2015 WASHINGTON OUTLOOK

Transcription

1 Retirement Plan Legislation and Regulations 2015 WASHINGTON OUTLOOK July 2015

2 Focus on Retirement Policy Issues 2015 Washington Milestones Jan. 6 Beginning of First Session of 114th Congress The first session of the 114th Congress convenes. Feb. 2 President s Fiscal Year 2016 Budget The President releases his fiscal year 2016 budget proposal. Apr. 14 DOL Issues Fiduciary Advice Proposal The DOL issues its revised and muchanticipated fiduciary investment advice proposal. Aug. Threat of Highway Trust Fund Insolvency Based on current spending and revenue trends, the Highway Trust Fund is nearing insolvency and expects to encounter shortfalls by the end of the summer unless Congress provides more funding. A highway funding bill could include bipartisan retirement-related legislation. Oct. 1 Threat of Default Unless the debt ceiling is raised or suspended, the Bipartisan Policy Center projects that the Treasury Department will exhaust its ability to use extraordinary measures and cash-on-hand in the fourth quarter of A debt limit deal could include bipartisan retirementrelated legislation. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. 20 State of the Union Address President Obama delivers his State of the Union address. Mar. 15 Suspension of Debt Ceiling Expires Suspension of the debt ceiling expired on March 15. The Bipartisan Policy Center projects the Treasury Department can use cash-onhand and extraordinary measures to meet obligations into the fourth quarter of Jul. Lifetime Income Estimate Proposal DOL Regulatory Agenda targets July for issuing a proposal on lifetime income estimates on benefit statements. However, it is more likely that the proposal will not be issued until the fall of Aug Hearings on Fiduciary Advice Proposal The DOL plans to hold public hearings on its fiduciary advice proposal during the week of August 10. Sep. 30 Deadline for Discretionary Spending Agreement An agreement on discretionary spending levels for fiscal year 2016 could include bipartisan retirementrelated legislation. Dec. 18 Target Adjournment Date The House and Senate have targeted December 18 to adjourn for the year. 2

3 Looking Ahead Focus on Retirement Policy Issues Select 2016 Washington Milestones Jan. 1 End of Sequestration Relief Sequestration relief provided in 2014 agreement on discretionary spending levels expires at the beginning of A bill addressing sequestration spending caps could include bipartisan retirementrelated legislation. Apr. SEC Target Date Fund Disclosure Re-proposal The SEC s regulatory agenda lists April 2016 for issuing a re-proposal regarding target date fund advertising and marketing disclosures. Oct. 14 Money Market Reforms Effective Money market reform rules finalized by the SEC in 2014, which impact defined contribution retirement plans that invest in such funds, will require compliance by October 14, Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Mar. 1 May Nov. 8 Super Tuesday Presidential primary elections and caucuses held in 12 states. Final Fiduciary Advice Regulations Many expect a final fiduciary regulation by May 2016 to allow enough time for a new rule to become applicable before the next administration takes office. Presidential Election Voters will elect the 45th president of the United States. In addition to the presidential election, all seats in the House of Representatives and a third of the seats in the Senate will be contested. 3

4 Focus on Retirement Policy Issues 2015 Retirement Policy Agendas LEGISLATIVE AGENDA Top-Tier Congressional Issues The atmosphere in Washington continues to be polarized and has been marked by infighting within political parties. Despite dim prospects for enactment of new legislation, there have been moments of cooperation, such as with the passage of a bipartisan trade bill. The focus of lawmakers will be on absolutely critical legislation, such as bills relating to funding and taxation. Some of the most significant issues that Congress will want to address include the need for a cash infusion into the Highway Trust Fund, agreement on discretionary spending levels for fiscal year 2016, expiration of sequestration relief applicable to discretionary spending, threat of default without raising or suspending the debt ceiling/limit, and extending expired tax provisions. While Congress will continue to evaluate options for comprehensive tax reform, serious efforts at moving a proposal forward are not expected until after the 2016 elections. Retirement-Related Issues There are a number of retirement-related proposals that have garnered bipartisan support (and are generally viewed as favorable), such as proposals to enhance automatic enrollment safe harbors and modernize rules for electronic delivery of participant notices. These proposals are unlikely to advance on their own but may very well be included in broader tax or appropriations bills identified above as toptier. It remains to be seen whether other retirement-related proposals, including efforts to supplant or defund implementation of the DOL s hotly contested fiduciary investment advice regulation, will prove to be successful. Initiatives to expand coverage are less likely to be successful. It appears unlikely that meaningful tax reform, which could affect retirement savings (one of the largest tax expenditures ), will occur this year. REGULATORY AGENDA U.S. Department of Labor (DOL) The DOL s number-one priority continues to be moving forward with their controversial fiduciary advice proposal. The DOL will hold public hearings and accept comments from the public in a push to finalize the regulation by the spring of 2016 in an effort to make the regulation effective prior to the next presidential administration. Also, the DOL expects to issue a proposal relating to lifetime income estimates on benefit statements in Other regulatory initiatives have been de-prioritized and/or are considered long term, such as a requirement to provide a guide with ERISA section 408(b)(2) disclosures, a revision to the safe harbor rules for the selection of annuity providers, fiduciary standards for using brokerage windows, and new disclosure requirements for target date investments. Changing priorities may reflect, to some extent, appreciation by the DOL that these issues do not require new regulation. U.S. Treasury Department (Treasury) Treasury s Internal Revenue Service (IRS) is expected to propose eliminating the determination letter program for individually designed plans. Treasury is also expected to finalize additional technical guidance on the interaction of lifetime income products with the tax qualification rules. Treasury has been piloting President Obama s new starter retirement savings program the myra (My Retirement Account) and intends to begin rolling out the program to a broader group of participating employers in U.S. Securities and Exchange Commission (SEC) The SEC is expected to provide additional guidance in 2015 on the effects of money market reform on retirement plans and accounts. The agency has also announced its intentions to conduct targeted reviews and exams of registered investment advisers and broker-dealers who service investors with retirement accounts. While SEC Chair Mary Jo White has expressed her support for the development of new rules creating a uniform standard applicable to investment advice, the SEC is not expected to issue a proposal within the next 12 months. The SEC also intends to re-propose disclosure rules applicable to target date fund (TDF) advertising and marketing materials, but no earlier than

