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In this article we briefly review the key 2012 retirement policy developments and then discuss what we expect to be the key retirement policy issues ‘on the table’ in 2013.
Like 2011 and, we suspect, 2013, the issues of the budget and the deficit dominated legislative policy in 2012. Thus, the major piece of legislation affecting retirement policy last year was transportation legislation — and the retirement policy provisions of it (funding relief and an increase in PBGC premiums) were probably only included because they produced revenues to cover the cost of transportation and student loan proposals.
Here are what we see as the key retirement policy developments of 2012.
For defined benefit plans, the most significant policy event of 2012 was the passage by Congress, in June, of the “Moving Ahead for Progress in the 21st Century Act” (MAP-21). MAP-21 provided funding relief in the form of an interest rate stabilization provision that allows DB plan sponsors, in effect, to use higher interest rates for valuing liabilities than would otherwise be permitted under Pension Protection Act rules. In addition to our article describing the legislation, we provided articles on MAP-21’s impact on benefit restriction rules and on the impact of the new valuation interest rates on long term funding risk.
Behind MAP-21 legislation (and an explicit reason for its passage) was the broader issue of the continued decline in interest rates. We provided an analysis of the impact of the decline in interest rates on DB plans, discussing its impact on funding and on investment and de-risking strategies.
MAP-21 also included an increase in PBGC premiums. In addition to our review of that increase in our MAP-21 article, we provided an analysis of PBGC’s current financial condition. PBGC continues to advocate a premium system that takes into account the financial condition of the sponsor. We also provided an article discussing, in view of the MAP-21 increase in PBGC’s variable premium, the relative cost of paying variable premiums vs. borrowing and funding.
Finally, early in 2012 the CFTC issued guidance ‘fixing’ the problems ERISA plans, and particularly DB plans using swaps to hedge interest rate risk, had with Dodd-Frank business conduct rules.
Probably the most important policy development with respect to DC plans was the decision of the United States District Court for the Western District of Missouri in Tussey v. ABB, holding that employer fiduciaries violated their fiduciary duty with respect to company 401(k) plans in connection with a revenue sharing-based fee arrangement. This was the first big win by plaintiffs in the 401(k) fee litigation and raised a number of issues concerning revenue sharing arrangements and investment policy statements.
End-of-the year fiscal cliff legislation included one provision (allowing in-plan Roth conversions) that directly affected DC plans. But, as we discussed in our article on this legislation, the increases in tax rates, particularly the increase in the capital gains/dividend tax rate and the new 3.8% Medicare tax on net investment income for high-earners, were probably more significant. These tax increases had the effect of making qualified retirement benefits generally, and 401(k) savings in particular, more attractive for high-income taxpayers in 2013.
Early in 2012 the Department of Labor finalized its ERISA section 408(b)(2) regulation (providing new provider-to-sponsor fee disclosure requirements). ERISA section 404(a) regulations on sponsor-to-participant disclosure were finalized in 2010. In addition to our article reviewing the regulation in detail, we provided a comprehensive outline of both sets of rules. The new fee disclosure regime was implemented in 2012, and DOL published technical guidance, which we reviewed in this article.
IRS and the Treasury Department released four regulatory initiatives — two revenue rulings and two proposed regulations — designed to encourage the use of annuities in or with respect to tax qualified retirement plans generally and defined contribution plans in particular.
The consensus seems to be that there will be continued gridlock in 2013. The issues of the budget and the deficit are still with us, and any legislative proposal will first be considered based on whether they increase or decrease revenues. But, after the ‘fiscal cliff’ deal, the consensus seems to be that comprehensive legislation on budget and tax reform will be difficult to pull off.
With respect to (non-retirement related) legislation for which majority support can be found – like last year’s transportation legislation (MAP-21) – retirement related proposals that will produce revenue may be included. We saw this in the fiscal cliff deal, where an in-plan Roth conversion proposal was included as a ‘pay-for’ for the delay of the sequester (a fancy term for automatic spending cuts.)
In that context, here are the key retirement policy issues that are ‘on the table’ for 2013.
Interest rates continued to trend down during 2012, and 2013 is, with respect to DB funding, likely to be worse than 2012. There has been discussion of some sort of ‘expansion’ of MAP-21 interest rate relief in 2013, perhaps using 90% of the 25 year average of rates instead of 85%, as currently provided. The usual constituencies for and against such a proposal continue to make their voices heard with policymakers. But if there is (non-pension) bipartisan legislation that costs money, extending MAP-21 interest rate relief to pay for it may be considered.
