Bank of America Merrill Lynch Legislative and Regulatory Brief

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1 RETIREMENT & BENEFIT PLAN SERVICES Bank of America Merrill Lynch Legislative and Regulatory Brief July DOL Regulatory Project Plan Revised Status On May 27, 2014, the DOL issued their twice yearly update to several projects relating to retirement savings plans. The proposed dates are not set in stone and tend to represent the earliest DOL expects to release the regulation. Retirement Savings Impact We are glad to see the DOL push out the proposal date for the fiduciary rule as well as other proposed projects We will continue to monitor all of the proposed projects for any additional changes in deliverable dates. DOL s proposal to amend the rules on what activities constitute fiduciary investment advice is now targeted for a January 2015 release (previously August 2014). DOL will release a request for information ( RFI ) relating to brokerage windows in defined contribution plans to determine if additional guidance or regulation is needed. The RFI is listed for release in May 2014 (previously April 2014), but has not yet been released as of the date of this brief; however, it appears DOL is looking to release the RFI relatively soon. Fiduciary re-proposal We anticipated this change considering the Administration would not likely release a controversial rule during the mid-term elections as it would be a distraction. DOL has indicated they are engaged in a thorough evaluation of the costs and potential benefits of changing this rule. More time to consider the impact of such a change is a good Once the proposal is sent to Office of Management and Budget (OMB), review is usually 90 days, but we anticipate it may be longer, as the OMB will want to be very careful in their review, considering the last proposal was pulled back because the DOL had not followed process. We continue to remain fully engaged with various industry associations to advocate for a fiduciary standard for our industry that enables us to continue to provide meaningful advice* and education to plans, plan participants and IRA account owners Open Brokerage Windows 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. 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 ( BAC ). Banking activities may be performed by wholly owned banking affiliates of BAC, including Bank of America, N.A., member FDIC. Brokerage services may be performed by wholly owned brokerage affiliates of BAC, including Merrill Lynch, Pierce, Fenner & Smith Incorporated ( MLPF&S ), a registered broker-dealer and member SIPC. Investment products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value Page 1 of 6

2 DOL Regulatory Project Plan Revised Status Employers currently have the option to include a brokerage window as part of their Plan investment options. This enables plan participants the opportunity to further diversify their investments and make decisions regarding how and where their money is invested without a plan sponsor needing to create an overly extensive and complex investment menu for all participants. DOL has reopened comments regarding its target date fund disclosure proposal as of May 27, This follows a similar reopening of comments by the SEC to collect comments on a risk-based disclosure for TDFs DOL wants to be sure to address concerns related to risk based disclosures for TDFs 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. Target Date Funds (TDFs) Disclosure is important for individuals to evaluate all aspects of investments to ensure they make investments that are appropriate for their particular needs. However, adding disclosures that are specific to risk may imply to the investor that it should be weighed more heavily than other information about the investment, i.e. historical performance, underlying investments, fees and costs associated with the investment. Additionally, there is not a standard definition of risk to benchmark against, so it remains to be seen what the DOL would require. We believe that target date funds are an important option when developing plan investment menus. We will continue to monitor this project for further developments. Annuity selection safe harbor We believe it is important to provide individuals with several distribution options that help enable them to spend down their retirement savings without running out of retirement savings in their lifetime. This is now targeted for release in January 2015 (previously October 2014). Providing Plan Sponsors with guidance in choosing annuity options for their plan investment menu can be helpful, but should not be mandated. DOL is working on a project to implement the benefit statement requirement added by the Pension Protection Act of Benefit statements/lifetime income disclosure Having a real sense of how well and for how long individuals retirement savings can support them is essential. DOL has indicated it might also require a lifetime income disclosure on benefit statements. This is now targeted for January 2015 (previously August 2014) We currently provide Plan Sponsors and participants with access to retirement planning tools that enable them to hypothetically illustrate their potential income in retirement inclusive of other assets, other retirement savings and other anticipated expenses in retirement. We feel that supplying these tools presents a more useful and holistic picture of retirement readiness. A DOL-mandated calculation on participant statements can only take into account the assets currently in a participant account which provides a very limited estimation of retirement readiness. Page 2 of 6

