Trendspotting
Stream of Income
U.S. Treasury proposal to reduce regulatory burdens for retirees
The U.S. Treasury Department announced a proposal to reduce regulatory burdens and make it easier for retirees to choose to receive their benefits as a stream of income in regular payments for as long as they live.
“When American workers take the responsible step of saving for retirement, we should do all we can to provide them with sensible, accessible choices for managing their hard-earned savings. Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security,” said Treasury Secretary Tim Geithner.
The guidance package issued by the Treasury Department builds on comments received in response to the departments of the Treasury and Labor’s joint request for information on the desirability and availability of lifetime income alternatives in retirement plans. The package will help Americans meet their need for income during retirement by:
• Encouraging Partial Annuity Options. Retirement plan participants often are confronted with a “cash or annuity” decision upon retirement. Given an all-or-nothing choice, many opt for a lump sum and decline the lifetime income stream, unaware they have the option to combine approaches. The proposed regulation changes a regulatory requirement, to make it simpler for defined benefit pension plans to offer combinations of lifetime income and a single-sum cash payment. This is designed to encourage more retirees to consider partial annuities, which allow for a steady stream of income for the duration of their lifetimes, while also keeping a portion of their savings invested in assets with the flexibility to respond to liquidity needs.
• Removing a Key Obstacle to “Longevity” Annuities. Another proposed regulation expands on the combination approach, by removing a regulatory impediment to purchasing a deferred “longevity” annuity. This would make it easier for retirees to use a limited portion of their savings to purchase guaranteed income for life, starting at an advanced age such as average life expectancy. Annuities of this type would provide an efficient way for 65- or 70-year-olds (or even younger savers) to address the risk of outliving their assets by purchasing a predictable income stream that will start when they are 80 or 85 years old. Once that risk is addressed, a retiree’s task of generating income from the remaining assets is more manageable, because it is limited to a fixed period of time.
• Clarifying Rules for Plan Rollovers to Purchase Annuities and Spousal Protection Rules for 401(k) Deferred Annuities. Two revenue rulings, issued on February 2, clarify how rules protecting employees and spouses apply when plan sponsors offer lifetime income options under their plans. The first ruling defines how the rules apply when employees are given the option to use a single-sum 401(k) payout to obtain a low-cost annuity from their employer’s defined benefit pension plan. The second ruling clarifies that employers can offer their employees the option to use 401(k) savings to purchase deferred annuities and still satisfy spousal protection rules with minimal administrative burdens. Both of these rulings would facilitate the availability of flexible options for employees, so that they can better use their 401(k) savings to achieve financial security in retirement.
—Tara Cantore
Failure to Launch
Employer breached ERISA by failing to make rollover distribution
An employerbreached his fiduciary duties under the Employee Retirement Income Security Act (ERISA) by failing to honor a former employee’s rollover distribution request.
The U.S. District Court for the Southern District of New York found that under the J&R Equipment Inc. 401(k) Plan and Trust, Edward Klepeis was entitled to have his vested balance in the plan rolled over as of December 31, 2005. Klepeis asked Joseph T. Falanga, owner of J&R and sole trustee of the plan, to roll over his plan assets when he resigned in January 2005. Under the terms of the plan, Klepeis would be entitled to distribution on the next anniversary date, December 31, 2005.
The court rejected the defendants’ argument that Falanga was justified in ignoring Klepeis’ rollover request because it was not in the proper form, noting that the plan does not require formal claims for participants to receive benefits. According to the court opinion, when Klepeis complained in 2005 about Falanga’s unresponsiveness to his rollover request—Qualified Plan Consultants (QPC)—the plan administrator told Klepeis that it needed only Falanga’s authorization, not a formal request by Klepeis. The court said Falanga, as a plan fiduciary with the duty to provide plan benefits to participants, should have given his authorization without unreasonable delay.
In addition, the court found Falanga breached his fiduciary duty by failing to execute the subsequent written rollover requests. It rejected the argument that the refusal to execute the first written request was justified because it was untimely. The defendants point to no authority, in the plan or the ERISA statute, for any timing requirement.
