Retirement Income Team Newsletter May 2013 In This Issue Page 2 Projecting Retirement Income 3 NAIC Update: Spring 2013 Meeting 5 Distribution Payments in Guise : An SEC Examination Priority 6 Converting Defined Contribution Plan Benefits To Annuities Through Rollovers to a Defined Benefit Plan: Practical Considerations for Employers 7 FINRA s 2013 Regulatory and Examination Priorities Include Variable Annuity Sales Practice Issues 8 Selecting an Annuity Provider: Part II 10 Around the Firm Dear Reader: The Drinker Biddle Retirement Income Team brings together seasoned lawyers with diverse talents in multiple practice areas, including employee benefits, investment management, securities, insurance, income taxation and government relations, to provide one source to which financial services companies and plan sponsors can look for help in resolving complex legal issues that impact the design and sales of retirement income products and their selection for use in defined contribution plans. Our newsletters address legal issues faced by retirement industry service providers insurance companies, mutual funds, banks and trust companies, investment advisers, broker-dealers, third-party administrators and record-keepers as well as by plan sponsors and fiduciaries. They also provide timely and valuable information regarding recent or expected regulatory developments and industry trends. The Retirement Income Team can be most effective by focusing on the issues, developments and trends that impact you. Please let me or any other member of the Team know if there is a matter relating to retirement income products or services that is of particular interest to you or if you have any comment or question regarding the information in our newsletters or on our website. For additional information about the Retirement Income Team and legal, regulatory and other issues affecting retirement income products and services, please visit our website at http://www. drinkerbiddle.com/services/practices/investmentmanagement/retirement-income-team. Retirement Income Team www.drinkerbiddle.com John Blouch Chair, Retirement Income Team John.Blouch@dbr.com (202) 230-5420 IRI GLRC and Retirement Plan Summit The Insured Retirement Institute (IRI) will be hosting its annual Government, Legal & Regulatory Conference (GLRC) and Retirement Plan Summit from June 17 to June 19, 2013 in Washington, DC. The programs for these events will focus on legal and regulatory issues for insurance companies and related brokerdealers. Fred Reish, from Drinker Biddle s Los Angeles office, will be a co-moderator at the Retirement Plan Summit on June 19. Topics will include: The View from Washington, Insurance Contracts and Fiduciary Risks, Fiduciaries in the Distribution Channel, Litigation and Enforcement, and current Hot Topics. Drinker Biddle attorneys will be speaking at both the GLRC and Retirement Plan Summit. For more details and registration information, please visit www.iriconferences. org or contact Elizabeth Maddox at 202-4693016 or emaddox@irionline.org. 1
Projecting Retirement Income By Fred Reish (310) 203-4047 Fred.Reish@dbr.com By Bruce L. Ashton (310) 203-4048 Bruce.Ashton@dbr.com The Department of Labor (DOL) has been thinking about either requiring or facilitating the projection of retirement income on quarterly participant benefit statements for defined contribution plans. The DOL s next step will be the solicitation of comments about the best way to do that. Three sample quarterly statements have been developed which will likely be released to the public for comment. The first, and simplest, sample statement provides only for the projection of the current account balance to a participant s retirement age. In reviewing the sample statement, it provides little additional value to participants, since the projected account balance is so large (almost $700,000) that it would leave a participant with the sense of great wealth but with little idea of the income that it would provide. The second sample statement includes both the projection of the account balance to retirement and an estimate of the amount of monthly income (using joint and 50 percent survivor payments). The great wealth of almost $700,000 is projected to yield about $2,500 per month somewhere short of living in luxury. The second sample is helpful. It gives participants a sense of the monthly income that could be provided from their account using reasonable withdrawal rates. And, it reinforces the fact that the ultimate purpose of the participant s account is to provide retirement income. The third sample is essentially the same as the second, except that the projected numbers are rounded. We assume that the purpose of the rounding is to emphasize to participants that these projections are estimates and should not be viewed as the actual amounts the participant will have at retirement. The samples describe the underlying assumptions, which are: Gender-specific life expectancy assumption. Retirement age of 67 (which is the normal retirement age for Social Security for most workers today). Joint-and-survivorship annuity with level monthly payments, assuming the participant and his/her spouse are the same age and that the survivor benefits are equal to 50 percent of the monthly payments to the retired participant. An inflation rate of 3 percent. An investment rate of return of 7 percent. (Note that the effect of a 3 percent inflation rate is