Bank of America Merrill Lynch Legislative and Regulatory Brief

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1 May 2015 baml.com/publicpolicyinsights DOL Regulatory Project Fiduciary re-proposal Update NOTE: The DOL is using significant resources on this project and as such, several other initiatives on the DOL Project Plan list have been slow to advance and many are reflected here as no new updates at this time These projects remain very much a concern for the DOL and they will likely refocus on them all in Department of Labor (DOL) re-proposed rule on the ERISA definition of fiduciary (also referred to as the Conflicted Advice Rule ) was released on the DOL website on Tuesday, April 14, The proposed rule was published in the Federal Register on Monday, April 20, 2015 DOL will accept comments through late July, 2015 Within 30 days of the close of the initial comment period, DOL will hold public hearings on the proposal. After the hearings are over, DOL will publish transcripts of the hearings in the Federal Register and reopen the comment period. DOL will then review the comments from letters and the hearings and decide what if anything to revise before publishing the final rule. The proposal says that the final rule will be effective 60 days after published in the Federal Register and the enforcement date will be 8 months after the final rule is published in the Federal Register. We are: Evaluating the proposal. Working with outside resources to better understand the implications of the proposal. Meeting with various internal groups to determine impact to our products, services and business models. DOL Budgetary Support for State plan proposals - no new updates at this time The President s 2016 fiscal budget would allot $6.5 million to support several two-year pilot programs for states to experiment with ways to expand private sector retirement options. Those include 401(k) plans and individual retirement accounts, particularly for people whose employers do not currently offer a plan. There are questions as to whether or not these proposed plans would be subject to ERISA rules and in conflict with Federal law. We have a voluntary system that works well and do not believe mandating plans is the answer. The DOL s budget item appears to indicate their support of state retirement savings programs this is not a welcome development. Mandated state plans do not just impact small employers; they have the potential to impact large employers with excluded classes of employees who would then be subject to a state plan requirement. See State Legislative Proposals below for more detail. The policy issues, status and views expressed are subject to change without notice at any time. This brief is provided for informational purposes only and should not be used or construed as advice or a recommendation of any product, service, security or sector. For Plan Sponsor and Consultant Use Only. Bank of America Merrill Lynch is a marketing name for the Retirement Services business of Bank of America Corporation ( BofA Corp ). Banking activities may be performed by wholly owned banking affiliates of BofA Corp, including Bank of America, N.A., member FDIC. Brokerage services may be performed by wholly owned brokerage affiliates of BofA Corp, including Merrill Lynch, Pierce, Fenner & Smith Incorporated ( MLPF&S ), a registered broker-dealer and member SIPC. Insurance and annuity products are offered through Merrill Lynch Life Agency Inc. ( MLLA ), which is a licensed insurance agency and wholly owned affiliate of BofA Corp. Investment products offered through MLPF&S and insurance and annuity products offered through MLLA: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value Are Not Deposits Are Not Insured by Any Federal Government Agency Are Not a Condition to Any Banking Service or Activity Page 1 of 7

2 July 2014 DOL Regulatory Project Open Brokerage Windows - no new updates at this time Update (continued) The comment period closed November 19, 2014 on the DOL request for information ( RFI ). 38 comment letters were received from a mix of individuals, industry associations and financial service firms, including but not limited to, American Benefits Council, US Chamber of Commerce, Plan Sponsor Council of America, and The SPARK Institute. Many comment letters indicated support for open brokerage windows, felt that existing guidelines are sufficient, and expressed concern that further regulations that place additional restrictions or guidelines would make them less attractive to plan sponsors. The industry continues to be supportive of open brokerage windows as they provide plan sponsors with menu flexibility to address participant requests related to socially responsible investing and different risk appetites for participant populations varied in age, income, and retirement readiness. Additional regulatory restrictions on open brokerage windows could result in more administrative costs and additional fiduciary responsibility for plan sponsors. DOL should carefully consider the comments received to their RFI to help ensure any guidance they may propose does not introduce additional controls or reporting requirements that make brokerage windows an overly costly or burdensome plan design option going forward. Annuity selection safe harbor no new updates at this time DOL is expected to release a proposal to amend its rules for fiduciaries when making annuities available as a distribution option in a defined contribution plan. This was targeted for release in January 2015, but as of the date of this publication, no further guidance has been received from the DOL. We believe it is important to provide individuals with several distribution options that help enable them to spend down their retirement assets without running out of retirement assets in their lifetime. Providing plan sponsors with guidance in choosing annuity options for their plan investment menu can be helpful, but should not be mandated. Benefit statements/lifetime income disclosure - no new updates at this time DOL is working on a project to implement the benefit statement requirement added by the Pension Protection Act of DOL has indicated it might also require a lifetime income disclosure on benefit statements. This was targeted for January 2015 release, but as of the date of this publication, no further guidance has been released by the DOL. Having a real sense of how well and for how long individuals retirement assets can support them is essential. We currently provide plan sponsors and participants with access to retirement planning tools that enable them to project their potential income in retirement inclusive of other assets, other retirement savings, and other anticipated expenses in retirement. While we currently offer a lifetime income calculation on statements for plans with Advice Access, individuals can enter additional financial information to provide a more holistic calculation based on all an individual s retirement savings and resources. A DOL-mandated calculation on participant statements can only take into account the funds currently in a participant account, which provides a very limited estimation of retirement readiness. Providing a projected balance on a participant statement could be misunderstood to be a guarantee of a future balance which would be incorrect and potentially dangerous for Page 2 of 7