3 DOL Regulatory Project Plan Revised Benefit statements/lifetime income disclosure 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 participants and plan sponsors alike. We believe this DOL project is unfounded and an unnecessary expense of time, money and resources for financial service firms. 408(b)(2) guide or summary DOL has updated its agenda to reflect that the proposed regulation was released in March 2014 and comments were due in June. The regulatory agenda does not give an estimated date for a final rule. Many submitted comments suggest that DOL delay or withdraw the proposal. 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. The DOL should withdraw and re-propose only when, and if, there is an evident need of additional disclosures which will run into hundreds of thousands of dollars in costs for a problem that has no evidence of existence. Supreme Court Activity This case, brought against Edison International and plan sponsor, alleges that as the employer breached its fiduciary responsibilities by selecting retail-class shares in an investment fund, instead of lower-cost institutional-class shares. The case also raises other fiduciary issues, including statutes of limitations for filing such lawsuits and investment safe harbors. Tibble v. Edison The Supreme Court will likely take up this case since they have asked the Solicitor General and DOL to weigh in. This is an important case to see if the Supreme Court takes up the case, and if so how they rule. There are potential implications for fiduciary responsibility related to share class choices in plan menus. We will continue to monitor the Supreme Court activity on this case. Before deciding whether or not to take up the case, the Supreme Court has asked the Solicitor General of the United States, working in conjunction with the Secretary of the Department of Labor, to file a brief offering their view on the issues The case before the court asked whether an inherited IRA is afforded protection in bankruptcy. A bankruptcy judge ruled that retirement funds must be held for the current owner s retirement in order to qualify as an exempt retirement fund protected from bankruptcy creditors claims. The Supreme Court held that an inherited IRA account did not qualify as a retirement fund for the purposes of exemption under the U.S. Bankruptcy Code Clark v. Rameker The Supreme Court s decision should be considered when deciding what to do with inherited IRA assets if creditor protection is a concern for the beneficiary of the account. This case only addressed IRAs and does not appear to have any direct implications for employer sponsored plans. Page 3 of 6

4 Supreme Court Activity The Dudenhoeffer case, also referred to as a stock drop case, alleges that the ESOP fiduciaries of the Fifth Third ESOP violated their duty of prudence under ERISA by continuing to hold and buy Fifth Third Bank stock when they should have known that the stock was overvalued and risky resulting in the price dropping significantly. The Court s ruling was unanimous and held that ESOP fiduciaries are not entitled to any special presumption of prudence and are generally subject to the same level of prudence that applies to ERISA fiduciaries. The case now goes back to the Sixth Circuit. This is the first stock drop case to be heard by the Supreme Court. Fifth Third Bank v. Dudenhoeffer We will continue to monitor the outcome of the case in the Sixth Circuit and provide updates and potential impact to plans going forward. Tax Court IRA Case In Bobrow v. Commissioner, the Tax Court addressed the one rollover per year rule that Individual Retirement Accounts ( IRA s) are subject to under the Internal Revenue Code. While IRA account owners may transfer assets between IRA accounts without limit, they may only effect a rollover from one IRA to another IRA once in a 12 month period. This is to prevent individuals from using the IRA as a short term loan. Previously, the IRS has indicated in proposed guidance and in their Publication 590: Individual Retirement Arrangements, that there were certain circumstances where multiple rollovers between IRAs could occur without violating the rule. As long as there was no more than one rollover of the same amount, between the same two IRAs, the Service indicated the taxpayer would not violate the rule. In this case, however, the Tax Court judge ruled that one rollover between IRAs per year means just that, one rollover per year, no exception. Subsequent to the tax court ruling the IRS released Announcement , indicating that effective for rollovers between IRAs after January 1, 2015, taxpayers are restricted to one rollover per year. This ruling does not impact rollovers from employer plans to IRAs. There is no limit on the number of rollovers an individual may effect from an employer plan to an IRA within a given 12 month period. The ruling also has no impact on the number or frequency of IRA to IRA transfers individuals can make in the course of a year (NOTE: a transfer of IRAs goes from institution to institution where the taxpayer never takes constructive receipt of the assets). The Bobrow case is interesting as it resulted in a very different interpretation of the one-rollover rule than the Service has provided for several years now. While the tax court interpretation is logical, it also presents some possible problems for taxpayers who violate the rule unwittingly. Rollovers in excess of one per year would be considered an excess contribution to the IRA and subject to a 50% excise tax penalty if not removed in a timely manner. Even if the taxpayer removes the erroneous rollover avoiding the 50% penalty, they are still left with a now taxable distribution subject to ordinary income taxes and a possible additional penalty of 10% if they are under age 59 ½. We have discussed the need for additional guidance from the regulators on this issue at various industry association meetings. We believe that the Treasury and IRS should try to come up with some appeal process for taxpayers who unintentionally violate the one-rollover rule. We will continue to discuss the issue in industry associations and share concerns and comments with the Treasury Department as appropriate. Page 4 of 6

