Wagner Law Group News
The Wagner Law Group
website provides comprehensive resources
on ERISA and employee benefits. Below are links to these resources.
Hancock Mixer in Pittsburgh: "Important Pension Changes
from D.C. - What Do You Need to Know?" February 8, 2012
NICSA's 30th Annual Conference in Miami: Panel Discussion with
Investment Management Women's Leadership Forum. February 12, 2012
Quoting The Wagner Law Group
Fees Squeezed by Disclosure Rules,"
Marcia Wagner, Bloomberg,
January 5, 2012
Brokers Outsource Fiduciary Duties,"
Marcia Wagner, Investment
News, January 1, 2012
to Meet Demand of Public Pensions,"
Marcia Wagner, Texas
Insider, December 21, 2011
High-Profile 401(k) Fiduciary Advocate Could Cost Advisers
Business," Marcia Wagner, Investment News,
November, 14, 2011
"Important Pension Changes from D.C. -
What Do You Need to Know?" Marcia Wagner, TD AmeriTrade
Institutional 2012 National Conference,
February 3, 2012 (Orlando)
Opportunities in the DCIO Market,"
Marcia Wagner, Financial Research Associates, LLC 5th Annual New
Opportunities in the DCIO Market, January 23, 2012 (Boston)
Changes from D.C. - What Do You Need to Know?"
Marcia Wagner, Broadridge 2011 Annual Regional Meeting Series,
November 30, 2011 (Boston)
Participant-Level Disclosure a Pass,"
Marcia Wagner, 401(k) Advisor,
Crisis of Working Americans: The Retirement Industry Call to
Action," Marcia Wagner, Legg Mason Retirement
Advisory Council, January 2012
Certification Requirements in 401(k) Fee Litigations,"
Marcia Wagner, 401(k)
Advisor, December 2011
"Reform School -
Consequences of Tax Reform Proposals Relating to 401(k) Plan
Contributions," Marcia Wagner, PlanAdviser,
November - December 2011
"Al Lurie on the
Third Washington Burning: The Uncivil Health Care Wars,"
Alvin D. Lurie, Estate
Planning Newsletter #1910 at Leimberg Services, December
Investment Advice Regulations,"
Marcia Wagner, 401(k) Advisor, November 2011
for Plaintiffs in Tibble v. Edison,"
Marcia Wagner, 401(k)
Advisor, October 2011
DOL's New Rules in 2012 - What Do You Need to Know to Stay
Ahead," Marcia Wagner, BlackRock and
PlanAdviser Webinar, December 1, 2011
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On February 2, 2012, the U.S. Departments
of Labor (the "DOL"), as well as the Treasury Department
and the Internal Revenue Service ("IRS"), announced two
separate executive actions intended to further the twin goals of
expanding transparency in the 401(k) plan marketplace and
broadening the availability of lifetime income options to
retirees. As discussed in more detail below, the DOL issued a
new final rule that will provide 401(k) plan sponsors with
information about the administrative and investment costs
associated with the plans they sponsor on behalf of their workers.
The DOL also announced a 3-month extension in the effective
date of this rule.
In addition, the package of rulings and proposed
regulations from the Treasury Department and the IRS will make it
easier for retirees to choose to receive their benefits as a stream
of income for as long as they live by reducing the regulatory
burdens associated with annuity distribution options. This
regulatory action is a first step in the enhancement of flexible
"lifetime income" options that can minimize the risk of
retirees outliving their retirement savings.
If you have any questions about the new 408(b)(2) regulations or
the tax guidance on lifetime income options, please contact me or
your primary law firm contact.
New Final Regulations
On February 2, 2012, the DOL finalized its regulations
under ERISA Section 408(b)(2), replacing the existing interim final
regulations that require certain disclosures by plan service
providers to responsible plan fiduciaries. The disclosures
relate to services to be performed by service providers and the
compensation they will receive, and they are required as a
condition for the service contract or arrangement to avoid
characterization as a prohibited transaction.
Effective Date. The new
final rule postpones the effective date of the required disclosures
from April 1, 2012 to July 1, 2012, thereby allowing additional
time for compliance. The delay in the effective date for the
408(b)(2) rules would also have the additional effect of deferring
initial participant-level disclosures under ERISA Section
404(a). For calendar-year plans, the initial disclosures from
the plan to its participants will now be required by August 30,
2012 (rather than May 31, 2012).
Electronic Delivery. The preamble
to the new final rules indicates that there is nothing in the
regulation that limits the ability of service providers to furnish
information via electronic media. This apparently includes
making information available on a website if plan fiduciaries are notified
as to how they can access such information. Without ready
access and clear notification to fiduciaries on how to gain such
access, information housed on a website may not be regarded as
having been furnished within the meaning of the regulation.