to provide a real return of 4 percent. All of the numbers are based on present values.) That the current employer and employee contribution rates grow 3 percent annually. Two additional thoughts: The projection of retirement income appears on the second page of sample statements 2 and 3. This may run contrary to the purpose of the projection. Participants want to know how they are doing and they want to know quickly and efficiently. Since projected income is a critical part of the answer to that question, it would be most effective if placed on the first page. The projections also include helpful information about the impact of increasing deferrals. That information makes the statement lengthy, complex and perhaps confusing. However, it is needed information; the issue is how to streamline the presentation. When these materials are distributed to the benefits community, the burden will be on us to review them and provide the DOL with meaningful and helpful comments. If properly done, this change could affect how participants evaluate their retirement savings, as well as their behavior, including important decisions about increasing deferrals, delaying retirement, and living standards. Fred Reish is a partner in the firm s Employee Benefits & Executive Compensation Practice Group, Chair of the Financial Services ERISA Team and a member of the Retirement Income Team. His practice focuses on fiduciary issues, prohibited Retirement Income Team www.drinkerbiddle.com 2
transactions, tax-qualification and retirement income. He represents plans, employers and fiduciaries before the governing agencies (e.g., the IRS and the DOL); consults with banks, trust companies, insurance companies and mutual fund management companies on 401(k) investment products and issues related to plan investments and retirement income; and represents broker-dealers and registered investment advisers on issues related to fiduciary status and compliance, prohibited transactions and internal procedures. Fred is a well-known speaker and author on ERISA topics. Bruce Ashton is a partner in the firm s Employee Benefits & Executive Compensation Practice Group and serves on the Financial Services ERISA and Retirement Income Teams. Bruce s practice focuses on all aspects of employee benefits issues, especially representing plan service providers (including RIAs, independent record-keepers, third party administrators, brokerdealers and insurance companies) in fulfilling their obligations under ERISA and in assisting service providers and plan sponsors in addressing the retirement income needs of participants. He is a well-known speaker and author on employee benefits topics. NAIC Update: Spring 2013 Meeting By Daniel W. Krane (215) 988-2488 Daniel.Krane@dbr.com By James C. McMeen (609) 716-6655 James.McMeen@dbr.com The National Association of Insurance Commissioners (NAIC) held its Spring 2013 National Meeting from April 6 to 9 in Houston, Texas. This update provides a brief overview of the activities of certain NAIC working groups that focus on issues affecting retirement income products and their providers. Contingent Deferred Annuity (A) Working Group As discussed in our October 2012 newsletter, the Contingent Deferred Annuity (A) Working Group (CDA Group) was established to evaluate the adequacy of existing laws and regulations applicable to solvency and consumer protection issues in connection with contingent deferred annuities (CDAs). CDAs are a type of annuity contract that provides guaranteed lifetime income payments if designated investments not owned or held by the insurer are depleted due to permitted withdrawals, poor market performance, fees or other charges. At the meeting, the CDA Group heard presentations from various regulators, industry and trade groups, consumer representatives, and other interested parties. In particular, a representative from the American Council of Life Insurers commented that the suitability rules of the Financial Industry Regulatory Authority (FINRA) do apply to sales of CDAs by brokers and, therefore, the Suitability in Annuity Transactions Model Regulation (#275) (Model Suitability Regulation) should not also apply because such application would result in two suitability reviews. In response, the CDA Group was of the view that FINRA does not apply its variable annuity suitability rules to CDAs, only its general suitability rules, which do not provide the same protections as the Suitability Model Regulation. Accordingly, the CDA Group recommended to the Life Insurance and Annuities (A) Committee (A Committee) that the Model Suitability Regulation be revised to specifically reference the sale of CDAs and make clear that certain training and product specific training requirements include CDAs. In response to comments from several other insurance regulators regarding reserve requirements for CDAs, the CDA Group recommended to the A Committee that analyzing reserving requirements for CDAs should be referred to an NAIC Working Group with the appropriate subject matter expertise. A representative from the Insured Retirement Institute commented that the CDA Group should make clear that the states do not have to wait until after the CDA Group and A Committee complete their work on CDAs before approving them. The CDA Group did not include this suggestion in its final report and recommendations to the A Committee. Finally, the CDA Group also heard a presentation from the Executive Director of the Center for Economic Justice who urged the CDA Group to make clear in its report and recommendations that it was not endorsing CDAs and who advised the CDA Group that states may have approved CDAs without realizing that they were CDAs and should re-examine and, if appropriate, re-approve such products. The CDA Group considered these recommendations beyond the scope of its charge and did not include them in its report and recommendations to the A Committee. Retirement Income Team www.drinkerbiddle.com 3
