Compliance February 2, 2012

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.
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These flexible “lifetime income” options can provide greater certainty in retirement and minimize the risk of retirees outliving or underutilizing their retirement savings.

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“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 are often 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 because they are 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 retirees to receive 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 change 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 starting at age 80 or 85. 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 Thursday clarify how rules protecting employees and spouses apply when plan sponsors offer lifetime income options under their plans. The first ruling clarifies 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.

Additional information on these proposals is available in a fact sheet posted on Treasury.gov. The proposed regulations announced are also available at Regulations.gov for public comment.

 

Compliance February 2, 2012

DoL Issues Final Rule on 401(k) Fee Disclosure

The U.S. Department of Labor’s (DoL) Employee Benefits Security Administration (EBSA) issued a final rule on 408(b)(2) fee disclosure Thursday.
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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.

“As President Obama has said, we’re at a make or break moment for the middle class and those trying to reach it,” said Secretary of Labor Hilda L. Solis.

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“What’s at stake is the American value that hard work pays off. 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.”

Solis continued, “This rule, and its companion participant-level fee disclosure rule, will greatly increase the level of transparency in retirement plans. When businesses that sponsor retirement plans, and the workers who participate in those plans, get better information on associated fees and expenses, they’ll be able to shop around and make informed decisions that will lead to cost savings and a larger nest egg at retirement.”

The DoL’s rule requires service providers to furnish information that will enable 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 disclosures of direct and indirect compensation certain service providers receive in connection with the services they provide.

The rule applies to those service providers that expect to receive $1,000 or more in compensation and provide certain fiduciary or registered investment advisory services, make available plan investment options in connection with brokerage or recordkeeping services, or 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 would require service providers, in addition to providing the required fee and investment expense information, to furnish a guide or similar tool to assist plan fiduciaries in identifying and locating the potentially complex information that must be disclosed and which may be located in multiple documents.

The DoL said the three-month extension of the effective date of the final rule was provided to allow service providers sufficient time to prepare for compliance. Service providers not in compliance as of July 1, 2012 will be in violation of ERISA’s prohibited transaction rules and subject to penalties under the Internal Revenue Code. (see DoL Extends Applicability Dates for Fee Disclosure Rules).

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 plan investment options available to them.  Due to the extension of the effective date of the final rule announced Thursday, plan administrators for calendar year plans now must make the initial annual disclosure of “plan-level” and “investment-level” information (including associated fees and expenses) to participants no later than August 30, 2012, and the first quarterly statement (for fees incurred July through September) must be furnished no later than November 14, 2012.

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 on this regulation is also available on EBSA's website at http://www.dol.gov/ebsa/newsroom.  

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