3 DOL Regulatory Project participants and plan sponsors alike. Update (continued) 408(b)(2) guide or summary no new updates at this time Comments on this proposal were submitted to the DOL in June, The DOL project plan does not include an estimated date for this project. There has been no further guidance from the DOL on this project to date. Industry associations have met with the DOL to express concerns about how costly and unnecessary this additional reporting would be. Plan sponsors have received two cycles of 408(b) disclosures to date and have not indicated that they are unable to read disclosures and gather the information they need from them to determine reasonableness of plan fees. The DOL has a proposal in search of a problem which is further evidenced by the proposal s inclusion of a focus group to determine if plan sponsors find current disclosures confusing. Supreme Court Activity Tibble v. Edison The Supreme Court heard arguments in the Tibble v. Edison excessive fee case. SCOTUS issued their decision on May 18, 2015 and held that because a fiduciary normally has a continuing duty to monitor investments and remove imprudent ones, a plaintiff may allege that a fiduciary breached a duty of prudence by failing to properly monitor investments and remove imprudent ones. Such a claim is timely as long it is filed within six years of the alleged breach of continuing duty. The case now goes back to the 9 th Circuit Court to consider the petitioners claims that the plan sponsor breached their duties within the relevant 6-year statutory period. The Supreme Court decision was not surprising considering that during the oral arguments this past February, the attorney for Edison International, the plan sponsor, conceded that the plan sponsor does in fact have a continuing duty of prudence that requires the periodic monitoring of investments and not just at the point in time when the investment is made. It is important to note the Supreme Court was only hearing arguments about whether the 6 year statute of limitations had been exhausted. The justices did not opine on whether the plan sponsor breached their fiduciary duty to monitor the investments in the plan. The case goes back to the 9 th Circuit now where they will hear the case and determine if the policies and procedures the plan sponsor had in place were sufficient and determine if the plan sponsor breached their fiduciary responsibility. This is an important case as it raises the question on the potential implications related to share class choices in plan menus and the statute of limitations on fiduciary responsibility related to investment menu selections. This case serves as a reminder to plan sponsors of the importance of investment policies and procedures, investment policy statements, and ongoing review of the plan investment options. We will continue to monitor the case in the 9 th Circuit. Page 3 of 7