The A Committee adopted the CDA Group s final report and recommendations. A copy of the report is available here: http://www.naic.org/meetings1304/ committees_a_2013_spring_nm_additional_materials.pdf Annuity Disclosure (A) Working Group The A Committee appointed the Annuity Disclosure (A) Working Group (Annuity Disclosure Working Group) to consider changes to the NAIC Annuity Disclosure Model Regulation to improve the disclosure of information provided for annuity products and to provide insurance companies with uniform guidance on developing disclosure practices and monitoring the distribution of annuities. The Annuity Disclosure Working Group s 2013 charge was to review and revise the NAIC Buyer s Guides (Buyer s Guides) which are consumer guides setting forth a general explanation of deferred annuities and fixed deferred annuities and some of their most common features. The model regulation requires that the Buyer s Guides (as applicable) be delivered, along with an annuity disclosure document, to each prospective applicant for an annuity contract. The Annuity Disclosure Working Group had previously discussed revisions to the Buyer s Guides on a teleconference call on March 22, 2013 and, at the meeting, approved a slightly revised version of the Buyer s Guides incorporating additional technical, non-substantive changes. The Annuity Disclosure Working Group submitted the revised Buyer s Guides to the A Committee, which approved them as well as the re-appointment of the group to complete its work developing interactive electronic versions of the Buyer s Guides for posting on insurance company websites. The final versions of the Buyer s Guides are available here: http://www.naic.org/meetings1304/ committees_a_2013_spring_nm_materials.pdf ERISA Retirement Income (A) Working Group The 2013 charge of the ERISA Retirement Income (A) Working Group (Retirement Income Group) was to work with representatives of the Department of Labor (DOL), the White House Council of Economic Advisors, the Department of the Treasury, and any other appropriate federal agencies, in coordination with the NAIC Government Relations Leadership Council, to consider possible options for easing plan sponsor concerns with the financial soundness of annuity providers as related to the DOL safe harbor for satisfying fiduciary responsibility requirements in selecting annuity providers. For more information about the DOL safe harbor, see our October 2012 newsletter. At the meeting, the Retirement Income Group heard a presentation from the Variable Annuity Life Insurance Company on the different types of ERISA plans and taxqualified plans. The group also heard a presentation from the National Organization of Life & Health Guaranty Association on the insurance guaranty system, the context in which it operates, and how core commitments of guaranty funds to consumers are honored when insurers become insolvent. The Retirement Income Group concluded the meeting by agreeing to hold conference calls prior to the NAIC s Summer 2013 National Meeting to continue to work on its charge. The A Committee adopted the report of the Retirement Income Group, which has not yet been made publicy available. ERISA (B) Working Group The ERISA (B) Working Group (ERISA B Group) reports to the Regulatory Framework (B) Task Force (B Task Force) which, in turn, reports to the Health Insurance and Managed Care (B) Committee. The ERISA B Group s 2013 charges were to (i) monitor, report, and analyze developments related to ERISA and make recommendations regarding NAIC strategy and policy with respect to those developments, (ii) develop a white paper analyzing the potential impact of small employer self-insurance on the small group market beginning in 2014, and (iii) review and revise the Stop Loss Insurance Model Act (#92) to take into account medical inflation. At the meeting, the ERISA B Group discussed surveying the states sometime in May to determine what, if anything, is occurring in the small group market in light of 2014 market reforms. Noting that state health insurance exchanges would not be fully operational until 2014, the ERISA B Group decided to postpone the state survey until 2014 and issue a white paper later that year, once the states and the working group have a better understanding of the impact, if any, of the health insurance exchanges on the small group market. For example, the ERISA B Group acknowledged that it could not fully analyze the impact of the exchanges until it was known which insurance companies and insurance products would be offered on the exchanges. The ERISA B Group also agreed to review existing literature on the impact of small group employer self-insurance on the goals of The Patient Protection and Affordable Care Act. Such literature may inform, or possibly obviate altogether Retirement Income Team www.drinkerbiddle.com 4
