Washington Update: What Do You Need to Know?
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Transcript of Washington Update: What Do You Need to Know?
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Washington Update: What Do You Need to Know?
Marcia S. Wagner, Esq.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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
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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
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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%.
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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.
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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).
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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
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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.
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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.
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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).
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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