5 Retirement Policy Issues 2015 Watch List EXPECTED IN 2015* POSSIBLE IN 2015* LESS LIKELY IN 2015* * Fiduciary Investment Advice Definition of Fiduciary Investment Advice The DOL has re-proposed regulations which supplant a 2010 much-criticized proposal defining the circumstances under which recommendations to a plan fiduciary, retirement plan participant, or IRA holder would be considered fiduciary investment advice under ERISA and regulations substantially lowering the threshold for becoming an ERISA fiduciary. While the DOL proposal is not expected to be finalized until 2016, the DOL will hold hearings on the proposal this summer, and we expected continued legislative efforts this year to limit the DOL s ability to implement a new rule. Separately, the SEC is looking to develop new rules establishing a uniform fiduciary standard of conduct for all brokerdealers and investment advisers when providing personalized investment advice, but a proposal is not expected within the next 12 months. IRS Determination Letter Program Changes to the IRS Determination Letter Program The IRS is considering significantly reducing its determination letter program for individually designed plans by It expects to propose such changes (and solicit input regarding transition issues) in Lifetime Income Estimates Lifetime Income Estimates The DOL is developing a proposal that is expected to be published this year for showing lifetime income estimates (i.e., projected monthly income at retirement) on participant benefit statements and is seeking information about how participants react to such estimates. Legislation proposed in Congress would require retirement income projections on participant benefit statements. *Topics appear in alphabetical order 5

6 Retirement Policy Issues 2015 Watch List (cont.) EXPECTED IN 2015* POSSIBLE IN 2015* LESS LIKELY IN 2015* * Plan Simplification Retirement Plan Enhancement and Simplification Legislation Comprehensive legislative proposals would address a broad set of issues that are considered important to participants and retirement plan sponsors, such as new auto-enrollment safe harbors and harmonization of multiple standards applicable to electronic delivery of participant notices. Since these proposals have received bipartisan and bicameral support, it is possible they could be included in broader tax and/or spending legislation this year. *Topics appear in alphabetical order 6

7 Retirement Policy Issues 2015 Watch List (cont.) EXPECTED IN 2015* POSSIBLE IN 2015* LESS LIKELY IN 2015* * Deficit Reduction and Tax Reform Expanded Coverage Lifetime Income Options Target Date Investments Deficit Reduction and Tax Reform Proposals Numerous proposals seek to reduce the deficit by limiting retirement plan tax expenditures by (for example) limiting the value of deductions and exclusions, limiting accumulations, and/or freezing the annual contribution limits. While tax reform will remain an area of focus for lawmakers, it s unlikely we ll see serious efforts at comprehensive reform until sometime following the 2016 elections. Initiatives to Expand Retirement Savings Coverage Various proposals would require employers who do not currently offer a retirement plan (or exclude business units from participation) to enroll certain employees in an automatic savings program. President Obama s myra program, which is voluntary, will allow employees to make small automatic payroll deposit contributions, through participating employers, that are invested in government savings bonds. While the Treasury is focused on making myra available during 2015, we do not anticipate enactment of federal automatic IRA legislation. State efforts to implement auto-ira requirements have been hampered by the need to determine if such programs are subject to ERISA and whether they conflict with the U.S. tax code. Lifetime Income Options The DOL is considering revisions to the safe harbor rules for the selection of annuity providers and the condition in the safe harbor relating to the ability of the annuity provider to make all future payments. In its most recent regulatory agenda, the DOL has de-prioritized issuing guidance in this area and classifies revisions to the safe harbor as a long-term project. Target Date Investment Disclosures The DOL s long-term agenda includes final amendments to the participant fee disclosure regulations and the qualified default investment alternative (QDIA) regulations that would require disclosures specific to target date investments. Similarly, the SEC intends to re-propose disclosure rules applicable to target date fund advertising and marketing materials by April The most recent regulatory agendas reflect that new disclosure rules have been de-prioritized, perhaps signaling appreciation of the robust educational efforts around target date investments that have already developed in the marketplace. *Topics appear in alphabetical order 7

8 Retirement Policy Issues 2015 Watch List (cont.) EXPECTED IN 2015* POSSIBLE IN 2015* LESS LIKELY IN 2015* * Brokerage Windows Fee Disclosure Standards for Brokerage Windows The DOL is considering whether to propose new rules on the use of brokerage windows in participant-directed defined contribution plans, which give participants access to a broad range of investments in addition to investment alternatives designated by plan fiduciaries. Even if the DOL decides to propose new rules, a proposal is not expected to be issued within the next 12 months. ERISA 408(b)(2) Guide The DOL has proposed amending its 408(b)(2) regulation to require that a guide be provided along with the required fee and service disclosures if such disclosures are contained in multiple or lengthy documents. In its most recent regulatory agenda, the DOL has de-prioritized requiring a guide perhaps signaling recognition that this is not an area where there is a problem in need of a solution. *Topics appear in alphabetical order 8