The defendants argued that the refusal to execute the second written request was justified because the request was not timely, and because the funds were frozen, pending Internal Revenue Service (IRS) approval of the plan’s termination. The court noted that the summary plan description (SPD) states that, upon termination, the plan assets will be distributed as soon as practicable. However, such a provision does not allow a fiduciary to hold onto a participant’s assets before plan termination occurs or where a participant has no notice that termination has occurred.
The court granted summary judgment to Klepeis.
In January 2011, Klepeis received a letter stating that his account had been transferred into an IRA managed by Rollover Systems Inc.; however, his balance had fallen from $63,936.41, the full value in his plan account as of December 31, 2005, to $57,312.76. The court said J&R would be credited for the amount it rolled over.
The court also found that prejudgment interest on $63,936.41, beginning December 31, 2005, is an appropriate part of Klepeis’s compensation, as he should have been able to invest his money as he saw fit as of that date, and that he is entitled to attorneys’ fees. He was granted leave to submit proof for his claims of prejudgment interest and attorneys’ fees.
—Rebecca Moore
SIDEBAR: IRS Issues Guidance About Annuities in Retirement Plans
The Internal Revenue Service (IRS) issued two pieces of guidance to clarify how certain rules apply when a retirement plan offers an annuity to participants.
Revenue Ruling 2012-3 describes how the qualified joint and survivor annuity (QJSA) and the qualified preretirement survivor annuity (QPSA) rules, described in §401(a)(11) and 417 of the Internal Revenue Code (IRC), apply when a deferred annuity contract is purchased under a profit-sharing plan.
Revenue Ruling 2012-4 describes whether a qualified defined benefit pension plan (that accepts a direct rollover of an eligible rollover distribution from a qualified defined contribution plan maintained by the same employer) satisfies §411 and §415 of the IRC in a case in which the defined benefit plan provides an annuity resulting from the direct rollover. Both rulings appeared in IRB 2012-8, dated February 21, 2012.
—Rebecca Moore
SIDEBAR: Small-Business Owners Concerned About Their Retirement
Recentresearch shows a majority of small-business owners are concerned about retirement, yet one-third of women and one-quarter of men surveyed have not estimated how much they will need when they retire. The survey, conducted by The American College, raises questions about the quality of retirement preparation performed by the majority of small-business owners. While 66% of the women respondents and 70% of the men respondents said they had developed an estimate of their retirement needs, only half of these individuals have done so with the assistance of a financial adviser.
—Tara Cantore
A Leg Up
Those who work with a financial adviser better at retirement planning
Two-thirds (66%) of those who work with a financial adviser have an understanding of how much of their retirement savings they will withdraw annually at retirement.
According to the 2011 Franklin Templeton Retirement Income Strategies and Expectations survey, among the Americans who have never worked with a financial adviser, only 36% said they know how much they will withdraw annually from their retirement savings. In addition, more than one-third (35%) of those who have never worked with an adviser said they do not think about how they will approach different sources of retirement income.
The survey showed that 79% of Americans do not work with a financial adviser, but nearly half (47%) of respondents said they would consider going to one or switching their current adviser if they found one who prepared a written retirement income plan.
“A large number of Americans are not currently enlisting the help of a financial adviser, in many cases because they think they don’t have enough money to warrant working with one,” says David McSpadden, senior vice president of Global Advisory Services for Franklin Templeton Investments. “The fact is, most Americans do want to retire at some point, but they may be missing a key resource for helping to determine how they will get there.”
Additional findings from the survey included:
• Of the respondents not using an adviser, 41% said it is because they do not think they have enough money to need one, and 30% said it is because they prefer to do it themselves.
• Thirty-eight percent who have never worked with a financial adviser say Social Security will provide the most income during retirement—twice as many as those who work with a financial adviser (19%).
• While 35% of respondents who have never worked with an adviser indicated that running out of money is their top concern, among those who have worked with a financial adviser (currently or in the past), that same concern fell to 24%.
