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In this article we review significant 2015 retirement policy developments. We begin with defined contribution plan initiatives and DOL’s re-proposal of its re-definition of an ERISA ‘fiduciary.’ After discussing other DC developments, we then discuss defined benefit plan initiatives, where issues related to risk transfer and de-risking, Pension Benefit Guaranty Corporation premiums and valuation assumptions – changes in interest rate and mortality assumptions – dominated policymaker and sponsor attention. We finish with a discussion of some broader retirement policy initiatives, including the emergence of state Auto-IRA programs.
On April 14, 2015, DOL released its long-awaited re-proposal of a regulation re-defining “fiduciary” under ERISA. In connection with that proposal it also proposed two new prohibited transaction exemptions (PTEs) and amendments (and revocations) of certain prior PTEs. The proposal significantly expanded those situations in which the giving investment advice to an employee benefit plan, plan fiduciary, participant or beneficiary, IRA, or IRA owner makes the advice-giver an ERISA fiduciary.
In addition to our general discussion of the proposal, we published articles on:
The proposed Best Interest Contract Prohibited Transaction Exemption and DOL’s proposed revision of the participant education rules.
The Council of Economic Advisors’ (CEA) report on The Effects Of Conflicted Investment Advice On Retirement Savings, and the related data, studies and analysis the Administration released in support of its proposal, and a paper by National Economic Research Associates, for Securities Industry and Financial Markets Association, criticizing the CEA report.
How DOL’s proposal may affect plan sponsors and plan participants.
As of year-end, DOL is considering comments on its proposal and moving towards finalization. There are bipartisan efforts in Congress to block or delay further action by DOL. Thus, the fate of the DOL proposal is still, to some extent, in doubt.
In 2015 we published a series of articles on a fiduciary’s “duty to monitor,” discussing:
The scope and substance of a fiduciary’s duty to monitor generally, identifying key issues for sponsors and monitoring strategies that sponsors may consider.
The application of those basic principles to the selection of plan investments and investment managers in a 401(k) plan intended to comply with ERISA section 404(c), in which participants choose investments from a fund menu.
The duty to monitor non-fiduciary service providers, focusing on two aspects of service provider arrangements that can make the monitoring process more complicated: fees and revenue sharing arrangements.
Also related to the duty to monitor: on July 13, 2015, DOL released FAB 2015-02, providing guidance concerning “the nature and scope of fiduciary responsibilities to act prudently in making, monitoring and reviewing annuity selections under a defined contribution plan.” Our article reviews this FAB. Finally, we note that the Supreme Court also considered the ERISA fiduciary duty to monitor, in Tibble v. Edison International (discussed below).
On May 18, 2015, the Supreme Court handed down its unanimous decision in Tibble v. Edison International, a defined contribution plan fee case. The Court vacated the Ninth Circuit’s decision (which had been in favor of sponsor fiduciaries) and remanded the case back to the Ninth Circuit for further proceedings, holding that the duty to monitor an investment is a separate and ongoing fiduciary responsibility.
On October 29, 2015, in the United States District Court for the Northern District of California, a former participant in two Intel defined contribution plans sued plan fiduciaries over investments in those plans. Generally, the complaint challenged the plans’ inclusion of hedge funds and private equity investments, as part of target date fund and balance fund investment strategies. Our article on the case discusses the issues raised by the complaint in detail. Generally, while plaintiffs may have raised some issues regarding the transparency and fee structures of these investments, the facts alleged in the complaint conflict, to some extent, with claims that these were “bad” investments.
With regard to company stock litigation, in October we published an article on Whitley v. BP (aka In Re: BP p.l.c. Securities Litigation), a stock drop case, currently on appeal before the Fifth Circuit Court of Appeals. The case provides a useful review of post-Fifth Third stock drop litigation theories and counter-theories involving alleged insider information that should have led fiduciaries to believe that the relevant company stock was over-valued by the market. In our December Legal and Regulatory Update we discussed the decision (favorable to defendants) in Pfeil v. State Street, applying Fifth Third where there is no allegation of insider information. Finally, in 2015 the Supreme Court decided not to review the Fourth Circuit’s decision in Tatum v. R. J. Reynolds Tobacco Company, a reverse stock drop case.
On May 13, 2015 Senators Isakson (R-GA) and Murphy (D-CT) introduced the Lifetime Income Disclosure Act, a bill that would require DC plan sponsors to provide participants an annual estimate of the “lifetime income stream equivalent” of their accrued benefit. As we note in our article, there is a DOL project on the same issue.