9 Fiduciary Investment Advice What is it? The DOL has re-proposed regulations which supplant a 2010 much-criticized proposal defining the circumstances under which recommendations to a plan fiduciary, retirement plan participant, or IRA holder would be considered fiduciary investment advice under ERISA. The proposal substantially lowers the threshold for becoming an ERISA fiduciary and imposes substantive ERISA prudence rules for the first time on a host of relationships (specifically, IRA accounts) not previously subject to ERISA s prudence rules. The Dodd Frank Act grants the SEC authority to adopt rules establishing a uniform fiduciary standard of conduct for all broker-dealers and investment advisers when providing personalized investment advice. SEC Chair Mary Jo White has expressed her support for the SEC to develop new rules creating a uniform standard applicable to investment advice. Status The DOL intends to hold public hearings on its revised fiduciary advice proposed rule during the week of August 10. Many expect the regulation to be finalized by spring The Spring 2015 Unified Regulatory Agenda lists Personalized Investment Advice Standard of Conduct as a long-term regulatory action (i.e., the SEC is not expected to publish guidance within the next 12 months). Background The original DOL-proposed regulation would have substantially broadened the circumstances under which a person providing help to ERISA-covered retirement plan sponsors, participants, and individual retirement account holders would be deemed a fiduciary under ERISA and, in so doing, would have limited the assistance that participants could receive without a separate fee. In January 2011, the SEC completed a study of the different standards applicable to broker-dealers and registered investment advisers, with respect to advice, and recommended a uniform standard. In September 2011, the DOL announced that it would re-propose its highly controversial fiduciary investment advice regulation. T. Rowe Price submitted comments to the DOL on the original proposal. In June 2012, 33 members of Congress wrote to the Secretary of Labor urging the DOL and SEC to closely coordinate their fiduciary initiatives. In April 2013, the U.S. Government Accountability Office s report to Congress on IRA rollovers included a recommendation that the DOL resolve uncertainty concerning which activities trigger fiduciary responsibility and require service providers to clearly disclose their financial interests in participants decisions and the extent of their fiduciary obligations. On July 9, 2013, Senator Orrin Hatch (R-UT) introduced the Secure Annuities for Employee (SAFE) Retirement Act of 2013, which would transfer rule-making and enforcement authority over IRAs from the DOL to the U.S. Treasury effectively preempting elements of forthcoming DOL regulations expected to address rollover advice. On August 2, 2013, a number of Senate Democrats sent a letter to the Office of Management and Budget (OMB) asking that the Obama administration coordinate the re-proposal of the fiduciary investment advice regulation with an expected SEC proposal addressing retail investment advice. In December 2013, FINRA issued a notice to members taking the position that member firms must be careful to supervise registered representatives to monitor conflicts of interest, and must follow suitability rules when recommending a rollover. 9

10 Fiduciary Investment Advice (cont.) Background (cont.) On January 13, 2014, 30 House Democrats sent a letter to the Secretary of Labor expressing concerns about a new rule that would limit access to investment education and information and the need to coordinate with other regulators on fiduciary standards. In November 2014, T. Rowe Price, along with other industry representatives, participated in a meeting with White House senior officials to discuss how current FINRA rules prevent unsuitable guidance and our belief that the rules should be constructed to maximize access to investment help. In February 2015, SEC Commissioner Daniel Gallagher indicated in a speech that the DOL has not formally engaged the SEC commissioners despite public reports to the contrary. On February 25, 2015, Representative Ann Wagner (R-MO) reintroduced the Retail Investors Protection Act, which was passed by the House of Representatives in 2013 and would delay the DOL s proposal until 60 days after the SEC issues a final rule governing standards of conduct for broker-dealers. On March 4, 2015, House Education and the Workforce Committee Chairman John Kline (R-MN) and Health, Employment, Labor, and Pensions Subcommittee Chairman Phil Roe (R-TN) sent a letter to the Secretary of Labor expressing strong reservations about a forthcoming proposal limiting access to lower- and middle-income Americans and requesting documentation demonstrating coordination between the DOL and SEC in the development of a proposal. On March 11, 2015, Chairman Lamar Alexander (R-TN) and eight other Republicans on the Senate Labor Committee sent a letter cautioning the OMB Director on the potential negative impact of approving the DOL s proposed rule if it has not changed significantly from the proposal the DOL offered in On April 14, 2015, the DOL issued its revised fiduciary advice proposed rule, along with a number of new or revised prohibited transaction exemptions. On June 3, 2015, the Securities Industry and Financial Markets Association proposed an alternative designed to work within the existing regulatory framework to modify FINRA s suitability rules to require that recommendations regarding an investment be in the best interests of the customer. On June 17, 2015, the House Committee on Education and the Workforce Subcommittee on Health, Employment, Labor and Pensions held a hearing on DOL s re-proposed fiduciary rule entitled Restricting Access to Financial Advice: Evaluating the Costs and Consequences for Working Families and Retirees. On June 24, 2015, the House of Representatives Appropriations Committee approved the fiscal year 2016 Labor, Health and Human Services funding bill, which includes a provision prohibiting regulatory changes to the definition of the term fiduciary. On June 25, 2015, the Senate Appropriations Committee approved the fiscal year 2016 Labor, Health and Human Services funding bill, which includes a provision restricting funding to implement a new fiduciary rule. 10