4 SEC Fiduciary Standard Guidance Project At the first SEC Investor Advisory Committee meeting of 2015, Securities and Exchange Commission (SEC) Chairwoman Mary Jo White said the agency will continue to look at the different fiduciary standards on the sale of investment products this year, but did not hint if the SEC will change anything. In a speech at the 2015 SEC Speaks event, SEC Commissioner Daniel Gallagher said that Commission has formally requested information, in particular quantitative data and economic analysis, relating to the benefits and costs that could result from various alternative approaches regarding the standards of conduct and other obligations of broker-dealers and investment advisers. No time frame for release has been provided at this time. We support a reasonable, uniform fiduciary standard that reduces confusion on the part of the consumer. We will continue to monitor SEC activity on the fiduciary standard project. We are glad that Chair White and the SEC are taking a slow and thoughtful approach to any possible rule change. Commissioner Gallagher recently announced his intention to resign from the Commission so we will watch to see what impact this may have on the project. Legislative Activity Senate Finance Committee Establishes Working Groups Senate Finance Committee Chair, Senator Orrin Hatch (R-UT) has established five working groups with specific policy focus areas as follows: 1) Individual Income Tax 2) Business Income Tax 3) Savings & Investment 4) International Tax 5) Community Development & Infrastructure. Each of the bipartisan groups will work directly with the nonpartisan Joint Committee on Taxation (JCT) to produce an in-depth analysis of options and potential legislative solutions within its assigned area, with the goal of having one final comprehensive report featuring recommendations from each of the five categories completed by the end of May. The working groups were charged with reporting back their findings in May, 2015 to Senate Finance. To date the groups have not published their reports and recommendations. We will continue to monitor for developments that may impact employee benefits. Senators Hatch and Wyden both understand the importance of continued retirement savings incentives, and will hopefully bring a bi-partisan approach to any changes to retirement savings guidelines. The report recommendations, which will be delivered to Chairman Hatch and Ranking Member Wyden (D- OR), will serve as a foundation for the development of bipartisan tax reform legislation. USA Accounts Program Representative Joe Crowley (D-NY), Rep. Crowley has indicated he will introduce legislation to help families save. Would create a long term savings account for every American child creating a culture of savings from birth. Would be called USAccounts funded through a combination of federal seed money ($500), matching funds (from the government of up to $500/year) and family contributions (up to $2,000/year). Extends Child Tax credit giving low income families the ability to contribute to an account. We are supportive of proposals that expand savings in general and retirement savings specifically. Rep. Crowley s proposal is an interesting approach to lifetime savings and financial literacy. Funding for such a program does not seem likely in the current environment in Washington unless it is proposed with a pay for in the form of a cut to another program or a new tax, neither of which seem likely. We will continue to monitor when Rep. Crowley introduces the proposal in Congress. Page 4 of 7

5 Legislative Activity SAFE Act sponsored by Senator Orrin Hatch (R-UT) (continued) Sponsored by Sen. Hatch (R-UT), it includes various retirement savings reforms, such as e-delivery of plan disclosures, reform in public and private pension funding guidelines, expand annuities in DC plans, and update 401(k) safe harbors among other issues. Senator Hatch continues to be supportive of current retirement savings incentives. In a recent speech, Mr. Hatch indicated that he does not want to see tax reform proposals that would cut back on 401(k) and other retirement savings. Originally proposed in 2013, Senator Hatch has indicated he will reintroduce a revised bill in Previous proposal included: a starter 401(k), an employee elective deferralonly plan expand availability of defined contribution multiple employer plans (MEPs) remove the 10% cap on the 401(k) automatic enrollment safe harbor simplification of defined contribution administration expansion of e-delivery of plan documents, statement, notices and disclosures. We support several of the proposals in the SAFE Act. Sen. Hatch has not yet re-introduced the bill, but we continue to monitor. Proposals that are beneficial to plans by reducing administrative burdens for plan sponsors and expanding coverage for employees with the offering of a starter 401(k) provide positive retirement savings reform. We have long supported expanded electronic delivery of plan documents and disclosure, and simplification of the rules and guidelines that permit e-delivery. Sending these communications via electronic formats reduces cost in printing and mailing and a paperless process is always good for the environment. Retirement Security Act of 2015 (S. 266) Sponsored by Sens. Collins (R-ME) and Nelson (D-FL) On January 27, Sens. Susan Collins (R-Maine) and Bill Nelson (D-Fla.) introduced the Retirement Security Act of The proposal seeks to encourage small businesses to offer retirement plans by permitting businesses without a commonality of interest to join multiple employer plans (MEPs). The bill would also create a new safe harbor for automatic enrollment plans which allows employees to receive an employer match on contributions of up to 10 percent of their pay. Bill has been referred to Senate Finance. We continue to monitor for activity. The Collins-Nelson bill is similar to the SAFE Act sponsored by Senator Hatch in expanding the use of Multiple Employer Plans (MEPs) by removing the current regulatory roadblocks, one of which requires that the participating employers share a similar business purpose. Making MEPs more broadly available has the potential to expand access to employer based retirement savings plans for almost half of the working population that does not currently have access to a plan at work. Additionally, the bill would allow the Saver s Credit to be made available on the Form 1040EZ. A companion bill (H.R. 557) was introduced in the House by Reps. Vern Buchanan (R-Fla.) and Rep. Ron Kind (D-Wisc.). MEPs would allow small plans to access many of the services that are usually not available to them due to cost restraints, like loan service and participant call center service support. Ways and Means Committee Sends IRA Charitable Rollover Provision (H.R. 637) On February 4, the House Ways and Means Committee approved a package of tax bills to permanently extend tax breaks for charities and small businesses. No further movement at this time, but there are several others in Congress supportive of making permanent this and several other temporary provisions that continue to be extended year after year. Page 5 of 7