The Franklin Templeton Retirement Income Strategies and Expectations survey was conducted online among a sample of 2,046 adults, comprising 1,020 men and 1,026 women 18 years of age or older.
—Tara Cantore
SIDEBAR: Investors in TDFs More Secure About Retirement
According to a study from ING U.S., 71% of target-date investors indicated that target-date funds made them feel more confident they were making sound investment decisions. When asked about various features available in these funds, all respondents showed a strong preference for those that are managed by multiple investment managers and provide a guaranteed income stream at retirement. More than nine in 10 (93%) target-date investors and nearly three-quarters (71%) of those who do not use them would want a target-date fund that provides stronger protection against market losses in the years leading up to and including retirement. Additionally, eight in 10 (80%) respondents using target-date funds and two-thirds (66%) of those not using them would prefer less market risk at that stage of the investment cycle.
—Tara Cantore
It’s Here
DOL issues final rule for 401(k) fee disclosure
In February, the U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) issued its final rule for 408(b)(2) fee disclosure.
The DOL also announced a three-month extension to the rule’s effective date, meaning service providers must be in compliance by July 1, 2012 for new and existing contracts or arrangements between Employee Retirement Income Security Act (ERISA)-covered plans and service providers.
“The common-sense rule that we are finalizing today will shed light on the true costs of 401(k) accounts and ultimately reward those working hard and saving for retirement,” said Secretary of Labor Hilda L. Solis.
The DOL’s rule requires service providers to furnish information that enables pension plan fiduciaries to determine both the reasonableness of compensation paid to the service providers and any conflicts of interest that may impact a service provider’s performance under a service contract or arrangement. It requires disclosure of direct and indirect compensation that certain service providers receive in connection with the services they provide.
The rule applies to those service providers that 1) expect to receive $1,000 or more in compensation and provide certain fiduciary or registered investment advisory services; 2) make available plan investment options in connection with brokerage or recordkeeping services; or 3) otherwise receive indirect compensation for providing certain services to a plan.
The DOL also announced that in the near future it intends to publish for public comment a separate proposal that requires service providers—in addition to providing the required fee and investment expense information—to furnish a guide or similar tool to assist plan fiduciaries with identifying and locating the potentially complex information that must be disclosed and may be located in multiple documents.
The DOL said it provided the three-month extension to allow service providers sufficient time to prepare for compliance. Service providers not in compliance as of July 1, will be in violation of ERISA’s prohibited transaction rules and will be subject to penalties under the Internal Revenue Code (IRC).
The effective date of the final rule works in conjunction with the compliance date of the department’s participant-level disclosure regulation (29 CFR § 2550.404a-5), which requires plan administrators to give workers who direct their retirement accounts in 401(k)-type plans easy-to-understand information to comparison shop among the available plan investment options. Due to the extension of the effective date of the final rule, announced February 2, plan administrators for calendar year plans now must provide the initial annual disclosure of “plan-level” and “investment-level” information (including associated fees and expenses) to participants no later than August the first quarterly statement for fees incurred July through September must be furnished no later than November 14.
Plan Advisers Must Understand Final 408(b)(2) Rule
“The majority of the changes that were made were to facilitate administration,” Bradford P. Campbell of Schiff Hardin LLP, former assistant secretary of labor for Employee Benefits and head of ERISA, told PLANADVISER. “They are generally positive changes. I also think that the department was wise to propose in a separate rule the summary disclosure.”
Campbell added, “I think one area where the change is kind of interesting is the way the [DOL] is asking plans to respond to failure to disclosure. They are almost commanding it now.”
Roberta J. Ufford of the Groom Law Group told PLANADVISER one of the biggest clarifications is the additional information requirement, which asks for a description of the arrangement between the payer and the covered service provider who is receiving the compensations.
Ufford said there are different ways plan advisers can prepare to be in regulation with the final 408(b)(2). She said plan advisers will have to look at their contractual materials, disclosures and arrangements to ensure they are complying with the rule.