11 Fiduciary Investment Advice (cont.) What is the purpose? The DOL s stated intent is to protect participants from potential conflicts of interest and self-dealing. Implications for clients The proposal may substantially decrease information that is provided to plan participants or may require plan sponsors or participants to pay third parties for such information. The proposal may also limit the information that service providers like T. Rowe Price can provide to plan sponsors or participants about investments. T. Rowe Price s perspective T. Rowe Price supports rules designed to protect the interests of retirement plan sponsors, their plans participants and beneficiaries, and IRA holders. Education about investments and rollover opportunities provided by service providers without a separate fee can be valuable to recipients; participants are best served by having access to multiple ways to obtain assistance. We oppose efforts to define fiduciary so broadly that even information provided free of charge today could no longer be provided without running afoul of prohibited transaction rules. Plan participants electing direct rollovers to IRAs are best served when they can make an educated selection of an IRA custodian. The DOL should be wary of expanding the fiduciary advice rule in such a way as to chill efforts to provide that education. 11

12 Changes to IRS Determination Letter Program What is it? The IRS is considering significantly reducing its determination letter program for individually designed plans. Status The IRS will be seeking input from the public during 2015 on proposed changes to its determination letter program. IRS officials have informally stated that they expect the determination letter program for individually designed plans to significantly change by Following changes to the program, it is expected that determination letters will only be provided for new and terminating individually designed plans. Opinion and advisory letters would still be available for preapproved plans (including master and prototype or volume submitter plans). Background Determination letters are used to demonstrate that the form of a plan satisfies the requirements for favorable tax qualification. Adopters of preapproved plans can rely on opinion and advisory letters applicable to such plans to demonstrate that the form of a plan satisfies tax qualification requirements. Plan sponsors must still operate their plans in accordance with its terms and in accordance with applicable laws and regulations. What is the purpose? The IRS has suggested budget constraints, limited resources, and a backlog of determination letter requests as reasons for significantly reducing the determination letter program for individually designed plans. Implications for clients T. Rowe Price s perspective Qualification issues, such as those related to the form of a plan, could adversely affect the deductibility of employer contributions, the ability of participants to defer taxes on contributions and investment earnings, and the ability of participants to roll over to another qualified plan. Plan sponsors may have more limited options for using a determination letter to help demonstrate due diligence related to merger and acquisition activity involving an entity with an individually designed plan. We anticipate that more plan sponsors will give serious consideration to using a preapproved plan in order to obtain the comfort of periodic IRS validation that the plan s terms meet the qualification requirements. 12

13 Lifetime Income Estimates What is it? The DOL is developing a proposal for showing lifetime income estimates (i.e., projected monthly income at retirement) on participant benefit statements and is seeking information about how participants react to such estimates. Legislation proposed in Congress would require retirement income projections on participant benefit statements. Status The DOL will be conducting surveys and focus-group testing to seek information on how participants react to such estimates. The Spring 2015 Unified Regulatory Agenda provides that the DOL expects to issue a proposal by July Background In an attempt to explore ways to facilitate access to, and use of, lifetime income products, the DOL and Treasury issued a request for information in early 2010 to which T. Rowe Price submitted comments. In May 2013, the DOL released an advance notice of proposed rule-making to which T. Rowe Price submitted comments, that requested input on whether (and how) participant benefit statements could include estimated lifetime income illustrations (in addition to the account balance). The USA Retirement Funds Act, which would require lifetime income projections on participant benefit statements, was introduced by Senator Tom Harkin (D-IA) on January 30, The SAVE Act, which would require lifetime income projections on participant benefit statements, was introduced by Represetatives Kind (D-WI) and Reichert (R-WA) on December 11, 2014 (a nearly identical proposal was also introduced in 2011). The Lifetime Income Disclosure Act, which would require lifetime income projections on participant benefit statements, was most recently introduced by Senators Isakson (R-GA) and Murphy (D-CT) on May 13, 2015 (a companion bill was introduced in the House on May 14, 2015). The proposal has been introduced in the House and Senate in each of the past three Congresses. What is the purpose? The DOL is exploring ways to educate participants regarding their retirement readiness and to perhaps encourage them to save more through lifetime income illustrations. 13

14 Lifetime Income Estimates (cont.) Implications for clients T. Rowe Price s perspective Plan sponsors may be unwilling to accept variation from any ordained safe harbor, which may stifle innovation of the sort that has allowed T. Rowe Price to test and learn how best to focus participants on what each participant can control today his or her savings rate. We believe in the value of translating savings into retirement income to help participants set retirement savings goals, and we are pioneers in retirement income projections on participant benefit statements. Our projections take into account assumptions regarding future contributions and earnings, and we believe that approach has been helpful to encourage participants to save appropriately for retirement. Also, a projection based on an assumption that a participant will take periodic withdrawals from his or her retirement savings is more likely to reflect an individual s actual experience than a projection based on annuitization. The DOL guidance on showing lifetime income estimates must support a variety of approaches, encourage innovation, promote the use of realistic assumptions, and aim for simplicity. We do not believe that a mandate will accomplish these goals. 14

