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2 Thank You to Our Sponsors! 2

3 Thank You to Our Premier Sponsor! 3

4 Session 1: Washington Update and Late-Breaking Regulatory Developments Craig Hoffman, General Counsel Nevin Adams, Chief of Marketing and Communications American Retirement Association 4

5 What We Will Cover Tax Reform Legislative Outlook HSAs Fiduciary Regulation Update Litigation Update The State of State-Run Plans 5

6 Tax Reform 6

7 Tax Reform Top of the Agenda President Donald Trump: We re going to substantially simplify and lower taxes. CBS 60 Minutes (November 13, 2016) Speaker of the House Paul Ryan: [Our tax bill will be] virtually identical to the one that Donald Trump rolled out in the campaign. It means everyone gets lower tax rates. But we plug loopholes to pay for it. CBS 60 Minutes (December 4, 2016) Senate Majority Leader Mitch McConnell: I think this level of national debt is dangerous and unacceptable My preference on tax reform is that it be revenue neutral. Bloomberg Politics (December 12, 2016) 7

8 Tax Reform Tax reform is a high priority for the (still new) Republican Congress and President Trump. Paul Ryan (R-WI), is (still) Speaker of the House, and Kevin Brady (R-TX), is (still) Chair of the House Ways and Means Committee. This past summer, they jointly unveiled a blueprint for tax reform. 8

9 The Blueprint for Tax Reform Lower individual marginal tax rates with brackets of 12, 25, and a maximum 33 percent rate. Lower capital gains, dividend, and interest tax rates by providing a 50 percent deduction, effectively halving the marginal rates. Lower corporate tax rates of 20 percent. Elimination of the AMT and death tax. A Border Adjustment Tax that many describe as a import tariff. 9

10 The Trump Plan for Tax Reform The President s tax reform plan includes the following: Lower individual marginal tax rates with brackets of 10, 25, and a maximum 35 percent rate. Lower corporate tax rates of 15 percent. Elimination of most personal deductions. 100 percent increase in the standard deduction for joint filers. Elimination of the AMT and the death tax. 10

11 Tax Reform On April 26, the President formally announced the principles that will form the basis of his tax reform plan. At this point, no legislative language has been released for either the blueprint nor the President s plan. The initial draft of the tax reform bill expected from the House Ways and Means Committee will likely include provisions from both the blueprint and the President s plan. 11

12 Through Way? Both the blueprint and the President s plan include a new tax rate for businesses that are organized as pass-through entities such as Sub-S corporations, partnerships, LLCs taxed as partnerships, and sole proprietors. The pass-through tax rate would equal 25 percent under the blueprint and 15 percent under the President s plan. The pass-through rate would only apply to the business income portion of the pass-through entity s income with the compensation portion being taxed at ordinary income rates. The big question is how to allocate the entity s total income between these two categories. 12

13 Pass Tense? This means that the business income of these pass-through entities will no longer be subject to the top individual tax rate (33 percent in the blueprint and 35 percent in the President s plan). Additionally, once the 25 percent (blueprint) or 15 percent (Trump) pass-through tax has been paid, the net amount remaining can be reinvested in assets that produce capital gains that are eligible for a maximum individual tax rate of 16.5 percent under the blueprint or 20 percent under the President s plan. 13

14 Current Law Assume a 50-year old business owner earns $50,000 per year from his/her business for the next 16 years and earns four percent on his/her investments. A business owner who saves $50,000 annually in a retirement plan and pays an assumed tax rate of 35 percent on retirement distributions (current rate assumption) would accumulate $770,169. The same business owner who forgoes the retirement plan and pays tax on $50,000 of income at current tax rates (35 percent on the 50,000 of annual income and 20% on capital gains on the earnings) would accumulate $719,330. Under current law, the small business owner would reap a $50,839 benefit from investing through a retirement plan. 14

15 Blueprint Example Assume a 50-year old business owner earns 50,000 per year from his/her business for the next 16 years and earns 4 percent on his/her investments. Applying the blueprint s tax rates on pass-through income to the above example (25 percent tax on pass-through income and 16.5 percent tax on subsequent earnings) leaves a total accumulation of $839,921. If the business owner contributes the same $50,000 to a qualified retirement plan and pays tax on the distributions at retirement at the 33 percent rate provided in the blueprint he or she will have accumulated $793,867. The small business owner who invests in a retirement plan will be at a $46,054 disadvantage. 15

