The Changing DC Landscape: How Regulation Is Changing the Face of the DC Plan
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Transcript of The Changing DC Landscape: How Regulation Is Changing the Face of the DC Plan
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The Changing DC Landscape:
How Regulation Is Changing the Face
of the DC Plan
Dave Nadig, ModeratorPresident, ETF AnalyticsIndexUniverse
Jimmy Veneruso, CFA, PresenterVice PresidentCallan Associates
Marcia Wagner, PresenterPrincipalThe Wagner Law Group
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Dave Nadig, President, ETF AnalyticsIndexUniverse
Jimmy Veneruso, CFA Vice PresidentCallan Associates
Marcia WagnerPrincipalThe Wagner Law Group
The Changing DC Landscape:
How Regulation Is Changing the Face
of the DC Plan
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General 401(k) Investment Trends
Most common QDIA solution Useful transition/mapping
strategy May incorporate more
complex underlying strategies
Improved integration/ operational support
Generally exempt from new disclosure regulations
Permits fund specialization for interested participants
Avoid duplication within categories Enhance fund oversight, disclosure Simplify investment education
Smaller Menus
Target Date Funds
Brokerage Accounts
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Who’s a Fiduciary?
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In 2011, DOL proposed removing five-part test:
Expanded definition to cover more advisors, more assets (e.g., IRAs)
Significant push back from industry
Proposed regulation withdrawn
Redefining FiduciaryOriginal regulation issued in 1975 used five-part test for "investment advice“:
Investment recommendation/ valuation for securities/other property
Provided on a regular basis Delivered pursuant to a
mutual understanding Serves as a primary basis for
investment decisions, and Individualized to the
particular needs of the plan
DOL expected to re-propose
fiduciary regulation in
July 2013
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Practical Implications Non-Fiduciary Advisors
Would need to change service model. Must disclose they are not providing impartial advice. Or they could accept fiduciary status and become subject to ERISA.
Re-proposed Rule in 2013: New definition to include individualized advice only. Will be similar in approach to DOL’s initial proposal. DOL is coordinating with SEC.
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Target Date Funds
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What Are Target Date Funds? Popular 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 raised 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%.
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Average “To” & “Through” GlidePaths
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TDFs Now a Mainstream Option
Active Domesti
c Equity
Active In
t'l Eq
uity
Genera
l/Core
Bond
Lifecyc
le/Tim
e Base
d Allocati
on
Stable V
alue/G
IC
Indexed
Domestic E
quity
Money M
arket
High Yie
ld Bond/Trea
sury Bond
Emerg
ing Mark
ets
Indexed
Int'l
Equity
Employe
r Stock
Self D
irecte
d Brokerag
e
Real Es
tate
Lifesty
le/Risk
Based Allo
cation
Inflation Pro
tected
Bond (TIPS)
Other Se
ctor
Mutual Fu
nd Window
Custom/H
ybrid
Fund
Socia
lly Resp
onsible
Retirem
ent In
come/A
nnuity
Exchan
ge Tr
aded
Funds (
ETF)
Hedge
Funds
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%Relative Frequency of Use, Different Investment Categories
Considering addingAdded in the past year Added more than a year ago
Source: Deloitte/ISCEBS 2011 Annual 401(k) Benchmarking Survey
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Growth of TDF & Target Risk Funds
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 $-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
0
50
100
150
200
250
300
350
400
450
# Funds Target Date
# Funds Target Risk
Assets Target Date
Assets Target Risk
Cash Flow Target Date
Cash Flow Target Risk
AUM
/Cas
h Fl
ows (
$,M
)
Num
ber o
f Fun
ds
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Trends In TDF & TRF Usage Passively managed target date funds now surpass actively managed target
date funds in prevalence (38.1% and 36.5%, respectively).
Nearly two-thirds (63.5%) of plans offer target date funds with some amount of passive management in the underlying fund allocation
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Trends In TDF & TRF Usage
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Potential TDF Conflicts of Interest Conflicts arise when a “fund of funds” invests in
affiliated underlying funds.