15 Retirement Plan Enhancement and Simplification Legislation What is it? Comprehensive legislative proposals would address a broad set of issues that are considered important to participants and retirement plan sponsors. Status Bipartisan and bicameral proposals may lay the groundwork for consensus on several retirement-related issues should an opportunity arise to move legislation forward. Background The Retirement Plan Simplification and Enhancement Act was introduced by Representative Richard Neal (D-MA) in 2012 and The Secure Annuities for Employee (SAFE) Retirement Act was introduced by Senator Orrin Hatch on July 9, 2013, and is expected to be a high priority for Senator Hatch in The SAVE Act was reintroduced on December 11, 2014, by Representative Kind (D-WI) and Reichert (R-WA). The Retirement Security Act, first proposed by Senators Collins (R-ME) and Nelson (D-FL), was introduced in both the House and Senate in 2014 and The Receiving Electronic statements To Improve Retiree Earnings (RETIRE) Act was introduced by Representatives Polis (D-CO), Roe (R-TN), Kelly (R-PA), and Kind (D-WI) on June 4, Four proposals would create a new safe harbor plan with automatic contributions beginning at 6% and increasing to at least 10% (and required matching contributions on employee contributions up to 10%). Three of the proposals would also remove the 10% limit under current law on auto-escalation in automatic enrollment safe harbor plans. Four proposals would encourage small employers to join together and participate in a multiple employer plan (MEP). These proposals would address the so-called one bad apple rule by helping to minimize the risk that a noncompliant participating employer will taint the qualification of the entire plan. Three of the proposals would also allow employers with no relation to each other to participate in an MEP (known as an open MEP ). The SAFE Retirement Act would require consolidation of participant notices and would allow for the electronic delivery of notices by posting to a secure website. The RETIRE Act would harmonize multiple standards applicable to the electronic delivery of notices required under IRS and DOL regulations. 15

16 Retirement Plan Enhancement and Simplification Legislation (cont.) What is the purpose? The proposals are intended to reform through simplification and strengthen through enhancements the retirement system and the rules applicable to retirement plans and IRAs. Implications for clients Plan sponsors would receive relief from some of the compliance, administrative, and other burdens associated with retirement plan administration. They would also be encouraged, through new safe harbors, to auto-enroll participants at higher deferral rates. T. Rowe Price s perspective We are supportive of efforts to promote retirement savings and investment through automatic programs that plan sponsors may elect to adopt. We believe these proposals will encourage plan sponsors to implement higher automatic contribution rates by validating automatic contribution features designed to maximize participant savings. We support consolidation of disclosure. Disclosure is important, but unnecessarily complex and duplicative disclosures distract participants attention from actions and decisions about retirement savings that position them for success. 16

17 Deficit Reduction and Tax Reform Proposals What is it? Numerous proposals seek to reduce the deficit by limiting retirement plan tax expenditures. Status It is expected that at least some of the recommendations that have already been made related to retirement savings, such as annual caps for consolidated retirement accounts, will be considered seriously if and when significant deficit reduction efforts are undertaken. Background The Cochairs (Bowles-Simpson) of President Obama s Deficit Commission proposed consolidating retirement accounts and capping tax-preferred contributions to the lower of $20,000 or 20% of income (20/20 cap). The House of Representatives and the Senate each passed a budget resolution for fiscal year 2014 that provided a procedural fast track for tax reform but did not provide specific changes to tax expenditures (such as the exclusion for 401(k) deferrals) that would presumably be required to finance lower tax rates. Amendments offered by Senator Richard Burr (R-NC) sought to preserve the current tax treatment of retirement plans and IRAs, but the amendments were never considered. On February 26, 2014, Ways and Means Committee Chairman Dave Camp (R-MI) released his long-awaited discussion draft on tax reform, which includes proposed changes that limit retirement savings incentives. Among the proposals predicted to raise substantial revenues are a proposal to differentially tax retirement incentives for individuals with income of more than $450,000, to put a moratorium on inflation adjustments to retirement savings limits until 2022, to limit one-half of qualified plan contributions to Roth (after-tax) contributions, and to substantially limit the tax incentives for nonqualified deferred compensation plans. In January 2015, the Congressional Budget Office projected that the federal budget deficit, which has fallen sharply over the past few years, will begin growing again as more baby boomers retire and, by 2025, may once again top $1 trillion. As part of his fiscal year 2016 budget, introduced February 2, 2015, President Obama once again proposed limiting (1) accumulations of retirement savings (the so-called $3 million cap) and (2) the value of deductions and exclusions to 28% of income (including exclusions for retirement contributions). The House of Representatives and the Senate passed budget resolutions for fiscal year 2016 that included reconciliation instructions (which could have provided a procedural fast track for tax reform by enabling avoidance of a filibuster in the Senate). However, the conference agreement report indicates that such instructions are to be used for the limited purpose of repealing the Affordable Care Act. On July 7, 2015, the Senate Finance Committee working groups on tax reform issued their reports which include three key goals for policy makers to pursue related to retirement savings and investment: (1) increasing access to tax deferred retirement savings, (2) increasing participation and levels of savings, and (3) discouraging leakage while promoting lifetime income. 17

18 Deficit Reduction and Tax Reform Proposals (cont.) What is the purpose? These proposals seek to raise revenue by limiting the tax expenditure on retirement tax incentives. Many of these proposals seek to limit tax benefits from retirement savings for higher paid individuals. This is attributable to a perception that tax benefits of retirement savings disproportionately favor higher paid individuals for whom tax incentives are seen to be less important. Implications for clients The Employee Benefit Research Institute research demonstrates that a 20/20 cap or modifications to the exclusion of employee contributions from taxable income would have a significant negative impact on retirement savings (including the lowest-income quartile of participants). These proposals, if enacted, might cause smaller-business owners to rethink plan sponsorship. T. Rowe Price s perspective We are concerned with recommendations to further limit retirement savings or change the tax incentives for retirement savings when additional incentives are needed to increase such savings. We support efforts to reduce the deficit but believe it is shortsighted to consider tax-deferred savings vehicles as tax expenditures. We encourage Congress to avoid complex rules that unduly penalize those who save early and conscientiously for retirement. 18