16 Fixing the Blueprint The disincentive under the blueprint for a business owner to contribute to and maintain a retirement plan can be simply corrected by applying the blueprint s 25 percent pass-through tax rate to retirement plan distributions associated with retirement plan contributions that would have been characterized as pass-through income if not contributed to the plan. Going back to the first example, if the maximum passthrough rate is instead applied to the allocable portion of the retirement plan distribution, the small business owner will gain $48,735 by contributing to the retirement plan. 16

17 Tax Reform The blueprint also includes Universal Savings Accounts as outlined in H.R 4094 (Rep. Dave Brat R-VA) that was introduced, but not enacted, in the last Congress. Universal Savings Accounts: $5,500 limit (with COLA) Anyone 18 or older is eligible Roth type tax treatment (i.e., after-tax contribution, tax-free distributions including earnings) 17

18 Tax Reform Retirement Impact With regard to the provisions in the IRC pertaining to savings: The Blueprint will continue the current tax incentives for savings. The Committee on Ways and Means will work to consolidate and reform the multiple different savings provisions in the current tax code to provide effective and efficient incentives for savings and investments. The President s plan makes no mention of possible changes to the tax rules applicable to retirement plans and White House officials indicated that none are intended. 18

19 Small Business Why Have a Plan? Under Brady blueprint business owners can save up to $12,000 on their own ($5,500 USAs and $6,500 IRAs). Are 401(k) plans worth the hassle? Workers are 15 times less likely to save without a workplace plan. 19

20 2017 Legislative Outlook Senate Majority Leader Mitch McConnell has indicated that the plan is to move tax reform legislation through the budget reconciliation process. Budget reconciliation will insulate the legislation from the need for 60 votes to break a potential filibuster in the Senate. There are likely to be two budget reconciliation bills in calendar year 2017, one for the 2017 fiscal year (which began October 1, 2016) and one for the 2018 fiscal year (which begins October 1, 2017). 20

21 What Is Budget Reconciliation? Created by the 1974 Congressional Budget Act. Only process that avoids Senate filibuster. Has been used for major legislation such as COBRA, EGTRRA, and welfare reform. Byrd Rule applies to provisions that do not affect revenue or lose revenue outside the ten-year budget window. Revenue neutral budget bill avoids a ten-year expiration date such as we had with EGTRRA. 21

22 House GOP Tax Plan Ten-Year Revenue and Economic Impact (Billions of Dollars) Revenue-Reducing Provisions Static GDP Dynamic Allow full expensing of capital investments -$2, % -$883 Consolidate individual income tax brackets into three of 12%, 25%, and 33% -$1, % -$1,641 Lower the corporate income tax rate to 20% -$1, % -$1,325 Tax cap gains and dividends as ordinary income, allow a 50% deduction for cap gains, dividends, and interest Tax income derived from pass-through business at a maximum rate of 25% -$ % -$531 -$ % -$388 Repeal the estate and gift taxes -$ % -$20 Expand and consolidate the standard deduction, replace the personal exemption with a dependent credit, and expand the Child Tax Credit -$ % -$112 TOTAL -$7, % -$4,900 Source: Tax Foundation Taxes and Growth Model, March

23 House GOP Tax Plan Ten-Year Revenue and Economic Impact (Billions of Dollars) Revenue-Raising Provisions Static GDP Dynamic Eliminate AMT, all itemized deductions except for mortgage interest and charitable contributions, and most personal credits $2, % $1,894 Disallow interest deduction on new loans $1, % $1,176 Border adjust business taxes (i.e., exclude export revenue; no deduction for imports) Eliminate section 199 and all business credits, and limit net operating loss deductions Enact a deemed repatriation of deferred foreign-source income and move to a territorial tax system $1, % $936 $ % $677 $25 0.0% $25 TOTAL $5, % $4,708 Source: Tax Foundation Taxes and Growth Model, March

24 Tax Reform Camp Proposal Double tax on contributions for top bracket earners Roth-only above 50 percent 401k limit for large plans Ten-year freeze on cost of living increases: 402(g) elective deferral 415 DB and DC SIMPLE plans Eliminate 403b and 457 plans Eliminate the stretch IRA Would have raised $250 billion in revenue 24

25 Poll Question #1 If elective employee contributions could only be made on an after-tax Roth basis, employee deferral rates would: A. Drop significantly B. Drop slightly C. Remain the same D. Increase slightly E. Increase significantly F. Who knows? 25