the need for, the white paper. The ERISA B Group also briefly discussed the ability of states to possibly prohibit stop-loss coverage when the attachment point is too low. Finally, the group discussed its plan to continue review of the NAIC ERISA Handbook for possible modifications. The B Task Force approved the re-appointment of the ERISA B Group and its report. A copy of the group s report is available here: http://www.naic.org/meetings1304/ committees_b_2013_spring_nm_materials.pdf Daniel W. Krane is a partner in the firm s Corporate and Securities Practice Group and is a member of the Corporate, Mergers and Acquisitions, Government and Regulatory Affairs, Insurance Regulatory and Retirement Income Teams. He concentrates his practice on corporate, transactional and regulatory matters for insurance, financial services and health care clients. Dan is active in the NAIC and has presented before NAIC working groups on various topics. Dan is the past chair of the Financial Services Integration Committee of the ABA Tort and Insurance Practice Section and the Insurance Committee of the Business Section of the Philadelphia Bar Association. James C. McMeen is an associate in the firm s Corporate and Securities Practice Group and serves on various teams, including the Financial Services ERISA and Retirement Income Teams. Jim has experience in a broad variety of corporate matters, including mergers and acquisitions; forming, organizing and counseling startup businesses; insurance regulatory matters; joint venture/partnering transactions; venture capital financings; securities offerings; corporate governance; and ongoing compliance with federal securities laws. Distribution Payments in Guise : An SEC Examination Priority By John W. Blouch (202) 230-5420 John.Blouch@dbr.com By Bruce W. Dunne (202) 230-5425 Bruce.Dunne@dbr.com The SEC staff recently issued its examination priorities for 2013. 1 One item of interest to retirement market participants is the staff s intention to focus on the wide variety of payments made by advisers and funds to distributors and intermediaries. According to the staff, such payments go by many names and are purportedly made for a variety of services, most commonly revenue sharing, sub-ta, shareholder servicing, and conference support. The staff intends to assess whether the payments are being made in compliance with applicable law, including Rule 12b-1 under the Investment Company Act of 1940 (1940 Act). In other words, the staff will be looking for payments that ostensibly are for nondistribution services but instead are for distribution. Rule 12b-1 provides the exclusive means by which a mutual fund may pay directly or indirectly for distribution of its shares. The rule requires a written plan adopted by the fund s board and approved by its shareholders. The fund must pay for distribution only pursuant to the 12b-1 plan, but it may pay for nondistribution services either pursuant to or outside of the 12b-1 plan. Issues arise if payments outside the plan could be viewed as being made indirectly for distribution. The SEC staff previously considered similar issues in the context of payments made by a fund, its investment adviser and affiliates of the adviser to sponsors of fund supermarkets. 2 The staff noted that funds participate in supermarkets to sell more of their shares and to increase assets under management and concluded that whether payments to sponsors must be made pursuant to a 12b-1 plan depends on the purpose of the payments and the party making the payment. The staff took the position that, because of the objective of these arrangements, at least part of the fees paid to a sponsor had to be considered payments for distribution, i.e., for services that are primarily intended to result in the sale of the fund s shares. The staff acknowledged that part of the fees could be for non-distribution services. It emphasized the responsibility of the fund s board to determine whether the fund was paying, directly or indirectly, for distribution or non-distribution services. In the case of non-distribution services, the staff said that the fund s board should consider the nature of the services, determine whether the fee paid by the fund for them is reasonable in relation to the value of the benefits received and the cost to the fund to obtain the services elsewhere and insure that the fund does not pay for services that duplicate services already being provided. In considering fees paid by the fund s adviser and its affiliates, the staff referred to earlier SEC guidance regarding whether an advisory fee paid by a fund to Retirement Income Team www.drinkerbiddle.com 5
its adviser might constitute an indirect payment for distribution by the fund. 3 In the view of the SEC, it is impermissible for an advisory contract to serve as a conduit for the indirect payment of distribution expenses outside a 12b-1 plan. This situation could arise, for example, if the advisory fee included an allowance for distribution. The SEC, however, also takes the position that it is permissible for an adviser to use its own resources, including those arising from its legitimate profits under the advisory contract, to pay for distribution of the fund s shares. Legitimate profits are those an adviser derives from advisory fees which, for purposes of the 1940 Act, are not excessive in relation to the services rendered. If the fund s board is satisfied that an adviser s distribution payments are being made out of its own resources, it may conclude that the advisory contract is not a conduit for the indirect payment of distribution expenses. The SEC staff s current examination priority will focus not only on the purpose of various kinds of payments but also on board oversight of the payments and the adequacy of disclosures made to the board about the payments. This focus can be expected to lead to heightened attention by fund boards to payments for non-distribution services made by funds and by their advisers and affiliates. Those who provide and pay for those services should expect increased scrutiny of their arrangements, including the nature of the services being provided and associated costs and profits. 