19 Initiatives to Expand Retirement Savings Coverage What is it? Various proposals would require employers who do not currently offer a retirement plan (or exclude business units from participation) to enroll certain employees in an automatic savings program. President Obama s myra program, which is voluntary, will allow employees to make small automatic payroll deposit contributions through participating employers that are invested in government savings bonds. Once an account reaches $15,000 (or after 30 years), the balance will be rolled into a private-sector retirement account. Status Auto-IRA legislation has been introduced in multiple sessions of Congress and has been included in every one of President Obama s budget proposals however, it remains to be seen whether significant efforts will be made to advance automatic savings legislation. A number of state legislatures are considering retirement plan coverage requirements for private employers, including establishment of state-sponsored automatic IRA programs. These programs are unlikely to be implemented prior to federal tax and labor law clarifications regarding their eligibility for favorable tax treatment and their status under ERISA as employee benefit plans. The U.S. Treasury has begun to pilot President Obama s myra program and expects to make the program available to all employers that do not sponsor a retirement plan sometime in Background In 2012, the California Secure Choice Savings Trust Act authorized a feasibility study for developing a program requiring employers with five or more employees to automatically enroll workers into a state-sponsored IRA program. The Automatic IRA Act of 2013 was introduced by Representative Richard Neal (D-MA) on May 16, President Obama introduced the myra program in his State of the Union address on January 28, The USA Retirement Funds Act which is similar to automatic IRA legislation but with annuitized distributions was introduced by Senator Tom Harkin (D-IA) on January 30, Representative Cartwright (D-PA) introduced a companion bill in the House of Representatives. The Obama administration s fiscal year 2016 budget proposal, released February 2, 2015, proposed once again that Congress pass automatic IRA legislation. Newly included in the latest budget proposal are provisions to encourage statelevel retirement savings initiatives and to expand coverage to employees who work part time on a long-term basis. In January 2015, Illinois enacted the Illinois Secure Choice Program, which establishes an automatic IRA program for businesses with at least 25 workers. The program cannot be implemented until an opinion is obtained from the DOL regarding the applicability of ERISA and adequate funding for start-up costs is secured. 19

20 Initiatives to Expand Retirement Savings Coverage (cont.) Background (cont.) In April 2015, Representative Crowley (D-NY) released his blueprint for SAVE UP accounts, which would require employers who do not maintain a plan to establish tax-deferred accounts with automatic enrollment, automatic escalation, and employer contributions. In May 2015, 26 Senate Democrats sent a letter requesting that President Obama clarify federal tax and labor laws with respect to state-sponsored initiatives such as automatic IRA programs. On July 13, 2015, in conjunction with the White House Conference on Aging, the the Obama administration issued a fact sheet saying that by the end of 2015 the DOL will publish a proposal "clarifying how states can move forward" with statesponsored IRA programs, "including with respect to requirements to automatically enroll employees and for employers to offer coverage." 20

21 Initiatives to Expand Retirement Savings Coverage (cont.) What is the purpose? These initiatives are intended to extend workplace retirement savings opportunities to individuals who don t currently have an employer-sponsored plan. According to the government, 75 million to 80 million Americans don t have retirement accounts through their employers. Implications for clients Automatic savings proposals would generally apply to employers who do not sponsor a qualified retirement plan. However, employers who sponsor a plan but exclude a division, subsidiary, or other major business unit would possibly have to provide an automatic savings program to those employees. Senator Harkin s proposal would apply to employers without retirement plan features that include auto-enrollment or lifetime income options. T. Rowe Price s perspective We are supportive of efforts to increase retirement savings for individuals not currently participating in the system. Care must be taken in these proposals to minimize employer burdens. Safeguards may be necessary to help ensure that an automatic savings program mandate (such as automatic IRA) does not have the unintended consequence of chilling adoption of 401(k)-style savings vehicles with higher contribution limits and the possibility of employer contributions. 21

22 Lifetime Income Options What is it? The DOL is exploring a revision to the safe harbor rules for the selection of annuity providers and the condition in the safe harbor rules relating to the ability of the annuity provider to make all future payments. The U.S. Treasury is expected to finalize guidance addressing technical issues arising from the interaction of plan qualification rules with the use of annuity options in retirement plans. Status The Spring 2015 Unified Regulatory Agenda de-prioritizes Selection of Annuity Providers--Safe Harbor for Individual Account Plans as a long-term regulatory action (i.e., the DOL is not expected to publish guidance within the next 12 months). The Treasury s Priority Guidance Plan indicates that it will publish final regulations to simplify the treatment of optional forms of benefit that are paid partly in the form of an annuity. Background Regulatory In 2008, the DOL issued final regulations establishing a safe harbor for the selection of annuity providers for the purpose of benefit distributions from a defined contribution plan. A key requirement for obtaining the safe harbor relief is that the fiduciary conclude that the annuity provider is financially able to make all future payments. The DOL and Treasury issued a request for information on lifetime income products in early 2010, to which T. Rowe Price submitted comments. On February 2, 2012, the IRS issued (1) Revenue Ruling , addressing how the qualified joint and survivor annuity rules apply when a deferred annuity contract is purchased under a profit sharing plan, and (2) Revenue Ruling , addressing the application of the vesting/nonforfeiture rules and the benefit limitation rules when a defined benefit pension plan accepts a direct rollover of an eligible rollover distribution from a defined contribution plan maintained by the same employer. On February 2, 2012, Treasury proposed a rule relating to modifications to minimum present value requirements for partial annuity distributions options under defined benefit plans. On July 2, 2014, Treasury published final rules on the use of qualifying longevity annuity contracts. On October 24, 2014, the DOL and IRS released guidance to facilitate the use of deferred annuities within target date funds (TDFs) held in qualified retirement plans. The DOL issued an Information Letter to Treasury confirming that a TDF that includes a deferred annuity is consistent with the rules for qualified default investment alternatives and that a plan fiduciary that appoints an investment manager to manage the TDF will not generally be liable for the investment manager s selection of the annuity provider. The IRS released Notice , which provides special nondiscrimination rules allowing qualified defined contribution plans to offer a series of TDFs that include deferred annuities, even if TDFs within the series are available only to older participants. On July 13, 2015, the DOL issued FAB which clarifies that an employer s fiduciary duty to monitor an annuity provider generally ends when the plan no longer offers the annuity as a distribution option. 22

