Marcia S. Wagner, Esq. ERISA LANDSCAPE – PLAN SPONSOR ISSUES CARING FOR PARTICIPANTS

Transformation of Retirement System DOL Interaction with White House ◦ Working with White House’s Middle Class Task Force ◦ Coordinated actions to improve retirement security DOL rollouts in 2012 & 2013: ◦ Fee disclosures for plan sponsors ◦ Participant-level fee disclosures  New 6-month reset of annual disclosure date ◦ Participant investment advic e 2014 / 2015 DOL regulatory initiatives include: ◦ Tips on selection of target date funds ◦ Inclusion of lifetime income streams in benefit statements 2

DOL Tips for Selecting a TDF Start process by examining TDF prospectus Identify Plan objectives ◦ Preservation of savings ◦ Maximizing income ◦ Stable retirement spending Relate TDF characteristics to plan objectives ◦ Investment performance ◦ Fees & expenses ◦ Glidepath ◦ Landing point Document decision-making process 3

Consideration of Demographic Factors in Selecting a TDF Consider alignment of TDF with the following factors: withdrawal patterns, participant ages and likely retirement dates, participation in DB plan, salary levels, turnover rates, contribution rates Identify TDF asset classes other than equity & fixed ◦ Real estate with capacity to address inflation risk ◦ Commodities ◦ Inflation-adjusted bonds (TIPS) ◦ Cash Know investment style - ◦ Passively vs. actively managed ◦ Impact on fees Understand investment form ◦ Mutual funds ◦ ETFs ◦ Collective trust ◦ Separately managed account 4

Customized Target Date Funds Advantages of custom TDF ◦ Incorporation of plan’s core funds ◦ Inclusion/exclusion of specialized asset classes ◦ Broader asset diversification ◦ Diversifying exposure to investment providers ◦ Improved investment performance ◦ Flexible glidepath design ◦ Elimination of tiered mutual fund fees 5

Monitoring TDF Modifications & Performance ERISA prudent process requires periodically monitoring TDF characteristics ◦ Management team ◦ Investment strategy ◦ Effective implementation of strategy Periodically review whether TDF continues to meet plan objectives and demographics TDF changes or mismatch may require replacing fund Check underlying funds/investments Role of Advisors provide meaningful TDF disclosures to participants as “best practice” right now and facilitate sponsor’s prudent review of TDF 6

Lifetime Income Initiatives Goals of Policymakers 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 7

Lifetime Income Solutions for DC Plans Three Basic Approaches 1) External Solution (Outside of Plan) 2) Distribution Option Within Plan 3) Investment Vehicle Within Plan External Solution Participants purchase IRA Annuities. Annuitization occurs outside of plan through rollovers. Internet portals can improve participant access. 8

“In Plan” Lifetime Income Solutions Distribution Option Within Plan Plan purchases Distribution Annuities Immediate annuity purchased at time of distribution Annuity contract is distributed to participant Investment Vehicle Within Plan ◦ Plan invests in Group Annuity ◦ Offers various investment and distribution options ◦ Participant’s account converted to lifetime income 9

Need for Additional Fiduciary Guidance Selection of Annuity Provider and Annuities Subject to ERISA fiduciary standards. Must act in accordance with duty of prudence and loyalty. Existing DOL Guidance 1995 guidance on Distribution Annuities for DB plans safe harbor on Distribution Annuities for DC plans. 1. Procedural prudence 2. Insurer’s ability to pay 2. Cost 4. Draw appropriate conclusions 5. Seek expert advice 10

Removing Regulatory Obstacles to Annuity Distributions Rollovers to DB Plans ◦ Rev. Rul ◦ 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 ◦ Ruling confirms 401(k) plans with deferred annuities can avoid onerous death benefit rules New IRS regulation relaxes required minimum distribution rules ◦ RMD rules mandate start at age 70 ½ but longevity annuities provide income stream for later in life 11

Default Annuities & Disclosures 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. Advance Notice of Proposed Rulemaking Lifetime income illustration in participant statements Must provide estimated income streams based on (1) current account and (2) projected account at NRA 12

So… Is The Answer Managed Accounts? Active management provides the best attributes of TDFs minus the risks. If implemented appropriately, efficiently and effectively, deals with decumulation planning Satisfies the policy goals of Washington and the regulators. 13

Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, Massachusetts Tel: (617) Fax: (617) Website: A ppt ERISA LANDSCAPE – PLAN SPONSOR ISSUES CARING FOR PARTICIPANTS