26 Making Progress on Retirement Policy House Ways and Means Committee Chairman Brady: Members are trying to answer questions such as: How do you make it easier for people to save for retirement? How can we make it simpler and more universal and broader used by Americans? Treasury Secretary Steven Mnuchin (pre-confirmation): We should, in a bipartisan fashion, work to increase retirement savings for all Americans. This should be an essential feature of overall tax reform. If confirmed, I would look to working with Congress on any measures that achieve this. 26

27 The Retirement Enhancement and Savings Act of

28 Senate Finance Markup On September 21, 2016, the Senate Finance Committee marked up a bill entitled, the Retirement Enhancement and Savings Act of 2016 (S. 3471). The bill would have made a number of important changes to laws affecting employer-sponsored retirement plans. The bill was never voted upon by the Senate and died with the adjournment of the 114 th Congress. Expected to be re-introduced in the new 115 th Congress. 28

29 Senate Finance Markup Pooled employer plans Allow for open MEPs with no commonality if certain requirements are met PEP benefits Single plan document Single Form 5500 filing Single plan audit Significant compliance requirements 29

30 Pooled Employer Plans (PEPs) Single 401(a) individual account plan with a tax-exempt trust or a plan of 408 individual retirement accounts that provides benefits to employees of two or more unrelated employers The PEP plan document must designate a pooled plan provider (PPP) PPP is a named fiduciary and acts as the 3(16) plan administrator Selection (and monitoring) of the PPP is a fiduciary plan sponsor responsibility 30

31 Other Retirement Plan Provisions in Senate Mark-Up 31

32 Senate Finance Markup Form 5500 aggregation Consolidated filings for 414(i) defined contribution individual account plans that: 1. Have the same trustee 2. Have the same one or more named fiduciaries 3. Have the same 3(16) plan administrator 4. Plans years begin on the same date 5. Provide the same investments or investment options Aggregate filing will be treated as separate individual returns for the purposes of the electronic filing requirements Effective January 1, 2020 Treasury and DOL may require any necessary or appropriate information regarding each plan in the group for enforcement and administration 32

33 Senate Finance Markup Retirement Plan Adoption Grace Period Employers may adopt a retirement plan on or before the due date with extensions of the employer s tax return Plan will be treated as being adopted on the last day of the taxable year to which the return relates Does NOT override 401(k) rules requiring plan adoption before elective deferrals may be made 33

34 Poll Question #2 An adoption grace period for a new plan would be: A. Used often B. Used moderately C. Used occasionally D. Rarely used 34

35 Senate Finance Markup Modify auto escalation safe harbor Removes 10 percent cap after the first plan year Small employer pension plan tax credit increase New amount is the greater of $500 or Lesser of $250 per NHCE or $5,000 Additional $500 per year for up to three years for including or adding automatic enrollment 35

36 Terminating 403(b) plans Senate Finance Markup Permits distribution of custodial account balances upon plan termination EPCRS expansion Allows correction of plan loan errors through selfcorrection Establishes EPCRS for 457(b) plan errors Establishes EPCRS for automatic feature errors Creates an EPCRS for IRAs and RMDs errors 36

37 Senate Finance Markup Extends rollover period for loans distributed upon termination of employment to the due-date of tax return for the year of distribution Eliminates six-month prohibition on elective deferrals after hardship distribution Allows hardship distribution to be made from QNECs, QMACs, and earnings on these amounts as well as earnings on deferrals Would eliminate need to take all available loans before getting a hardship distribution 37

38 Senate Finance Markup Eliminates the use of the stretch IRA as a distribution option at death, instead requires a total distribution within five years of death Exception available for eligible beneficiary i.e., a surviving spouse, minor child, disabled dependent, or anyone else no more than ten years younger and certain binding annuities in effect on date of enactment 38

39 Senate Finance Markup Lifetime Income Disclosure -- based on Lifetime Income Disclosure Act (LIDA) -- would require ERISA DC plans to include annuity equivalent calculation on benefit statements once per year Annuity equivalent equals monthly annuity (single and joint) purchased with current account balance beginning at NRA DOL would prescribe assumptions and model notice to be provided to participants Notice would warn actual annuity benefit may be materially different Employers and service providers protected from liability if DOL rules are met 39