1 SEC, Office of Compliance Inspections and Examinations, Examination Priorities for 2013 (Feb. 21, 2013) at 5. 2 Investment Co. Institute (pub. avail. Oct. 30, 1998). 3 1940 Act Release No. 16431 (Jun. 13, 1988). John Blouch is of counsel to the firm s Investment Management Practice Group and serves as Chair of the Retirement Income Team. John s practice focuses on the federal securities laws and their application to participants in the financial services industry, such as insurance companies, banks, investment companies, investment advisers and broker-dealers, as well as to companies and individuals generally. John regularly advises insurance companies on a wide range of securities-related matters, including registered variable annuity and life insurance products, mutual funds, broker-dealer and investment advisory activities and the use of exempt group variable annuity contracts and mutual fund shares to fund qualified retirement plans. Over the years, John has advised dozens of insurance companies in connection with their variable insurance operations. Bruce Dunne is of counsel to the firm s Investment Management Practice Group and a member of the Retirement Income Team. He focuses his practice on the registration, reporting, exemptive and other provisions of the federal securities laws, with emphasis on their application to investment companies, including retail and variable insurance products mutual funds, insurance company separate accounts and private investment funds, and to investment advisers. Converting Defined Contribution Plan Benefits to Annuities Through Rollovers To a Defined Benefit Plan: Practical Considerations For Employers By Joshua J. Waldbeser (312) 569-1317 Joshua.Waldbeser@dbr.com Employers who sponsor both a 401(k) or other defined contribution plan and a defined benefit pension plan may be able to offer participants a lifetime income benefit that is already largely in place. Such employers can permit terminating employees who are covered under both plans to roll all or a portion of their defined contribution benefits over to the pension plan to receive a greater life annuity benefit from the pension plan. This approach may be beneficial for retirees and other terminating employees, while still helping to minimize the employer s administrative burdens. For retirees, this rollover feature is a convenient (and tax-deferred) means to convert lump-sum defined contribution plan benefits into a guaranteed stream of retirement income. It is an optional feature that would not create any burdens for participants who wish to receive their defined contribution benefits in a lump sum. From the employer s perspective, all defined benefit plans are subject to the qualified joint & survivor annuity (QJSA) requirements under ERISA and the Internal Revenue Code (Code), but defined contribution plans that do not offer annuity forms of benefit are not. This approach allows defined Retirement Income Team www.drinkerbiddle.com 6
contribution benefits to be annuitized indirectly through the defined benefit plan, without subjecting the defined contribution plan to QJSA complications. Employers should be aware that this approach has a few complications and limitations of its own. In Revenue Ruling 2012-4, the IRS clarified how certain qualification requirements apply under this scenario, so that employers can be comfortable that it will not trigger compliance problems. In particular: Underfunded Pension Plans. If the defined benefit plan s funding level is below 60 percent, the plan cannot accept rollover contributions during any year in which this level of underfunding persists. This is because the Code Section 436 funding requirements that apply to single-employer defined benefit plans mandate that benefit accruals cease if the plan has a severe funding shortfall, and the benefit liabilities attributable to the rollovers would constitute additional accruals. PBGC Guarantees. In the event the defined benefit plan is terminated while underfunded, all benefits (including those attributable to rollovers) become subject to the guaranteed benefit limitations set by the Pension Benefit Guaranty Corporation (PBGC). The Revenue Ruling indicates that a participant must receive a disclosure explaining this issue and the relevant PBGC limits, so that he or she is aware of the risk that some pension benefits may not be insured. Valuation and Funding. The rollover contributions must be converted to immediate annuity benefits applying actuarial factors no less favorable than the statutory interest rate and mortality table set forth in Code Section 417(e), which are used to determine the minimum present value of pension benefits. Also, a separate interest crediting rate applies in the