Are fund managers ever subject to ERISA?
Implications of DOL guidance Plan sponsors are alone in their fiduciary obligation. Must ensure TDFs (and underlying funds) are appropriate plan
investments.
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Recent Target Date Fund Legislation DOL 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
and became effective in 2012.
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Former Senator 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.
TDF Proposals In Congress
“The discovery that many 2010 target date funds contain junk bonds is troubling, but not surprising. Many target date funds are composed of hidden underlying funds that can have high fees, low performance or excessive risk. With more than 90% of employers choosing off-the-shelf target date funds as their employees' standard option, there is no question that we need greater regulation and transparency of these products.”Senator Kohl
Chair, Senate Aging Committee
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Target Date Fund Redesign Trends Cost control Predictability Transparency
Greater use of institutional/
indexed funds
More sophisticated asset allocation strategies
Investment horizon/liability management
(glide path design)
Annuities/income guarantees
{{{{
Inflation protection strategies Broader equity exposure Revised fixed income approach
Greater life expectancies To retirement or through retirement? Criticism from Congress, other constituencies
Emerging trend Initial offerings wrapped around existing
funds
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Lifetime Income?
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Lifetime Income Traditionally, 401(k)s designed for
accumulation/supplemental benefits 401(k) reporting focused on balances,
not benefits
401(k)s Displace Pensions as Primary Retirement
Plan
Balance Reporting Impacts Participant
Behavior
DOL to Require Reporting of Projected Monthly
Benefit
{{{
Discourages savings due to size of target amount
May lead to overconfidence Encourages lump sum distributions
Questions about projection method, annuity factor, rate of return
Single number or range of possible outcomes
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Defined Contribution & Politics Obama Administration believes lifetime income
options facilitate retirement security. Initiative to reduce barriers to annuitization of 401(k) plan assets. DOL / IRS issue 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. Utility of default annuities limited because of different needs to
retirees and difficulty in reversal
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DC Plan Annuitization Recent developments include 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.
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Tax Relief for Lifetime Income Options Proposed Regulations & Rulings on Required
Minimum Distributions: PLR 200951039: no surprises as to age 70 ½ interpretations. Proposed Reg. (Feb. 2012): longevity annuity beginning at age 80 or 85
will not violate required minimum distribution rules. Annuity premium lesser of $100,000 or 25% of account balance.
Proposed Reg. (Feb. 2012): split distribution options consisting of annuity and lump sum approved.
Rev. Rul. 2012-4: participants can rollover 401(k) balance to same employer DB plan and convert to annuity from DB plan.
Rev. Rul. 2013-3: deferred annuities in 401(k) plan will not trigger IRS death benefits for surviving spouse.
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Lifetime Income Options: Applications Anticipate future legislation or regulation.
Most likely: DC plans must disclose monthly or yearly
lifetime income that account balance can provide
through annuity purchase. Possible DOL reg. in 2013
Also possible: DC plans must offer life annuities as
benefit distribution option.
Be prepared to explain concept of longevity annuities.
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Benchmarks & Fee Disclosure
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Recent Fee Disclosure Regulations Two fee disclosure regulations implemented in 2012
Section 408(b)(2) disclosures to plan sponsors (Effective July 1, 2012) Section 404(a)(5) disclosures to participants (Effective Aug 30, 2012)
DOL considering guide/tool for 408(b)(2) disclosures How to read disclosures Potentially complex, provided through multiple documents Targeting May 2013 release
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TDF Monitoring & Benchmarking
Our survey finds that a wide variety of broad-based securities market benchmarks are being used for participant disclosures, indicating little consensus on what constitutes an appropriate comparative for this purpose.
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Thank You.Questions?
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The Changing DC Landscape:
How Regulation Is Changing the Face
of the DC Plan
Dave Nadig, ModeratorPresident, ETF AnalyticsIndexUniverse
Jimmy Veneruso, CFA, PresenterVice PresidentCallan Associates
Marcia Wagner, PresenterPrincipalThe Wagner Law Group