5 Bank of America Merrill Lynch Legislative and Regulatory Brief March 2014 SEC Fiduciary Standard SEC Fiduciary Standard Guidance Project - no updates at this time The SEC Chair Mary Jo White has asked her staff to make the evaluation of potential options an immediate and high priority so that the Commission has the information it needs to come to a decision as to whether and, if so, how best to exercise the authority provided in Section 913 of the Dodd Frank Act. Chair White has also indicated that she is engaged in discussion with DOL about the impact of the rule on the securities industry and that the agencies need to be coordinated. We believe in and 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 is engaged with the DOL to ensure cross agency discussions. Legislative Proposals No time frame for release has been provided at this time. Recent proposals include: Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act of 2014 (Sen. Ron Wyden) Extends various expiring tax provisions, including two provisions that impact retirement savings Tax-free distributions from individual retirement plan for charitable purposes. Extends for two years the provision that permits an Individual Retirement Account ( IRA ) owner who is age 70 ½ or older generally to exclude from gross income up to $100,000 per year in distributions made directly from the IRA to a public charity. Multiemployer pension plan funding rules. Multiemployer plans ( MEP s) are subject to funding requirements if the plan is less than 80% funded or less than 65% funded. The Pension Protection Act of 2006 provided for relief related to these funding requirements which is set to expire on December 31, The funding relief would be extended under the Expire Act of 2014 for one year. Efforts to move this bill to the Senate floor for a vote have been unsuccessful to date. These provisions have been extended several times since they were initiated under the Pension Protection Act of When a temporary provision has been continually extended for years, Congress should consider making them permanent. The likelihood of the Expire Act, or several others in the House and Senate that also propose extensions, is not likely until late 2014 or early 2015 if at all. Concerns with making these provisions permanent are based in the cost of the provisions. In the current environment in Washington, there is very little appetite for expanding the deficit or raising taxes. Congress should either make the provisions permanent or end them and enable tax payers to plan accordingly instead of waiting until year end, or into the next tax year retroactively to extend these various provisions. MAP-21 Reauthorization Act (Sen. Barbara Boxer) Proposal would provide funding to the Highway Trust Fund, used for improvements to national highways, bridges and other transportation structures. While this is a bill to fund transportation maintenance, it includes a provision that impacts retirement savings plans. As part of the funds needed to cover the cost of the proposal, the ability for non-spouse beneficiaries to take distribution of inherited retirement assets in IRAs and employer sponsored plans would be eliminated (the stretch provision). We believe that any changes related to retirement savings do not belong in a highway funding bill. Forcing non-spouse beneficiaries to take distributions of inherited retirement assets in just five years time will result in significant taxes to the beneficiary. We are supportive of the stretch provision afforded to non-spouse beneficiaries and believe Congress should leave them intact. We will continue monitor this proposal. Page 5 of 6

6 Bank of America Merrill Lynch Legislative and Regulatory Brief March 2014 ank of America Merrill Lynch Legislative and Regulatory Brief July 2014 Legislative Proposals Non-spouse beneficiaries would be required to remove their inherited retirement assets within 5 years of the death of the account owner. There are a few exceptions proposed for minor children and certain special needs beneficiaries. MAP-21 Reauthorization Act (Sen. Barbara Boxer) Lifetime Income State Legislative Proposals Several states have been proposing some form of a state run or state sponsored retirement savings vehicle for individuals who work for employers that do not offer a retirement savings plan. 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. No state has yet been successful in implementing a state mandate for employers. California has come close and is engaged in a cost and feasibility study and has issued a Request for Information. Before CA can go forward they have several requirements to meet imposed by the state Assembly and then must go back to the CA State Assembly to pass a statute that would permit the establishment of the plan/accounts. To date, no State proposals are including the myra as part of their proposals. We will continue to monitor. There are several concerns with state run/sponsored retirement plans for uncovered individuals. 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. 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. 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 passes them. We do not support forcing a plan and its fiduciary responsibility on an employer, and believe that employers should continue to voluntarily offer workplace retirement plans at their discretion. *Investment advice provided to participants relative to plan assets is solely through Advice Access. 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. Bank of America Merrill Lynch and its associates do not provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your own independent advisor as to any tax, accounting or legal statements made herein Bank of America Corporation. All rights reserved. ARCQXGHV SHEET /2014 Page 6 of 6