Nevertheless, it is interesting to note that the DOL's regulatory
impact analysis assumes that 50% of service provider disclosures
will be delivered electronically.
Summary of Disclosures. A
potentially significant change that may be required in the future
is the provision by service providers of a guide or disclosure
summary to assist plan fiduciaries in reviewing disclosures.
The DOL attached a sample guide to the final regulations as an
appendix and has reserved a place in the final regulations to contain
such a requirement. However, at the present time, the sample
guide is only offered as a suggestion and is not required.
The sample guide included with the regulations
consists of two columns. Information to be listed in the
first column would include the services to be provided, various
categories of service provider compensation (i.e., direct,
indirect and shared compensation) and fees and expenses relating to
investment options. The second column would show where the
services listed in the first column are to be found in the service
agreement or where information relating to investment fees and
expenses can be accessed on the internet. Thus, such a guide
is intended to enable plan fiduciaries to locate compensation
information disclosed through multiple and/or complex documents.
Technical Changes. The new
final rules under ERISA Section 408(b)(2) contain a number of minor
technical changes and clarifications that are discussed
below. Despite the changes, the new final rules are
substantially similar to the interim final regulations.
Requirements. Service providers generally must provide plan
fiduciaries with the information necessary to assess the
reasonableness of total compensation, both direct and
indirect. With regard to indirect compensation, the interim
final regulations required service providers to furnish a
description of all such compensation that the provider reasonably
expects to receive, as well as the services for which the indirect
compensation will be received and the identity of the payer of the
indirect compensation. The new final regulations added a
requirement that the service provider also describe the arrangement
between the payer of the indirect compensation and the service
provider (or an affiliate or subcontractor of the service provider)
pursuant to which the indirect compensation will be paid.
In an effort to coordinate the 408(b)(2) disclosures
required under the new final rule with the pending disclosures
required under the participant-level disclosure rules, the new
final rule harmonizes certain disclosures required for fiduciaries
of "look through" investment products that are deemed to
hold plan assets, such as bank collective investment trusts.
The interim rule required such fiduciaries to provide descriptions
of three categories of compensation-related information: (i)
compensation to be charged directly against the investment in
connection with events such as an acquisition, sale, transfer or
withdrawal, (ii) if the investment product's return is not fixed,
annual operating expenses (e.g. the expense ratio) and (iii)
ongoing expenses, such as wrap fees, mortality and expense
fees. Under the new final rule, if the investment product is
a designated investment alternative ("DIA"), the latter
two categories do not apply and the fiduciary must instead disclose
the DIA's total annual operating expenses expressed as a percentage
of the average net asset value for the year (which must also be
disclosed under the participant-level disclosure rules).
The new final rule also requires fiduciaries of DIAs
to disclose any other information relating to the DIA that is
within the control of, or reasonably available to, the service
provider. The DOL does not view this requirement as a mandate
to obtain or prepare new information not under the service
provider's control and has indicated that in the case of a
recordkeeping platform offering mutual fund investments, the new
requirement could be satisfied by passing through the prospectuses
of such funds.
Disclosure by Brokers and
Recordkeepers. Under the interim regulations, recordkeeping
platforms were required to provide certain information with respect
to the DIAs on their platforms, but were able to meet this
obligation by passing through current disclosure materials of the
investment's issuer, such as a prospectus. The interim rules
required such disclosure materials to be regulated by a State or
Federal agency. The new final rule retains this concept but
redirects its focus to the issuer of the investment that furnishes
the pass-through materials by requiring the institution, not the
materials, to be regulated.
The ability to comply with the disclosure rules by
passing through materials of investment issuers is limited to
issuers that are either a mutual fund, insurance company, an issuer
of a publicly traded security or a financial institution supervised
by a Federal or State agency. In addition, the issuer may not
be an affiliate of the service provider making the disclosure.
The new final rule indicates that it is possible to meet the
disclosure obligations by furnishing information replicated from
the issuer's disclosure materials.
Timing for Disclosure Updates. Under the
interim rule, changes to information furnished by service providers
were required to be disclosed within 60 days of the date on which
the service provider was informed of the change, unless
extraordinary circumstances beyond the service provider's control
made this impossible, in which case, the new information had to be
disclosed "as soon as practicable." The new final
regulation leaves this rule intact, but creates an exception for
disclosures by both fiduciaries managing "look through"
investment products as well as recordkeeping platforms.