40 Lifetime Income The Thing Almost Everyone Wants, and (Almost) Nobody Gets 40

41 Retirement Income Offerings Source: 2017 PLANSPONSOR DC Survey 41

42 Retirement Income Offerings Source: 2017 PLANSPONSOR DC Survey 42

43 How About a DIY Option? Source: 2017 PLANSPONSOR DC Survey 43

44 Five More Reasons Plans Don t Offer Lifetime Income There is no legal requirement to provide a lifetime income option The safe harbor for selecting an annuity provider doesn t feel very safe Yes, despite Field Assistance Bulletin (FAB) (insights on how to reconcile the time of selection standard in the safe harbor Rule with ERISA s duty to monitor and review certain fiduciary decisions Operational and cost concerns linger Participants don t take advantage of the option when offered (even in DB plans) Participants aren t asking for it See reasons-why-more-plans-dont-offer-retirement-income-options/ 44

45 Where Things Stand Surveys show participants like the concept of lifetime income Real life indicates that most, given an opportunity to take it don t At least one study (EBRI) shows that even DB participants, given a choice, opt for lump sum Plan sponsors still have concerns Partial annuities have some design promise 45

46 Poll Question #3 If participants were provided with an equivalent annuity calculation on their benefit statement, they would: A. Contribute more to increase their savings B. Contribute less because it appears hopeless C. Contribute the same amount D. Not have any idea what it means 46

47 Health Savings Accounts The Other Retirement Savings Account 47

48 Health Savings Accounts HSAs provide a triple tax advantage for savers: 1. Contributions reduce taxable income 2. Earnings on the account build up tax free 3. Distributions for qualified expenses from the account are not subject to taxation. Legislation has been introduced in both the U.S. Senate and House that is designed to give HSAs a boost, including doubling the current HSA limits (which in 2017 are $6,550 for individuals and $13,100 for families). Because of this, an HSA could prove to be more advantageous from a tax perspective than saving in a 401(k) plan or other retirement savings plan. 48

49 HSAs Sway 49

50 Five Things You May NOT Know About HSAs HSAs Can Invest in More than Money Market Funds HSAs can be invested in the same investment options that have been approved for individual retirement accounts (IRAs). You Can Withdraw Funds from the HSA at Any Time An individual may take distributions from an HSA at any time, but they are excluded from an individual s taxable income only if they are used to pay for qualified medical expenses. You Won t Lose it if You Don t Use it There is no use-it-or-lose-it rule associated with an HSA, as there are with the FSA. Normally HSAs Are Not Subject to ERISA when the employer does not contribute to the HSA, or when the establishment of the HSA is completely voluntary on the part of the employee. The Fiduciary Rule Has an Impact While HSAs aren t normally thought of as a retirement vehicle, the recently finalized Labor Department fiduciary rule extends to HSAs. As a result, employers could be impacted by the rule if they provide more than general investment education. See 50

51 Some Issues Healthcare (costs) top-of-mind for workers and plan sponsors Some signs that workers are already shifting retirement savings to healthcare Triple tax advantage has been touted if limits were raised, would workers max HSA before saving in 401(k)? 51

52 Poll Question #4 If HSA limits were doubled, my firm would: A. Consider offering HSA administration B. Immediately offer HSA administration C. Offer HSA administration if demand develops D. Not touch this market with a ten-foot pole 52

53 Fiduciary Regulation Update 53

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55 Effective Date The Final Regulation officially became effective on June 7, With that said, however, the date on which the new rules actually were to be applied (the Applicability Date ) was scheduled to be April 10, The BIC Exemption was likewise scheduled to become effective on April 10, 2017 with a slimmed down BIC exemption transition period from April 10, 2017 until January 1,

56 Presidential Memo On February 3, 2017, President Trump issued a Presidential Memorandum directing the Acting Secretary of the DOL to: examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice. As part of this examination, you shall prepare an updated economic and legal analysis concerning the likely impact of the Fiduciary Duty Rule, which shall consider, among other things, the following: 56

57 Presidential Memo (i) Whether the anticipated applicability of the Fiduciary Duty Rule has harmed or is likely to harm investors due to a reduction of Americans' access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice; (ii) Whether the anticipated applicability of the Fiduciary Duty Rule has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; and (iii) Whether the Fiduciary Duty Rule is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services. 57

58 Presidential Memo If you make an affirmative determination as to any of the considerations identified in subsection (a) or if you conclude for any other reason after appropriate review that the Fiduciary Duty Rule is inconsistent with the priority identified earlier in this memorandum then you shall publish for notice and comment a proposed rule rescinding or revising the Rule, as appropriate and as consistent with law. Acting U.S. Secretary of Labor Ed Hugler then issued a statement, The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President s memorandum. 58

