition of fiduciary to cover– IRAs

– Brokerage activities

– Investment performance reporting

– Distribution consulting

– However, will have notice and comment period, and possibly hearings

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In-Plan Roth Conversions

• What is the Issue?– Prior rules allowed for Roth IRA conversions

• Limitation: Can’t do it “inside” a 401(k) plan

– Taxpayer Relief Act of 2012 added “in plan” option

• Convert pre-tax 401(k) accounts to Roth 401(k) accounts

• Plan sponsor decision to offer to participants

• Similar to IRA conversions offered in the past

• Generates current tax revenue for Federal government

– Guidance as to how to implement rule has not been released

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In-Plan Roth Conversions

• Why do We Care?– Plan design option participants may ask about

• What is the Outlook?– Not currently being broadly offered/used

• Awaiting additional guidance regarding how to implement rule

• Concern is if permitted to occur, subsequent guidance would require sponsors, providers and participants to “correct” prior conversions

– Treasury has asked for input as to what guidance is needed

– Guidance to be issued by summer

– Do not expect a lot of adoption at the plan level

– Operationally, we are prepared to move forward

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Lawsuits and Settlements

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What have the courts been up to?

• Information about fee lawsuits continues to come out

• Some are worth noting:

– Tussey v. ABB

– Braden v. Walmart

• Common Basic Facts– Fund line-up included expensive share classes

• ABB – Retail Share Classes

• Walmart – Expense ratios in excess of 100bps

– Revenue share funded plan fees

– Alleged breaches of fiduciary duties in not ensuring reasonable fees

– Participants sued

– Plan sponsors and service providers lost

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So, what can we learn from these cases?

• A lot of what we already knew

– Be aware of the share classes you select

• What revenue share is produced?

• Are other, cheaper share classes available?

– Do the math (i.e., what are the actual dollars)

– Don’t pick funds just because revenue share is better

– Consider other fee structures

– Don’t use 401(k) plan fees to subsidize other services

• In summary, UNDERSTAND YOUR FEES

– Section 408(b)(2) Summary Fee Disclosure will help

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Fee Lawsuits Ancillary Issues

• What is the Issue?

– As part of ABB lawsuit, Fidelity found liable for misuse of float

• Used interest bearing accounts to generate additional revenue

• Taken in as revenue but not disclosed as a “plan fee”

• Why is this important?

– Court found that float = plan asset

• Now has to be disclosed as direct revenue for services

• Can’t be used to offset expenses outside of the plan

– Fidelity has appealed based on this characterization

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Fidelity Float Issue

• Why do we care?– Characterizing float as a plan asset would be a shift

– However, we do not have the “Fidelity” issue

• Do not use “interest bearing” accounts

• No hard dollar revenue from float

• Not being used to offset expenses outside the plan

– Still an opportunity to learn

• Fidelity getting inquiries from other large plan sponsors

• DOL gaining interest in use of float

• Court decision focused on disclosure

• We are reviewing our float disclosures to ensure good coverage

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The Next Litigation Issues

• What is the next issue?– Is everyone paying their fair share?

– Revenue share is not equal for all funds

• Participants in high revenue share funds pay more fees

• May be more obvious SDAs and employer stock

• Why is this important?

– It’s no longer about overall fee reasonableness at plan level

– Need to consider fee fairness at participant level

• Why do we care?

– Getting sued stinks

– Fee issues are not going away

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Questions?

The information contained herein and any information provided by employees and representatives of Wells Fargo and its affiliates is for educational purposes

only and does not constitute investment, financial, tax or legal advice. Further,

this information is general in nature and is not intended to address the particular

needs of any specific plan.