Disclosure of any changes to the investment information required
for these providers must now be made at least annually,
thereby relaxing the 60-day rule. This eliminates the need to make
frequent, or even non-stop, notifications with regard to minor
modifications of investment information relating to DIAs and other
Reply Deadline for Information
Requests. Service providers generally must respond to the
request of a plan fiduciary for any additional information needed
to satisfy ERISA's reporting and disclosure requirements, such as
the annual Form 5500 filing requirement. Under the interim
rule, the deadline for such a response was 30 days following
receipt of a written request from the fiduciary. The new
final rule offers flexibility with respect to the deadline by
providing that the required information merely needs to be
delivered "reasonably in advance" of the reporting or
disclosure deadline cited by the plan fiduciary. As under the
interim rule, the new final rule provides that where the disclosure
cannot be made due to circumstances beyond the service provider's
control, it must be made "as soon as practicable."
Timing for Corrections. The interim
rule had provided that good faith errors or omissions in disclosing
information could be corrected as soon as practicable, but not
later than 30 days from the date a service provider knows of the
error or omission. The new final rule expands this treatment
to errors or omissions that occur in connection with disclosure
updates (i.e., any required disclosures describing changes
to previously provided information).
"Cost" Definition. Under ERISA
Section 408(b)(2), recordkeepers generally must disclose all
compensation relating to their services. If a recordkeeper is
serving without explicit compensation or when compensation for
recordkeeping services is to be offset or rebated based on other
compensation received by the recordkeeper, a reasonable and good
faith estimate of the cost of the services to the plan must
be provided. The new final rule now requires an explanation
of the methodology and assumptions used to prepare the cost
estimate. The interim rule defines "compensation"
as anything of monetary value but it does not define
"cost." However, the new final rules now clarify
that cost may be described or estimated in the same manner as
compensation. This rule change is primarily intended to
accommodate service providers that need to disclose the cost of
recordkeeping services (rather than compensation).
Estimated Ranges for Compensation. With regard
to whether compensation or cost may be disclosed in ranges (for
example, by a range of basis points), the DOL indicated its
tentative approval in the preamble to the new final rules, noting
that "disclosure of expected compensation in the form of known
ranges can be a 'reasonable' method for purposes of the final
rule." However, the DOL indicated that, whenever
possible, more specific, rather than less specific, compensation
information is preferred.
Conditions for Relief under Class
Exemption. The new final rule maintains the class
exemption included in the interim final regulations, which provides
a plan fiduciary with relief from ERISA's prohibited transaction
rules if, among other things, the fiduciary did not know that a
covered service provider failed to make required disclosures and
reasonably believed that such disclosures were made. Upon
discovering that the service provider failed to disclose the
required information, the plan fiduciary must request in writing
that the service provider furnish such information.
If the service provider fails to comply with this
request within 90 days, the plan fiduciary must notify the
DOL. The fiduciary must also decide if the service
arrangement should be terminated. Under the new final rule,
this decision must now be governed by the fiduciary standard of
prudence. In the DOL's view, this means that if the requested
information relates to services to be performed after the 90-day
period and such information is not disclosed promptly after the end
of the 90-day period, the plan fiduciary must terminate the
contract or arrangement "as expeditiously as possible"
consistent with its duty of prudence.
Exclusion from Covered Plan Definition. Service
providers generally must provide the disclosures required under
ERISA Section 408(b)(2) to all of their "covered plan"
clients. The interim rule excluded simplified employee
pensions, SIMPLE retirement accounts, individual retirement
accounts and individual retirement annuities from the definition of
a covered plan, thereby making it unnecessary for service providers
to furnish disclosures to these plan clients. The new final
rule further excludes certain legacy 403(b) annuity contracts from
the disclosure requirement.
This relief from
coverage is being provided in recognition of the fact that many
403(b) plan sponsors made certain design changes in response to
plan document requirements and other recent changes in the law,
voluntarily causing their plans to become subject to ERISA.
However, in many instances, employers and plan fiduciaries have not
had (and do not currently have) any dealings with legacy annuity
contracts established by individual participants prior to the
plan's voluntary ERISA conversion. For such a contract to
qualify for the exclusion from the disclosure rules, it must have
been issued before January 1, 2009, and the employer must not have
had the obligation to contribute to the contract, or have actually
contributed to the contract, on or after that date. Further,
the contract must be fully enforceable by the individual owner
without any involvement of the employer and must be fully vested.
Guidance on Lifetime Income Options
On February 2,
2012, the IRS issued four different sets of regulatory guidance
concerning lifetime income options for defined contributions plans
("DC Plans"). This guidance, which also has
implications for individual retirement accounts ("IRAs")
and defined benefit plans ("DB Plans"), includes the
regulations on partial annuity distribution options for DB Plans,
regulations on longevity annuity options for DC Plans and IRAs,
(3) Revenue Ruling
2012-3 on spousal consent rules for DC Plans with deferred
(4) Revenue Ruling
2012-4 on rollovers from DC Plans to DB Plans.