59 Effective Date On March 2, 2017, the DOL issued a proposed regulation that would extend the applicability date by 60 days The purpose of the delay is to provide time to examine the regulation in accordance with the President s Memorandum of February 3, 2017 ARA Comment Letter recommended an extended delay until at least January 1, 2018 and a corresponding extension of BICE transitional relief until at least July 1,

60 Effective Date On April 7, 2017, the DOL issued a final regulation that extended the applicability date for 60 days until June 9, 2017 The BICE transitional period continues to expire on January 1, 2018 Significantly, however, the DOL modified the BICE to only require adherence to the impartial conduct standards during the transition period The DOL pledged to examine the regulation in accordance with the President s directive during the transition period and, if merited, make revisions to the rule or the BICE 60

61 Effective Date The proposed rulemaking notice also put out for public comment over 20 legal and policy questions, the answers to which will assist the DOL in their examination of the regulation Comments from the public on the legal and policy questions were due by April 17,

62 Litigation 62

63 Poll Question #5 Are your clients worried about 401(k) litigation? A. Yes B. No C. Not really D. Yes, but not enough to do anything about it 63

64 A Decade of Excessive Fee Litigation At best, these fee structures are complicated and confusing when disclosed to plan participants. At worst, they are excessive, undisclosed, and illegal. 64

65 Un-Settling? Defendant Settlement Attorney Fee Ameriprise Financial $36.5 million $9.0 million Bechtel $26.2 million $7.7 million Boeing $57.0 million $20.8 million Caterpillar $22.3 million $5.83 million Cigna $47.8 million $12.8 million General Dynamics $20.9 million $5.7 million International Paper $41.5 million $11.5 million Kraft $14.2 million $4.7 million Lockheed Martin Corp $84.3 million $22.3 million Nationwide $190.0 million $50.0 million Novant Health $32.0 million $10.8 million 65

66 Your Plan Might Be An Excessive Fee Target If It s a multi-billion dollar plan Your multi-billion dollar plan has retail-class mutual funds You have proprietary funds on your menu You can t remember the last time you benchmarked your plan/investments You are still paying asset-based record keeping charges, rather than a per-participant fee You haven t hired a qualified retirement plan adviser to help Source NAPA-Net, 66

67 The Results? More litigation, and the bar is being raised (lowered?) More settlements May gradually move down market (but smaller accounts, smaller contingent fees) More consolidation? Lower fees? Plan sponsor reactions? Will/are you do anything different? 67

68 The State of State-Run Plans Just Don t Call it a Mandate 68

69 Elements of State Proposals Require private employers over a certain size to offer a retirement plan for their employees Create a state-run retirement plan for private employers to fulfill the requirement Institutional pricing on investments Guaranteed return options are available No cost for the employer a) Employers will not be required to contribute to the plan b) Employers will not have to pay any administrative expenses. Exempt from ERISA 69

70 Typical Response But I don t work with small plans The new Administration won t support these My state isn t part of this I haven t seen any impact in my market(s) 70

71 The Result(s) of Retirement Shortfalls Fraying social safety net Diminished tax base Strained resources Economic impacts 71

72 Spread Sheet 72

73 Staggered Starts Oregon - pilot program to begin on July 1, 2017 (furthest along contracted with Ascensus in December 2016 to manage the program) Illinois - seeking a delay from June 1, 2017 to June 1, 2018 Connecticut - January 1, 2018 Authority can delay effective date at will Maryland - law is effective (July 1, 2016) Unclear when it will be implemented California law is effective (January 1, 2017) Implementation is at early stage (still looking to hire an Executive Director of the Program) 73

74 What Could This Mean? Fewer opportunities (employers opt for lower cost, administration burdens of state-run plan) Diminished opportunity for upsell (those IRA balances can t be rolled over to qualified plans) An opportunity to talk with plan sponsors and POTENTIAL plan sponsors about a better alternative for their workers 74

75 Wait Just a Minute Last month President Trump signed Congressional Review Act legislation blocking Obama-era DOL s safe harbor exempting states and municipalities auto-ira programs from ERISA On May 3 the U.S. Senate passed H.R. Res. 66 by a vote of 50-49, echoing action taken by the House of Representatives in February, blocking the safe harbor for state-run auto IRA plans That won t necessarily undo the work that has been done or stop the state-run initiatives underway although it would potentially undermine the clarity and encouragement that the Obama administration had sought to provide these programs Indeed, several of the programs under development have already announced their determination to forge ahead, regardless 75

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