In July 2015, the Savings & Investment Bipartisan Tax Working Group of the Senate Finance Committee produced a report for the Committee’s broader tax reform project. The WG report provides a useful inventory of current bipartisan defined contribution plan policy proposals.
In November, the ERISA Advisory Council released a summary of its 2015 recommendations. One issue DOL had asked the EAC to consider for 2015 was ‘lifetime plan participation.’ Together with its summary, the EAC released a “Sponsor Tip Sheet and Sample Communications” which would, if adopted by DOL, provide detailed guidance on (i) plan design and policy and (ii) the style and tone of participant notifications encouraging lifetime plan participation. In our article we discuss EAC’s lifetime plan participation recommendations and conclude with some remarks about their significance for plan sponsors.
In 2015, de-risking and risk transfer remained a significant focus of policymakers and sponsors. A key driver of this activity was increasing PBGC premiums. We provided several articles discussing these issues, including:
The financial factors affecting a decision to terminate or not terminate a frozen plan, comparing the cost of buying annuities with the ‘book value’ of the plan plus ongoing overhead costs and the significance for this analysis of the equity risk premium.
Strategies for reducing PBGC variable-rate premiums.
The effect of changes in mortality and interest rate assumptions on de-risking transactions.
On the regulatory front, on July 9, 2015, IRS released Notice 2015-49, Use of Lump Sum Payments to Replace Lifetime Income Being Received By Retirees Under Defined Benefit Pension Plans, effectively banning the payment of lump sums to retiree-annuity recipients in de-risking transactions.
Finally, on February 26, 2015, GAO issued a report: Participants Need Better Information When Offered Lump Sums That Replace Their Lifetime Benefits. In November, the ERISA Advisory Council published a summary report on “Pension Risk Transfers” that included recommended model Insurance Company Risk Transfer and Lump Sum notices and recommended that DOL issue them “as soon as administratively feasible.” We discuss the EAC’s recommendations in our December Legal and Regulatory Update.
On July 31, 2015, IRS released Notice 2015-53, providing static mortality tables for 2016, updated for mortality improvements. The update was in line with expectations and reflects the current rules. IRS indicated, however, that it expects to adopt new assumptions, reflecting the Society of Actuaries’ updated (2014) tables, in 2017.
In October, Congress passed the Bipartisan Budget Act of 2015, including increases in PBGC premiums, a modification of Tax Code rules for when plan-specific mortality assumptions may be used and an extension of HATFA interest rate stabilization relief. In November we published an article on how the increases in PBGC variable-rate premiums in the Bipartisan Budget Act have made using a borrow-and-fund strategy to reduce those premiums more attractive.
Finally, we published two articles on the effect of changes in interest rate and mortality assumptions on DB finance: the first considering the effect on sponsor financial statements; and the second considering the effect on ERISA minimum funding requirements.
On January 30, 2015, the DOL released a final regulation on the content and form of the annual funding notice, generally required to be provided by plan administrators of DB plans.
On September 11, 2015, the PBGC finalized its reportable event regulation. The major feature of the new regulation is a tightening of the ‘well-funded plan’ waiver and the addition of a new ‘low-default-risk’ waiver, shifting focus (for the first time in a PBGC rule) from the financial condition of the plan to the financial condition of the plan sponsor.
Failing to get federal legislation, advocates of an Auto-IRA program for employees not currently covered by an employer plan have turned to state legislatures. Several states (including California, Illinois and Oregon) are exploring state Auto-IRA programs. We discuss Illinois’ Auto-IRA legislation in our article The Illinois Secure Choice Savings Program and the DOL myRA letter.
The states are, however, concerned about two federal law issues: ERISA preemption and ERISA coverage. In November, DOL published guidance on these issues, providing a “path forward” for state Auto-IRA plans. DOL found that, where certain requirements were met, state Auto-IRA programs were neither preempted nor covered by ERISA. DOL also exempted state ERISA plans (that is, state facilitated retirement plans for private employers that are intended to be covered by ERISA) from ERISA preemption and from the “nexus” requirement otherwise applicable to multiple employer plans. Following this guidance, we expect to see states interested in Auto-IRA arrangements to proceed with implementation, perhaps as soon as 2016.
President Obama, in his January 2015 State of the Union speech, announced a middle class tax initiative that included several retirement savings-related proposals: an Auto-IRA program; tax credits for small employers who set up a plan or Auto-IRA; expansion coverage of part-time employees; and capping tax-qualified benefits at $3.4 million. A number of these proposals were also included in the Administration’s 2016 fiscal year budget.