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Current pension legislative and regulatory outlook – September 2009 – DC plan initiatives

Sep 14, 2009

This article is one of two this month reviewing the current pension legislative and regulatory agenda as Congress comes back from its August recess. In this article we cover defined contribution plan issues – where initiatives on 401(k) fee disclosure and investment advice remain a priority – and broader issues relevant to both DB and DC plans.

In a companion article we focus on defined benefit plans and, critically, temporary relief from Pension Protection Act (PPA) funding requirements.

We generally divide the material that follows into sub-discussions of the current state of the legislative and regulatory process and the substance of different proposals under consideration.

401(k) fee disclosure –process

While there are other bills, both in the House and the Senate, we've focused primarily in prior articles on Congressman Miller's (D-CA, and Chairman of the House Education and Labor Committee) 401(k) fee bill. It's our sense that Congressman Miller's bill will provide the template for any legislation on this issue. The key process issues with respect to that bill are:

(1) Will Congressman Miller defer legislation in favor of regulatory efforts by the (now Democrat-controlled) DOL? Our sense is that the answer to this question is no. Congressman Miller clearly cares a lot about this legislation, has very strongly held and specific beliefs about what it should look like and would like to push this process forward.

(2) Will there be a "moving vehicle" for this legislation? Right now, there's no clear answer to that question. Health care reform is taking up almost all of Congress's attention. Strategically, Congressman Miller has combined this legislation with Congressman Andrews's (D-NJ) advice legislation and, critically, with DB funding relief. To the extent that funding relief is perceived as "must have" economic legislation, chances of passage of Congressman Miller's 401(k) fee disclosure legislation would improve.

401(k) fee disclosure –substance

We have written a lot about the differences between Congressman Miller's 401(k) fee disclosure proposals, proposals of other Democrats and  DOL's proposed regulations (for our most recent article, see House Education and Labor Committee approves fee, advice and DB funding legislation). As we see it, the key issues are (in no particular order):

The greater specificity and detail, in Congressman Miller's bill, of required disclosures. A key sub-issue here is whether and the extent to which revenue sharing must be disclosed to participants.

The requirement, in Congressman Miller's bill, that fully integrated providers disclose a charge for "free" or discounted services (e.g., recordkeeping) that are not offered separately.

The requirement, in Congressman Miller's bill, that all 401(k) plans that allow participants to choose investments provide participants with a low-cost index fund investment option.

There are members of Congressman Miller's own party that have different views on these issues. But as we said, Congressman Miller feels strongly about his proposals and is likely to be a powerful advocate for them.

Investment advice –process

The fate of Congressman Andrews’ advice proposals appears at this point to be bound up with the fate of Congressman Miller's 401(k) fee disclosure proposals. Democrat opposition to Bush administration advice proposals is undivided. If Congress does not pass legislation on this issue in the relatively near term, we can expect the DOL to re-propose significantly tougher regulations.

Investment advice –substance

We discuss the 401(k) investment advice issue in detail in our articles Congressman Andrews introduces advice legislation and House Education and Labor Committee approves fee, advice and DB funding legislation. Pre-PPA, affiliates of funds offered in a plan's fund menu could offer investment advice in limited circumstances. PPA (as interpreted by the Bush administration) seemed to open the door more broadly to the provision of investment advice in these circumstances. It is clear that the Obama administration and Democrats in the House (at least) would like to close that door.

As originally proposed, Congressman Andrews’ advice legislation would have cut back even on pre-PPA rules allowing the provision of advice by fund managers. In its current state, as reported out of the House Education and Labor Committee, and combined with Congressman Miller's fee bill, it's unclear to what extent exceptions, however limited, for the provision of advice by fund managers will remain. We continue to hear that Congressman Andrews does want to preserve certain (perhaps only fashioned on SunAmerica) exceptions for, e.g., model driven advice, although perhaps those exceptions will be subject to new and tougher rules. We would look for further clarification of this issue before legislation is passed.

Other retirement plan issues

Let's take note of several other retirement plan issues that are developing: the treatment of target date funds; the treatment of hard to value assets; Automatic Workplace Pensions; and an expanded Saver's Credit.

Of these issues, target date funds have probably gotten the most attention, with both Congressional and joint SEC-DOL hearings. It is unclear, however, exactly what in the way of policy changes can be made to address the target date fund "problem." It is possible that we will see regulatory proposals requiring a better description of exactly how assets are allocated over time under different target date plan offerings. On this issue, see our article Plan investments – target date funds.)

The issue of hard to value assets has gotten less attention. And, while there are some clear policy initiatives that could be undertaken, there does not appear to be any consensus as to just how serious the "problem" of hard to value assets is, and who should bear the cost of solving it. Nevertheless, there are policymakers that would like to "do something" about this issue, and a dramatic event – such as a well-publicized write-down in the value of a major asset resulting in big claims against PBGC assets – could trigger action. (On this issue, see our article Plan investments – hard to value assets.)

As we have discussed (see our article Administration retirement proposals), proposals for Automatic Workplace Pensions and an expanded Saver's Credit really go together and are a key part of President Obama's long term pension policy program. As we understand it, the administration regards Automatic Workplace Pensions (which, generally, would require companies that do not provide a 401(k) plan to provide for automatic enrollment in a payroll deduction IRA) as the more important of these proposals. Notwithstanding that priority, no legislation implementing Automatic Workplace Pensions has yet been introduced. As discussed in our article, Congressman Pomeroy has introduced legislation expanding the Saver's Credit.

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Of course, the biggest issue is, in the current context, will Congress have time for pension policy at all? Our guess is that the fate of DC legislation – and, critically, 401(k) fee and advice legislation – is linked to the fate of DB funding relief. As we said in our related article on DB funding relief, whether there will be action on pension issues this year depends on the economy and on how critical DB funding relief is perceived to be to the health of key companies. If a persuasive case can be made that relief is needed sooner rather than later, then we're likely to see DB funding legislation this year or early next year. And that legislation will probably also include 401(k) fee and advice provisions. But a lot has to happen between now and the passage of such a bill.

We will continue to follow these issues.