Not FDIC Insured Not Bank Guaranteed May Lose Value Marcia S. Wagner, Esq. The Politics of Retirement A Washington Update

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 2

1.Increasing Savings 2.Protecting Returns 3.Decumulation Planning 4.Tax Reform 3

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 4

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. 5

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. 6

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. 7

1.Increasing Savings 2.Protecting Returns 3.Decumulation Planning 4.Tax Reform 8

Introduction –Policymakers focusing on protection for investment returns. –Regulatory Agenda Improving fee transparency. Encouraging participant-level advice. Broadening “fiduciary” definition. 9

Fee Transparency –Policymakers want plans to get fair price for services. –Plan Sponsor-Level Disclosure Regs Effective July 1, 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. 10

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. 11

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. 12

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. 13

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. 14

1.Increasing Savings 2.Protecting Returns 3.Decumulation Planning 4.Tax Reform 15

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. 16

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 (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 (k) plans typically exempt from onerous death benefit rules. Ruling confirms that 401(k) plans with deferred annuities can still avoid them. 17

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). 18

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. 19

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. 20

1.Increasing Savings 2.Protecting Returns 3.Decumulation Planning 4.Tax Reform 21

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 22

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 23

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 24

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 25

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 26

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

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 28

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. 29

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 30

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 …… 31

The Politics of Retirement A Washington Update Marcia S. Wagner, Esq. 99 Summer Street, 13th Floor, Boston, MA Tel: (617) Fax: (617) Website: Neither Eaton Vance or The Marcia Wagner Law Group, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein. This presentation is being distributed with permission from The Wagner Law Group by Eaton Vance Distributors, Inc., Member FINRA, SIPC. 2 International Place, Boston, MA Eaton Vance does not provide tax or legal advice. Investors should consult a tax or legal professional before making investment decisions. Copyright Marcia S. Wagner, Esq Reprinted by permission. All rights reserved.