“A plan adviser, especially if the adviser generally assists the plan sponsor in reviewing other plan services, should be prepared to help their plan sponsor clients in implementing the new rules,” Ufford said. “The plan adviser will probably be expected to help their plan sponsor clients comply with these rules.”
Campbell said the bulk of the final rule falls on the plan adviser: “They need to make sure they have their disclosure houses in order. I think most service providers are going to be able to comply with the July 1 deadline, because most of the changes are relatively minor.”
408(b)(2) Poses Concerns For B/Ds, Small-Plan Advisers
Some industry experts are concerned that covered service providers will misinterpret the DOL’s 408(b)(2) regulation guidance about using ranges to estimate indirect compensation.
The interim regulation required that covered service providers give the responsible plan fiduciary a description of all indirect compensation. When a broker/dealer provides a brokerage account for a plan, the broker/dealer almost always receives indirect compensation for the investments. In some cases, there may be hundreds of possible compensation arrangements, according to Fred Reish, chairman of the financial services ERISA team at Drinker Biddle & Reath LLP.
The problem, Reish said, is that broker/dealers cannot possibly know, in advance, the compensation arrangements under which they will be paid. The final regulation made several clarifications to the fee disclosure requirements, including a statement permitting the use of estimates and range of fees.
“The final regulation provides tremendous relief, in my opinion, to broker/dealers,” Reish told PLANADVISER, but added that he is concerned covered service providers will still misinterpret the DOL’s guidance about ranges. Broker/dealers may provide a range of fees so broad that it negates the purpose of the DOL’s regulation, Reish said.
“They have to be realistic [with the ranges],” Reish said. “And I’m worried that people are going to forget that part.”
Reish also believes additional guidance from the DOL is needed about how and when change disclosure notices are required. For instance, when the responsible plan fiduciary selects an investment, does the broker/dealer need to give the fiduciary a change of disclosure if it is outside the initial disclosure range?
“It’s conceivable someone else has a different interpretation, but that’s mine,” Reish said. “People are going to have to, you know, make decisions about that because the guidance from the DOL isn’t specific enough.”
Ufford said she agrees brokers must be cautious if they elect to state a range of fees. Ranges rather than specifics make sense for brokerage windows because many compensation arrangements are possible, but broker/dealers must ensure their range numbers are realistic and standard for the industry.
“When you use a range, it should be appropriate for the circumstance,” she said. “[The] DOL intended to provide flexibility [by allowing ranges] when more specific disclosure would be difficult to provide, and that can be a great thing. But if you’re trying to get a specific answer for when it’s okay to use a range instead of more specific information, there is no specific answer. So you really have to use a good-faith effort here.”
Ufford thinks the real problem could arise with small-plan advisers who may not have been disclosing detailed information about compensation. Many recordkeepers and other plan service-providers already have systems in place to disclose specific indirect compensation because of Schedule C in Form 5500, which has required plan sponsors and administrators to report service provider fees and compensation for plan years beginning in 2009.
The disclosures that are needed to support Schedule C requirements are similar to information that is required to be disclosed by the new 408(b)(2) disclosure regulations, Ufford said. Schedule C, however, only applies to plans with 100 or more participants. As a result, many advisers to small plans were not affected by the implementation of disclosures required for Schedule C.
“So you can see that, although plan advisers and others have seen this coming, they may not have yet been directly obligated to start delivering information,” Ufford said. “Plan advisers who have not yet done so should be looking at their current disclosure materials and procedures and considering how they will comply with the new requirements. Plan advisers may also want to take a look at how they will support their plan clients, because their plan clients may ask for help with reviewing the disclosure materials they receive from other service providers covered by the new 408(b)(2) regulation.”
—Tara Cantore and Corie Russell
Plan sponsors and service providers with questions about the final rule can contact EBSA’s Office of Regulations and Interpretations at 202-693-8500. A fact sheet about this regulation is also available at EBSA’s website, www.dol.gov/ebsa/newsroom.