event of a delay between the rollover contribution and the participant s annuity starting date. If these factors are applied, the annuity benefit attributable to the rollover contribution will not be taken into account in determining the maximum benefit payable from the pension plan under the rules of Code Section 415(b). This may or may not be important, depending on the level of benefits the plan otherwise provides. If the plan uses more favorable conversion factors (that provide a more generous annuity than legally required), this is permissible but it may generate additional funding costs for the employer, and the excess will be included in calculating the maximum pension benefit the participant can receive under Section 415(b). ERISA plan actuaries are well-qualified to deal with these intricacies and should be consulted to help identify the approach that best minimizes additional costs and complications. Coordination with Service Providers. Implementing this rollover feature will require the involvement of the defined benefit plan s actuary or TPA who is responsible for valuation and benefit calculations, and this will result in some increased costs. Likewise, amending the plan document to reflect the associated technical requirements (and the Summary Plan Description, etc.) will require the engagement of experienced ERISA counsel. Joshua Waldbeser has been an associate in the Employee Benefits & Executive Compensation Practice Group at Drinker Biddle s Chicago office since 2008, and prior to this, he worked for the U.S. Department of Labor, Employee Benefits Security Administration. Joshua s practice focuses on working with plan sponsors and prototype plan, investment, and other service providers with respect to Title I of ERISA and the IRS qualification requirements for retirement plans. Joshua also works with tax-exempt and governmental employers with respect to 403(b) and 457 plans, including special issues for governmental and church plans. FINRA S 2013 Regulatory and Examination Priorities Include Variable Annuity Sales Practice Issues By Mark F. Costley (202) 230-5108 Mark.Costley@dbr.com In its January 11, 2013 Regulatory and Examination Priorities Letter (2013 Letter), the Financial Industry Regulatory Authority (FINRA) includes variable annuity sales practice issues as among the key investor protection and market integrity issues that it will focus on in the coming year. In discussing variable annuities in the 2013 Letter, FINRA recognizes the benefits that they can provide investors, but notes the following concerns: Retirement Income Team www.drinkerbiddle.com 7
long holding periods in conjunction with significant surrender charges can make variable annuities unsuitable for investors who have near-term liquidity needs; high fees and expenses above typical subaccount fees reduce performance, and high commissions make variable annuities a target for switching; consolidation in insurance companies offering variable annuities may provide an inappropriate incentive for brokers to recommend exchanges; insurance company offers to buy back a variable annuity or increase the account value to forgo contractual guarantees may present both brokers and investors with a less-than-clear picture of the transaction s financial benefit to the investor; and finding a similar variable annuity with the features included in the prior variable annuity may be challenging. Many of the concerns noted in the 2013 Letter were referenced in FINRA s 2012 and prior letters. For example, the 2009 and 2010 letters also focused on variable annuity exchanges (especially in connection with employment changes by registered representatives who sold the variable annuities), and suitability issues, in particular with regard to sales and exchanges involving older investors. FINRA notes in the 2013 Letter that its examiners will focus on the following variable annuity-related issues: suitability of recommendations; the sales representative s level of product-specific knowledge; the level of due diligence in assessing the risk tolerance and liquidity needs of the customer when making investment recommendations; the manner in which material risk exposures are disclosed to customers; and the impact on broker compensation associated with competing investment alternatives. FINRA member firms have rightly complained at times that that they have been surprised by the level of scrutiny that FINRA has attached to certain products or sales practices. No such complaint would be warranted in this case. As indicated above, FINRA has consistently highlighted its concerns regarding variable annuity sales practices. Firms involved in the distribution of variable annuity products, both product creators and retail sellers, should review their policies, the implementation of those policies, and the educational support they provide their sales representatives to ensure that they are ready to answer the questions that FINRA is all but promising to ask. Mark Costley is a partner in the firm s Investment Management Practice Group and a member of the Retirement Income Team. Mark began his career at the National Association of Securities Dealers, Inc. (now FINRA) and has more than 25 years of experience in the financial services industry. He focuses his practice on the representation of financial services companies on matters relating to the development and offering of investment products and services. Mark