6 Legislative Activity (continued) H.R. 637 would make permanent the rule allowing certain tax-free distributions from individual retirement accounts for charitable purposes. It was approved This could be picked up as a provision of a larger tax bill at some point this year, we will continue to monitor. It would be good if Congress can pass this legislation to make this temporary provision permanent so that eligible individuals and charitable organizations can plan accordingly each year instead of waiting for a possible last minute congressional extension as has happened for the past few years. The charitable IRA rollover provision is very popular with both individuals age 70 ½ and older, as well as with charitable organizations. Retail Investor Protection Act Sponsored by Rep. Wagner (R-MO) The bill follows the same basic structure as Rep. Wagner s legislation that passed the House in the last Congress. Before DOL could put forward a rule that would expand the definition of a fiduciary under ERISA, the SEC would have to issue a rulemaking on a uniform fiduciary standard under Section 913 of Dodd-Frank. Before the SEC could issue that rule, it would be required to look into potential issues with a rulemaking in regards to investor harm and access to advice that were not adequately addressed in the SEC s 2011 study. The SEC would also be required to look into alternative remedies that could reduce confusion or harm to investors, such as simplifying the titles used and enhancing disclosure surrounding different standards of care 04/29/2015 Referred to the Subcommittee on Health, Employment, Labor, and Pensions. This proposal was passed by the House last year, but not by the Senate. If it passes the House, it is not likely to come to a vote in the Senate. This is more of a political statement by Rep. Wagner as the DOL has already submitted their re-proposed rule to the OMB and it is now under review. So the first part of the bill, to stop DOL from moving forward with a rule before the SEC, is a moot point. Since the bill is not likely to become law, it will not likely have any impact on the DOL or the SEC fiduciary projects. State Legislative Proposals The President s 2016 fiscal budget proposes to provide $6.5MM in funds to support pilot state run retirement programs, so there is clearly support from the current Administration for these types of plans State run retirement proposals or studies have been introduced in AZ, CA, CO, CT, IL, IN, KY,MA, MD, ME, MI,NC, NE, NH, NJ, OH, OR, RI, UT, VT, WA, WV, WI. Proposals have passed, but have not yet been implemented in CA, IL, CT. Other states that have initiated a task force or study groups to evaluate the possibility of a state run plan. Several analysis raise concerns about these plan creating the potential for state preemption of ERISA, which would create significant administrative concerns for employers with employees across multiple states, something ERISA was meant to address. To date, no state proposals are including the Treasury myra as part of their proposals. We will continue to monitor. While we believe expanding retirement savings coverage, especially to populations that do not have an employer plan available to them at work, is good, we do not agree with a state run/sponsored plan that mandate employers participate. Page 6 of 7

7 State Legislative Proposals (continued) Proposals vary from state to state ranging from expanding the state employees retirement system to cover non-state employees, to mandated auto-ira type programs where employers with more than 10 employees in the state would have to facilitate payroll deposits to IRA accounts on behalf of their employees. Whether states can even offer a plan to individuals that are not employees of the state remains to be seen. DOL and IRS will have to make those determinations if plans get to the point where a state is ready to implement. California and Illinois have come the closest to implementation. Both need to obtain determinations from the Department of Labor that the plans will not be considered ERISA plans before IL can put their plan into effect in CA still has two other requirements and then must go back to the State Assembly to have a law passed to begin the program. Concerns have been expressed that these state plans could subject employers to fiduciary responsibility under ERISA. This could impact large employers with excluded classes of employees as well as small to mid size employers. We have a voluntary system that works well and do not believe mandating plans is the answer. We do not support forcing a plan and its fiduciary responsibility on an employer, and believe that employers should continue to offer voluntarily workplace retirement plans at their discretion Bank of America Corporation. All rights reserved. AR3H6NPD Page 7 of 7