New Opportunities in the DCIO Market Marcia S. Wagner, Esq.

2 1. Retirement Income 2. Target Date Funds (b) Trends

3 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, ◦ 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.

4 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.

5 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.

6 1. Retirement Income 2. Target Date Funds (b) Trends

7 Recent Developments for TDFs 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 but are not yet effective.

8 DOL’s Proposed Changes to QDIA Reg’s Background 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).

9 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.

10 Conflicts of Interest in TDFs Conflicts 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 A (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.

11 Congressional Proposal for TDFs 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. Senator Kohl’s proposal differs from DOL approach to improve disclosures to employers and participants.

12 1. Retirement Income 2. Target Date Funds (b) Trends

Non-ERISA v. ERISA 403(b) Plans Non-ERISA 403(b) plans are impracticable, even if theoretically possible. Non-ERISA status is lost with employer discretion for loans, non-safe-harbor hardship distributions, or similar features. Some 403(b) vendors will not exercise discretion. Eliminating some features (e.g., loans) is unpopular. Employer is forced to exercise discretion and, thus, create ERISA plan. 13

Form 5500 Audit Requirement Before 2009, simplified Form 5500 (e.g., no audit). Audit requirement now applies to large plans (i.e., 100 or more participants). o Audit exemption still available for small plans if certain conditions are satisfied (e.g., 95% of the plan assets are held by a mutual fund or insurer). o Audit exemption for 403(b) contracts frozen before Audit costs are driving plan consolidation. 14

Investment Management Oversight Historically, employers exercise little control over 403(b) investment menu. ◦ Participants have sole control. ◦ Some vendors require standard menus. Allowing participants to invest in problem funds creates ERISA fiduciary risk. Negotiate control or terminate the relationship. 15

Moving Assets: Model Solution Freeze contributions to existing investment vendors. Terminate 403(b) plan and participants choose: ◦ receiving individual contracts to avoid back- loaded expense charges or termination fees. ◦ rolling over money tax-free if it is not subject to deferred payment or other restrictions. ◦ receiving cash subject to income and early distribution taxes, and vendor’s restrictions. Replace 403(b) plan with 401(k) plan. 16

17 New Opportunities in the DCIO Market Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, MA Tel: (617) Fax: (617) Website: A