Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More FRED REISH, ESQ. April 7, 2016
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DOL Regulatory Agenda Pension Benefit Statements As part of this initiative, the Department will explore whether, and how, an individual benefit statement should and could present a participant's accrued benefits in a defined contribution plan (i.e., the individual's account balance) as a lifetime income stream of payments, in addition to presenting the benefits as an account balance. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 2
Increase in life expectancy for 65-year-olds (From Society of Actuaries Report) Women 2000 86.4 years 2014 88.8 years +2.4 years Men 2000 84.6 years 2014 86.6 years +2.0 years
Withdrawal Rate Risk Table 3. Estimated Probability by CRS That A Retirement Account Will Last for at Least a Specific Number of Years Probabilities that money will last a given number of years, excluding the impact of investment fees and taxes Initial annual drawdown rate 4% 5% 6% 25 years or more 30 years or more 35 years or more 97.7% 94.0 89.4 87.8% 77.0 66.9 65.2% 49.5 38.8 Source: CRS Monte Carlo simulation of a portfolio consisting of 35 percent S&P 500 index and 65 percent AAA-rated corporate bonds. But, see The 4 Percent Rule is Not Safe in a Low-Yield World, Finke, Pfau and Blanchett. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 4
The Issue: Participant Understanding Which Workers Are Delaying Retirement and Why?, Towers Watson Insider, September 2014. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 5
The DOL and Projections of Retirement Income 1. Account Value 2. Monthly Income after Retirement 3. Survivor Monthly Income A. Estimated for Current Account Value $124,023.02 $459.92 $229.96 B. Projected at Retirement $665,715.09 $2,468.67 $1,234.34 All future projections are shown in today s dollars, which account for inflation. Inflation changes the purchasing power of money. Presenting your projections in today s dollars will give you an idea of how much you could buy with your retirement account when you retire. Caution: projected values at retirement are only estimates. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 6
DOL Regulatory Agenda Retirement Income Practical effects: Change of perspective Projections Benchmark Advice on deferrals: Gap analysis Retirement income products Retirement education Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 7
DOL Regulatory Agenda Annuities Selection of Annuity Providers--Safe Harbor for Individual Account Plans: Based on the RFI comments, the Department is developing proposed amendments to the annuity selection safe harbor primarily focused on the condition in the safe harbor relating to the ability of the annuity provider to make all future payments under the annuity contract. Government concerns: (i) sustainable lifetime income and (ii) plan pricing versus retail costs. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 8
FIG. 1-4 SEVERE COGNITIVE LIMITATION, BY AGE AND GENDER: 1998 20% 15% 10% 5% 0% 51-54 55-59 60-64 65-69 70-74 75-79 80-84 85+ Men Women Total Note: Definition of severe cognitive impairment: Errors on half or more of 9 very easy items from a standard geriatric screen for mental status for self-respondents; IQCODE score of 3.9 or higher on Jorm proxy assessment. Source: HRS,1998. Growing Older in America, The Health & Retirement Study, National Institute on Aging, U.S. Department of Health and Human Services, 2002.
DOL Regulatory Agenda Target Date Disclosure This rulemaking will amend the Department's qualified default investment alternative regulation. The proposed rulemaking also will amend the participant-level disclosure regulation to require the disclosure of the same information concerning target date, or similar investments, to all participants and beneficiaries in participant-directed individual account plans. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 10
DOL Regulatory Agenda Target Date Disclosure Prognosis. SEC and DOL. DOL: 404a-5 and 408(b)(2) proposed regulation. Asset allocation and glide path. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 11
DOL Regulatory Agenda Standards of Brokerage Windows This rulemaking project will explore whether, and to what extent, regulatory guidance on fiduciary requirements and regulatory safeguards for such arrangements are appropriate for plans that allow participants to direct investments through brokerage windows. EBSA expects to begin this review by issuing a Request for Information. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 12
DOL Regulatory Agenda Considerations: Use of brokerage windows. Fiduciary duty to prudently select and monitor. Who is the responsible plan fiduciary? to open account? for 408(b)(2). Prognosis. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 13
Allocation of Expenses and Revenue Sharing
The Law on Allocations Plan fiduciaries are required to engage in a prudent process and should apply the general principles of ERISA to make decisions about: the allocation of expenses; and the allocation of revenue sharing. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 15
Revenue Sharing and Costs The common methods of allocating revenue sharing are: Per capita. Pro rata. Equalization. The common methods of allocating costs are: Per capita. Pro rata. To participant. Question: How are these decisions being made? Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 16
Allocation of Expenses In Field Assistance Bulletin 2003-03, the DOL said: When the plan documents are silent or ambiguous on this... [F]iduciaries must select the method or methods for allocating plan expenses. A plan fiduciary must be prudent in the selection of the method of allocation. [Emphasis added.] Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 17
Allocation of Expenses The FAB lays out the following principles: The fiduciaries must engage in a deliberative, prudent process; They must weigh the interests of different classes of participants and the effect the method of allocation they chose has on those participants; The method of allocation must have a reasonable relationship to the services being provided to the participants; The fiduciaries must avoid conflicts of interest. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 18
Allocation of Revenues In Field Assistance Bulletin 2006-1, the DOL said: Prudence in such instances, at a minimum, would require a process by which the fiduciary chooses a methodology where the proceeds of the settlement would be allocated, where possible, to the affected participants in relation to the impact the market timing and late trading activities may have had on the particular account. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 19