23 Lifetime Income Options (cont.) Background (cont.) Legislative Legislation proposed in prior sessions of Congress would exclude from income a percentage of certain annuity payments up to specified limits. The Retirement Plan Simplification and Enhancement Act, which was introduced by Representative Richard Neal (D-MA) in 2012 and 2013, would facilitate annuity portability by allowing the direct rollover of annuity investment options when they are no longer authorized to be held within a retirement plan. The SAFE Retirement Act introduced by Senator Orrin Hatch on July 9, 2013, would modify the annuity selection safe harbor. On January 30, 2014, Senator Tom Harkin (D-IA) introduced the USA Retirement Funds Act, which would require employers to offer a lifetime income option (or enroll their employees in a USA Retirement Fund) and modify the annuity selection safe harbor. The SAVE Act, which was first introduced in 2011, was reintroduced on December 11, 2014, by Representatives Kind (D-WI) and Reichert (R-WA) and would modify the annuity selection safe harbor. The Retirement Security Act, first proposed by Senators Collins (R-ME) and Nelson (D-FL), was introduced in both the House and Senate in 2014 and 2015 and would facilitate annuity portability by allowing the direct rollover of annuity investment options when no longer authorized to be held within a retirement plan. The Obama administration s fiscal year 2016 budget proposal, released February 2, 2015, proposes to facilitate annuity portability by allowing the direct rollover of annuity investment options when they are no longer authorized to be held within a retirement plan. In May 2015, T. Rowe Price participated in a meeting requested by the U.S. Government Accountability Office to discuss lifetime income options available to defined contribution plan participants. What is the purpose? The IRS and DOL are looking for ways to facilitate access to, and use of, lifetime income products in defined contribution plans (such as 401(k) plans), mostly through the issuance of technical guidance. Implications for clients T. Rowe Price s perspective Portability of annuity products (when employees change jobs), liquidity of such products, fiduciary concerns with selecting an annuity provider, and the challenges of educating participants regarding annuities and fees are considered barriers to more widespread adoption that may not be addressed through legislation or regulation. We support efforts to provide clarity to plan sponsors regarding qualification and fiduciary issues associated with using lifetime income products. 23

24 Target Date Investment Disclosures What is it? The DOL intends to finalize amendments to the participant fee disclosure regulations and the QDIA regulations that would require disclosures specific to target date investments. The SEC intends to re-propose disclosure rules applicable to TDF advertising and marketing materials. Status The Spring 2015 Unified Regulatory Agenda lists target date disclosure as a long-term DOL regulatory action (i.e., the DOL is not expected to publish guidance within the next 12 months). The Spring 2015 Unified Regulatory Agenda indicates that the SEC will issue a re-proposal regarding TDF advertising and marketing by April The regulatory agendas reflect that new disclosure rules have been de-prioritized, perhaps signaling appreciation of the robust educational efforts around target date investments that have already developed in the marketplace. Background On June 18, 2009, Rich Whitney, director of asset allocation at T. Rowe Price Group, Inc., provided testimony at the DOL/SEC hearing on target date investment options regarding the T. Rowe Price retirement date investments asset allocation, glide path, and benefit to retirement plan participants in light of the financial crisis. In June 2010, the SEC proposed rule changes to the advertising and marketing of TDFs to which T. Rowe Price submitted comments. In November 2010, the DOL published proposed disclosure regulations that would amend the final regulations on QDIAs as well as supplement the DOL final regulations for participant disclosures to require enhanced disclosures for target date investment options. In February 2012, the SEC released findings from a study of investor understanding of TDF communications. Subsequently, the SEC and DOL reopened their comment periods to consider the findings of the study. T. Rowe Price submitted comments to the SEC. In late 2012, T. Rowe Price and other mutual fund company representatives participated in meetings with SEC and DOL officials to discuss concerns with the two agencies proposals that were raised in industry comment letters. In April 2013, the SEC Investor Advisory Committee proposed five recommendations for the SEC to consider before it finalized its TDF disclosure regulations, including a recommendation for a standardized risk-based glide path illustration as either a replacement for or supplement to its proposed asset allocation glide path illustration. In February 2014, Rich Whitney, director of asset allocation at T. Rowe Price Group, Inc., and other T. Rowe Price representatives joined other mutual fund company representatives in explaining concerns to the SEC with risk disclosures of the sort proposed by the SEC Investor Advisory Committee. In the spring of 2014, the SEC and DOL requested comments regarding the 2013 SEC Investor Advisory Committee recommendation for a standardized, risk-based glide path illustration for target date investments. T. Rowe Price submitted comments to both agencies. 24