Regulations on Partial Annuity Distribution Options for DB Plans. These
proposed regulations would encourage DB Plan sponsors to offer
"split options," where participants may elect to receive
a portion of their accrued benefits as an annuity and the other
portion as a lump sum. From a policy perspective, the goal of
the proposed rule would be to give participants greater flexibility
in their lifetime income choices, eliminating the "all or
nothing" choice that many DB Plan participants currently face
when deciding between a lump sum or an annuity.
Under current law,
if a plan were to offer split options to participants, statutory
actuarial assumptions (i.e., applicable mortality table and
applicable interest rate under Section 417(e)(3) of the Internal
Revenue Code) would generally need to be used to calculate each
bifurcated benefit (i.e., partial lump sum and partial
annuity). However, as proposed, plans would only be required
to use the statutory assumptions to calculate the partial lump sum,
meaning that the plan's regular conversion factors would be used to
calculate the partial annuity.
For example, let us
assume that a newly retired participant (age 62) has accrued a
normal retirement benefit of $1,350 per month (payable at age
65). Let us further assume that this benefit either has an immediate
monthly annuity value of $1,200 (determined using the plan's
regular conversion assumptions), or an immediate lump sum value of
$100,000 (determined using statutory assumptions). If the
participant were to elect 25% of his benefit as an annuity (and the
remaining 75% as a lump sum), under the proposed regulations, the
participant would be entitled to a $300 immediate monthly annuity
and a $75,000 current lump sum. As illustrated, the proposed
regulations would allow the plan to use simple arithmetic (25% x
$1,200) to arrive at the value of the partial annuity.
Conversely, a much more complex calculation would be required under
the current rules, if the statutory assumptions (rather than the
plan's regular conversion assumptions) were used to calculate the
immediate partial annuity.
Regulations on Longevity Annuity Options for DC Plans and IRAs. A longevity
annuity is sometimes referred to as "longevity insurance"
or a "deeply deferred annuity." It is an annuity
with an income stream that begins at an advanced age, such as age
80. As the name suggests, longevity annuities are a very
effective tool to manage longevity risk, especially since the lower
cost of such annuities allows retirees to keep and retain
investment control over a larger portion of their portfolios.
Thus, these types of annuities are especially attractive to
investors who believe they will be able to mange the rest of their
savings until age 80, or the applicable commencement date of the
current law, longevity annuities are not an attractive investment
vehicle within a tax-qualified plan or IRA because of the required
minimum distribution ("RMD") rules, which require
distributions to commence at age 70½. Under the proposed
regulations, any portion of a plan or IRA account invested in a
qualifying longevity annuity contract ("QLAC") would be
disregarded for purposes of the RMD rules. For example, if
participants allocated a portion of their accounts to a QLAC at age
70 (or in increments over time before age 70), only the non-annuity
portion of their accounts would be subject to the RMD rules.
To qualify as a QLAC, the annuity premium must be limited to the
lesser of $100,000 or 25% of the account balance. In
addition, the QLAC must commence annuity payments no later than age
Ruling 2012-3 on Spousal Consent Rules for DC Plans. Prior to
this IRS guidance, there was some uncertainty with regard to how
the spousal consent rules would apply in the case of a DC Plan with
deferred annuity investments. Most DC Plans are exempt from
the spousal consent requirement (e.g., participant does not
need spousal consent to take an immediate lump sum) since they
provide that the participant's account is payable to his or her
surviving spouse upon death and meet certain other related
However, if such DC
Plan were to offer an annuity option and a participant were to
affirmatively elect it, the spousal consent requirements would
apply. One of the applicable requirements is that, without
spousal consent, the participant's account must be paid in the form
of a qualified pre-retirement survivor annuity ("QPSA")
upon the participant's death to the surviving spouse. In
Revenue Ruling 2012-3, the IRS clarified that when a participant
invests in a deferred annuity under a DC Plan, the participant's
account is not subject to the QPSA requirement before the
participant affirmatively elects to commence an immediate annuity
Ruling 2012-4 on Rollovers from DC Plans to DB Plans. This IRS
guidance benefits employers who sponsor both a DB Plan and a DC
Plan, as well as the participants in both plans who prefer lifetime
income options. Under Revenue Ruling 2012-4, as an
alternative to offering annuity options under the DC Plan, an employer
may amend its DB Plan to permit rollovers to it from the DC
Plan. Accordingly, a participant who desires to annuitize his
or her DC Plan account balance may do so, by rolling over his or
her account balance to the DB Plan and receiving an actuarial
equivalent annuity benefit payable from the DB Plan.
The advantage of
this type of arrangement is that the participant is able to benefit
from the favorable actuarial assumptions used in the DB Plan
(rather than the prevailing actuarial assumptions utilized for
individual annuity contracts in the commercial marketplace).