Purpose of a Fee Policy Statement A fee policy statement establishes policies and guidelines for a Plan. The purpose is to provide a framework for a committee to determine the reasonableness of costs associated with the Plan, as well as the allocation of revenue sharing and how plan expenses are paid. A fee policy should contemplate the use of market data, such as benchmarking reports. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 20
Key Issues in ERISA Litigation Overly expensive investments Excess payments to service providers Corporate benefit from plan Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 22
Supreme Court grants Petition for Certiorari in Tibble v. Edison International The case involves the use of retail shares when lower cost institutional share classes were available. Some of the funds were selected more than six years before the suit was filed which is the outer statute of limitations under ERISA in fiduciary breach cases. In its amicus brief, the DOL said: plan fiduciaries owe a continuing, and not merely a one-time, duty to act prudently with regard to... the investment of plan assets. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 23
Settlements The Beesley v. International Paper lawsuit was settled for $30 million. There were several claims, including excessive administrative fees and imprudent investments. However, the terms of the settlement were interesting: The plan will no longer offer retail mutual funds. The plan will not pay the recordkeeper a percent of assets. The plan will include a large cap index option in its line-up. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 24
Settlements The Nolte v. CIGNA lawsuit was settled for $35 million. There were several claims, including excessive administrative fees and imprudent investments. However, the terms of the settlement were interesting: The will institute a competitive bidding process for recordkeeping services. The plan will no longer offer retail mutual funds. The plan will evaluate investment and recordkeeping services separately (to obtain unbundled pricing). Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 25
Perez v. Ramsay, (No. 14-cv-6733, W.D. N.Y., Filed December 29, 2014) Ramsay provided investment advisory services to ERISAcovered plans and also owned a TPA that administered the plans: The DOL alleges that Ramsay caused himself and his companies to be paid fees and commissions which were not properly disclosed to or authorized by the plans; The DOL also alleges Ramsay used his fiduciary authority to cause the plans to invest in a higher fee fund when the same fund portfolio was available in a lower fee class. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 26
Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 27
DOL Investigations: Investment Expenses In a DOL investigation, an investigator asked: Why did the Plan decide to use A shares for some of its investment funds rather than shares offered to employer-sponsored plans, such as R shares? For the [XYZ mutual fund], why did the Plan decide to offer Y shares? Could the Plan use I shares? Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 28
DOL Investigations: 408(b)(2) The DOL has started investigating plans concerning 408(b)(2) disclosures. A recent DOL letter requested: Copiesof...feedisclosuresfromserviceproviders. All written agreements... relating to services rendered to the Plan by all service providers. Minutes of any Board of Directors meetings in which the Plan was discussed as well as the minutes of any Plan Trust or Plan Committee meetings. continued... Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 29
DOL Investigations Continued... Sch. C - Indirect Compensation from Investment Vehicles Documents sufficient to show all compensation (money and any other thing of value) paid by any fund, account, or entity in which the Plan invests or charged against the fund or account and reflected in the value of the Plan's investment, to any person or entity in connection with services rendered to the Plan. continued... Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 30
DOL Investigations Continued... Examples... include, but are not limited to:... brokerage commissions and fees charged in connection with purchases and sales of interest in the fund, subtransfer agency fees, shareholder servicing fees, account maintenance fees, 12b-l distribution fees,... continued... Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 31
DOL Investigations Continued... Sch. A, Line 2 - Insurance Commissions and Fees Documents sufficient to show all compensation (money and any other thing of value) paid by the Plan or on behalf of the Plan to any person or entity in connection with services rendered to the Plan, including but not limited to commissions and consulting fees, and sales and base commissions... Note: Benchmarking. DOL focusing on adviser compensation. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 32
DOL Investigations of Advisers [BD/RIA] has agreed to pay $633,715.46 to 10 pension plans.... This agreement follows an investigation by the [DOL] that found the full-service brokerage company violated federal law when it recommended certain hedge funds of funds as investments...theserecommendations resulted in the hedge funds of funds paying [BD/RIA] revenuesharing and other fees. Comment: Same concept applies to IRAs. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 33
DOL Investigations of Advisers [RIA] has agreed to pay $1,265,608.70 to 13 pension plans to resolve alleged violations of ERISA. An investigation... found that the... fiduciary investment adviser made investments in mutual funds on behalf of ERISA-covered defined benefit plan clients and received 12b-1 fees from those funds.... [RIA] failed to fully disclose the receipt of the 12b-1 fees, and to use those fees for the benefit of the plans either by directly crediting the amounts to the plans or by offsetting other fees the plans would be obligated to pay the company. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 34
DOL Investigations of Advisers [Wirehouse] has settled allegations made by the U.S. Department of Labor that the company and one of its employees violated [ERISA] by failing to prevent the fiduciaries of pension plans of two Alabama-based companies from engaging in prohibited transactions. The out-of-court settlement requires [Wirehouse] to restore a total of $170,854 to the plans and provide additional training to its investment advisers serving as fiduciaries of employee benefit plans. Retirement Plan Update: Court Decisions, SEC and DOL Guidance, and More - April 7, 2016 35
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