represents a wide variety of brokerdealers and investment advisers in all aspects of their businesses and also regularly advises mutual funds and exchange-traded funds. Mark has also represented clients in connection with acquisitions, regulatory investigations and enforcement proceedings. Selecting An Annuity Provider: Part II By Fred Reish (310) 203-4047 Fred.Reish@dbr.com By Bruce L. Ashton (310) 203-4048 Bruce.Ashton@dbr.com Selecting an annuity provider for a defined contribution plan may seem more difficult than other fiduciary decisions. In this article, we discuss whether this perception of the fiduciary s obligation is correct and then identify some of the information a fiduciary should review in making the selection. In the October 2012 Retirement Income Team newsletter, we discussed the DOL fiduciary safe harbor for selecting an annuity provider for defined contribution plans. We noted that, while the regulation is helpful in describing the fiduciary process, it does not identify specifically what fiduciaries should look at. As background, under ERISA fiduciaries must act prudently in selecting investments, products and services. This process entails engaging in an objective, Retirement Income Team www.drinkerbiddle.com 8
thorough and analytical process. In this sense, the search for a suitable annuity provider requires the same process as for any other fiduciary decision. The difference is in the information to gather and assess. But, some people believe that a fiduciary must try to predict whether the insurance company will be able to make all future payments. That is not the case. The DOL regulatory safe harbor says a fiduciary must conclude that, at the time of selection, the annuity provider is financially able to make all future payments under the annuity contract.... [emphasis added] The fiduciary is not required to predict the condition of the insurance company in the distant future, but instead to reasonably conclude that, as of the date of the selection, the company has the financial ability to make the promised payments. What information should the fiduciaries review to make that decision? The following is a partial list: First, fiduciaries should review the company s ratings from the relevant rating agencies (S&P, Moody s, Fitch and AM Best). They should look at the company s overall financial viability and, where available, its claims paying ability. Fiduciaries should look for consistently high ratings across all of the services. COMMENT: Ratings information should be available on the company website. Second, fiduciaries should look for consistently high ratings over an extended period that covers a number of financial cycles. While there is no general rule for that time period, a review of ratings over 10 to 15 years should ordinarily reflect an insurance company s condition under different economic conditions. We have discussed these and other factors in a white paper we published in May 2012 (co-authored with our colleague, Joe Faucher) entitled Lifetime Income in Defined Contribution Plans: A Fiduciary Approach (www.drinkerbiddle.com/resources/publications/2012/ Lifetime-Income-in-Defined-Contribution-Plans). Fred Reish is a partner in the firm s Employee Benefits & Executive Compensation Practice Group, Chair of the Financial Services ERISA Team and a member of the Retirement Income Team. His practice focuses on fiduciary issues, prohibited transactions, tax-qualification and retirement income. He represents plans, employers and fiduciaries before the governing agencies (e.g., the IRS and the DOL); consults with banks, trust companies, insurance companies and mutual fund management companies on 401(k) investment products and issues related to plan investments and retirement income; and represents broker-dealers and registered investment advisers on issues related to fiduciary status and compliance, prohibited transactions and internal procedures. Fred is a well-known speaker and author on ERISA topics. Bruce Ashton is a partner in the firm s Employee Benefits & Executive Compensation Practice Group and serves on the Financial Services ERISA and Retirement Income Teams. Bruce s practice focuses on all aspects of employee benefits issues, especially representing plan service providers (including RIAs, independent record-keepers, third party administrators, brokerdealers and insurance companies) in fulfilling their obligations under ERISA and in assisting service providers and plan sponsors in addressing the retirement income needs of participants. He is a well-known speaker and author on employee benefits topics. COMMENT: Information going back more than a few years may not be readily available on the company website. In that case, the fiduciary may need to request the information from the company. Finally, fiduciaries should consider information about state insurance guarantees that may be available to protect the participant s benefits. These state guarantees should pay benefits guaranteed by an insurance company s general account if the company becomes insolvent, though the amount of coverage varies from state to state. COMMENT: Insurance companies are subject to legal restrictions on providing this information, but it may be obtained on the website of the National Organization of Life & Health Insurance Guaranty Associations (www.nolhga.com). Retirement Income Team www.drinkerbiddle.com 9