An increase in PBGC premiums may be considered for the same reason. As part of the Administration’s FY2013 budget (issued in February 2012), PBGC asked for premium increases of $16 billion over 10 years. In MAP-21 they only got around $9 billion. PBGC’s deficit increased in 2012. It is likely that a proposed increase in premiums will be part of the FY 2014 budget as well. As with an extension of interest rate relief, increasing PBGC premiums increases revenues, making such a proposal a possible element of any bi-partisan legislation that ‘costs money.’
When the IRS issued guidance for 2012 MAP-21 valuation interest rates, it stated that it may reconsider the methodology it used. Earlier this month, the IRS released the MAP-21 rates for 2013 valuations, which do appear to reflect a ‘more conservative’ basis for the 25 year average calculations.
The other major outstanding regulatory issue for DB plans for 2013 is finalization of rules for variable interest crediting rates under hybrid/cash balance plans. Sponsors of hybrid plans with variable interest crediting rates are currently operating under proposed regulations from 2010. We would expect action on this issue in 2013.
Probably the most important retirement policy feature of the deal on the fiscal cliff was that it did not include any reduction in the limits on, e.g., 401(k) contributions. Such a reduction is a feature of the Simpson Bowles proposals, and a limit on the tax preference for 401(k) contributions to 28% (rather than the current full value of the exclusion, e.g., 39.6% for high earners) was part of the Administration’s FY 2013 budget. The Administration’s FY 2014 budget is due out soon; whether it contains such a proposal will be an important indicator of the President’s position on this issue. If (as currently seems unlikely) Congress undertakes comprehensive tax reform or major tax legislation, this issue may come up again.
Short of a fundamental change in the 401(k) ‘tax deal,’ the major issues for 401(k) plans remain fees, disclosure, fiduciary responsibility and retirement income. Most of the activity with respect to these issues in 2013 is likely to be in the agencies and the courts.
With respect to fees, the major administrative issue remaining is probably what to do about electronic disclosure. DOL’s electronic disclosure rules are generally considered stricter and less accommodative than IRS’s or, for that matter, than what is becoming standard business practice. DOL has been under pressure to revise these rules, but top leadership at DOL has so far resisted making basic changes to them. Legislation was introduced last year by Congressman Neal (D-MA) to liberalize these rules, and it is conceivable (perhaps even likely) that it will be reintroduced in the new Congress. Whether a suitable legislative vehicle can be found for this proposal is another question. If there is no legislative solution, it is still possible that DOL will find some way to improve its rules without compromising on the issues that it is concerned about.
One issue that came up in the follow-on guidance with respect to new fee disclosure rules was the treatment of brokerage windows. While it appears that DOL has backed off proposing comprehensive rules for window arrangements, it has indicated that it has concerns about “brokerage window only” plans, and we may see guidance on this issue in 2013.
After last year’s Tussey v. ABB decision, it is unlikely that 401(k) fee litigation will go away. Indeed, litigation is probably as big a driver of fee policy as regulation is. It is possible, with the implementation of robust provider-to-sponsor disclosure, that plaintiffs’ lawyers will be ‘on the hunt’ for sponsors who have not adequately reviewed fee arrangements.
It is likely that the major DOL regulatory initiative with respect to DC plans in 2013 will be a re-proposal of the re-definition of ‘fiduciary’ under ERISA. DOL’s original proposal (in 2010) was very controversial and, some argued, fundamentally flawed. DOL withdrew that proposal (in part because of pressure from Congress) in 2011. DOL said then that it would re-propose in 2012; it did not do so. We are likely to see a new proposal in 2013 (perhaps early in 2013). Whether DOL backs off from some of its more controversial positions remains to be seen.
With Hilda Solis leaving DOL and Timothy Geithner leaving Treasury, it’s unclear whether there will be changes in key retirement policy personnel, or changes in policy, at either agency. But if Mark Iwry remains the principal retirement policy ‘thought leader’ at Treasury, we are likely to see a continued commitment to ‘retirement income’ initiatives. The Administration has been advocating a number of policies in this regard, including auto-IRA, an improvement in the Saver’s Credit, and disclosure of the ‘life annuity value’ of 401(k) account balances. But the most likely initiative will be a DOL revision of the fiduciary rules for selecting an annuity provider in a DC plan, with the hope of encouraging the adoption by DC plans of an in-plan life annuity option.
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We look forward to keeping you informed about these issues — and the ones we haven’t identified or forecast — in 2013.