25 Target Date Investment Disclosures (cont.) What is the purpose? Through additional participant disclosure requirements, the DOL intends to help educate plan participants regarding target date investment construction, glide path, and risk. The SEC intends to enhance information provided to investors in TDF advertising and marketing materials and to help educate investors regarding the meaning of the target date. Implications for clients T. Rowe Price s perspective Plan sponsors will have to comply with new participant disclosure requirements specific to target date investments. While few changes would be required to standard materials provided to T. Rowe Price recordkept plans to meet the DOL requirements, compliance with SEC requirements as originally proposed would involve repetitive and frequent disclosures of asset allocations at the target date. We are generally supportive of regulatory efforts to educate participants regarding target date investments, but required disclosures should not make target date investments seem riskier than other investments. The DOL and SEC should coordinate guidance so that retirement plan participants are not overexposed to information that is too repetitive or presented so frequently as to lose meaning. Proposed risk disclosure discussed by the SEC Investor Advisory Committee would overemphasize market risk at the expense of other risks important to participants (such as inflation and longevity risk). 25

26 Standards for Brokerage Windows What is it? The DOL is considering whether to propose new rules on the use of brokerage windows in participant-directed defined contribution plans, which give participants access to a broad range of investments in addition to investment alternatives designated by plan fiduciaries. Status The Spring 2015 Unified Regulatory Agenda lists Standards for Brokerage Windows as a long-term regulatory action (i.e., the DOL is not expected to publish guidance within the next 12 months). Background During the fee disclosure rule-making process, industry representatives sought clarification from the DOL about the treatment of brokerage windows and similar plan features. In 2012, the DOL issued Field Assistance Bulletin , which provided guidance in the form of Q&As on issues related to newly effective fee disclosure requirements. Q&A 30, which was subsequently withdrawn, provided that some brokerage window investments may need to be treated as designated investment alternatives if a significant number of participants selected the same investment through the brokerage window. The DOL issued a request for information on the use of brokerage windows on August 21, What is the purpose? According to the DOL, this rule-making project will explore whether, and to what extent, regulatory guidance on fiduciary requirements and regulatory safeguards for offering brokerage windows are appropriate. The rule-making project may also clarify whether any similar plan features will be treated like brokerage windows. Implications for clients T. Rowe Price s perspective Until a proposal is issued, it is difficult to know its potential impact. Brokerage windows may be valued by investment-savvy participants wanting more flexibility with their investment options. Plans that pair brokerage windows with designated investment alternatives can appeal to a wide variety of participants. We urge regulators to exercise caution in imposing regulatory requirements that reduce investment choice in participantdirected retirement plans. 26

27 Fee Disclosure ERISA 408(b)(2) Guide What is it? The DOL has proposed amending its 408(b)(2) regulation to require that a guide be provided along with the required fee and service disclosures if such disclosures are contained in multiple or lengthy documents. The proposed guide must specifically identify the document, page, or other specific locator that enables the plan fiduciary to quickly and easily find the information required to be disclosed under the 408(b)(2) regulation. Status The Spring 2015 Unified Regulatory Agenda de-prioritizes a Guide or Similar Requirement for Section 408(b)(2) Disclosures as a long-term regulatory action (i.e., the DOL is not expected to publish guidance within the next 12 months) perhaps signaling recognition that this is not an area where there is a problem in need of a solution. Background Final DOL regulations imposing fee disclosure requirements on covered service providers became effective July 1, The regulations are intended to ensure that plan fiduciaries are provided the information needed relevant to selecting and monitoring service providers and assessing the reasonableness of fees and expenses. At the time regulations were proposed, the DOL sought reactions to a proposed fee guide that gave page references in source documents to important materials referenced in 408(b)(2) disclosures. The DOL submitted a proposed rule to the OMB on June 25, On November 14, 2013, T. Rowe Price, along with other industry representatives, participated in a meeting with the OMB to discuss a possible guide requirement. The DOL issued a proposed regulation on March 12, The DOL also announced its intention to conduct focus group sessions with small pension plans to explore current practices and the need for a guide to help navigate and understand the required disclosures. What is the purpose? The DOL believes that a guide or similar summary may assist fiduciaries, especially fiduciaries to small and medium-sized plans, in identifying and understanding the potentially complex disclosures. Implications for clients T. Rowe Price s perspective A guide requirement would require service providers to develop infrastructure and systems that are not used for any other purpose. Such regulations would increase the overall cost of plan recordkeeping and might affect plan fees for these services. T. Rowe Price has seen no indication that there is widespread confusion about 408(b)(2) disclosures or fees, in general, among plan fiduciaries. T. Rowe Price opposes a regulatory initiative that will drive substantial cost and complexity without adding materially to plan fiduciary understanding of fees. 27

28 Disclosure Important Information Call to request a prospectus, which includes investment objectives, risks, fees, expenses, and other information you should read and consider carefully before investing. This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are as of July 2015 and may have changed since then. The fund is subject to market risk, as well as risks associated with unfavorable currency exchange rates and political economic uncertainty abroad. This insight is provided for informational and educational purposes only and are not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. This insight provides opinions and commentary that do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision. Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Past performance cannot guarantee future results. All charts and tables are shown for illustrative purposes only. T. Rowe Price Investment Services, Inc., distributor. 28

29 CJB3HUHX 2015-US-12214