Retirement Income Team Around the Firm Mark Costley and Diana McCarthy were speakers at the Investment Company Institute s General Membership Meeting Legal Forum on May 2, 2013 in Washington, DC. Their presentation addressed Current Issues and Best Practices for Mutual Fund Platform Arrangements. Fred Reish gave the keynote presentation at the 42nd Annual Retirement & Benefits Management Seminar on April 25, 2013 in Charlotte, North Carolina. Fred spoke on Hot Issues for Retirement Plan Sponsors & Service Providers. Fred Reish was quoted in Employee Benefit News in an April 1, 2013 article on a recent brief he co-authored with Bruce Ashton for the Institutional Retirement Income Council (IRIC). The brief emphasized the importance of knowing what constitutes realistic and safe withdrawal rates from retirement plans. Joan Neri was a speaker on a panel of retirement industry experts at a breakfast program on Retirement Plan Lawsuits on the Rise: Who Is Liable? on March 28, 2013 in Florham Park, New Jersey. Brad Campbell presented on Reading the ERISA Tea Leaves for Fund Lawyers at the Investment Company Institute s 2013 Mutual Funds and Investment Management Conference in Palm Springs, California from March 17-19, 2013. On March 7, 2013 Lincoln Financial Group announced a partnership with Drinker Biddle s Retirement Income Team to create resources designed to help plan sponsors better understand and assess the value that in-plan guarantees can add to employer-sponsored retirement plan programs. A Plansponsor.com article on March 19, 2013 highlighted the recent Drinker Biddle white paper co-authored by Fred Reish and Bruce Ashton, The Benefits of Mandatory Distributions and interviewed co-author, Bruce Ashton. Fred Reish was a speaker at the San Francisco Mid-Sized Conference presenting In s and Out s of 401(k) Plans: Accumulation and Distribution of Benefits on March 19, 2013. SaverNationSM, a unique program for increasing employee deferrals to 401(k), 403(b) and 457 plans, has been given a 2013 Bank Innovation Award for enabling saving for tomorrow without having less to spend today. Bruce Ashton was the principal legal architect of the program. The award was presented on March 18, 2013. Bruce Ashton spoke on ERISA Fiduciary Issues: Is the Sky Really Falling? at the ALI-CLE Pension conference in San Francisco, California on March 13, 2013. Fred Reish was a panelist during the Legal Roundtable general session and at the workshop on Life After Fee Disclosure - The Aftermath at the NAPA/ASPPA 401k Summit on March 4, 2013 in Las Vegas, Nevada. In March we issued a White Paper by Fred Reish and Bruce Ashton for Lincoln Financial Group: Lincoln Secured Retirement IncomeSM Solution: Addressing Participant Retirement Income Risks. This White Paper is now available on our website at www. drinkerbiddle.com/resources/ publications/2013/lincoln- Secured-Retirement-Income- Solution-Addressing-Participant- Retirement-Income-Risk. Brad Campbell was quoted on March 8, 2013 in Plan Adviser in an article titled: DOL s TDF Guidance Mischaracterizes the Market. The article compiles industry practitioners reactions to recent guidance from the DOL on selecting and monitoring target-date funds (TDFs). On March 3, 2013, Investment News published a special Q&A with Fred Reish titled, Q&A with C. Frederick Reish: Regulations, Sponsors Favor Experts. Plan Sponsor magazine reported on the latest Inside the Beltway audiocast presented on February 26, 2013 by Fred Reish and Brad Campbell, which focused on the DOL s regulatory agenda for 2013. Diana McCarthy presented to approximately 50 members of the Chicago Finance Exchange, an organization comprised of leading women in Chicago finance, on February 5, 2013. Diana joined panelists discussing mutual fund boards. The panel discussed structure, legal and regulatory framework, board composition and role, and mutual fund meetings. Mark Costley was quoted in Ignites on January 17, 2013 in an article titled Fines Show FINRA s Vigilance on Late Prospectuses. Retirement Income Team www.drinkerbiddle.com 10
Retirement Income Team Bruce L. Ashton (310) 203-4048 Bruce.Ashton@dbr.com John W. Blouch (202) 230-5422 John.Blouch@dbr.com Bradford P. Campbell (202) 230-5159 Bradford.Campbell@dbr.com Susan G. Collings (215) 988-2618 Susan.Collings@dbr.com Summer Conley (310) 203-4055 Summer.Conley@dbr.com Mark F. Costley (202) 230-5108 Mark.Costley@dbr.com Bruce W. Dunne (202) 230-5425 Bruce.Dunne@dbr.com Daniel W. Krane (215) 988-2488 Daniel.Krane@dbr.com Diana E. McCarthy (215) 988-1146 Diana.McCarthy@dbr.com James C. McMeen (609) 716-6655 James.McMeen@dbr.com Joan M. Neri (973) 549-7393 Joan.Neri@dbr.com Fred Reish (310) 203-4047 Fred.Reish@dbr.com Joshua J. Waldbeser (312) 569-1317 Joshua.Waldbeser@dbr.com Retirement Income Team CALIFORNIA DELAWARE ILLINOIS NEW JERSEY NEW YORK PENNSYLVANIA WASHINGTON DC WISCONSIN 2013 Drinker Biddle & Reath LLP. All rights reserved. A Delaware limited liability partnership. Jonathan I. Epstein and Andrew B. Joseph, Partners in Charge of the Princeton and Florham Park, N.J., offices, respectively. This Drinker Biddle & Reath LLP communication is intended to inform our clients and friends of developments in the law and to provide information of general interest. It is not intended to constitute advice regarding any client s legal problems and should not be relied upon as such. Disclaimer Required by IRS Rules of Practice: Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.