December 2010 | Legislative Intelligence Update | 2011 Regulatory and Legislative Outlook

DECEMBER 2010—Legislative Intelligence Update | Target Date Fund Disclosure

Welcome to this edition of IMCA's Legislative Intelligence update. This month's update discusses proposed disclosure rules for target date retirement funds and provides a regulatory and legislative outlook for 2011.

The purpose of this update, prepared by Morgan Lewis, is to give members legislative and public affairs intelligence and analysis and is strictly informational and educational.IMCA, as an education and credentialing organization, does not lobby legislators or regulators nor advocate for any particular legislative or regulatory position either on its own or through its relationship with Morgan Lewis.

If, after reading this update, you have additional questions please contact IMCA using the "Questions? Email IMCA" button at the bottom of this e-mail. We will either respond personally to your inquiry or include a response in an upcoming issue.
______________________________________________________________________________________

Employee Retirement Income Security Act (ERISA)

Target Date Fund Disclosure

At the end of November, the U.S. Department of Labor (DOL) proposed disclosure rules for target date retirement funds used as investment options in participant-directed 401(k) and other individual retirement account plans. The proposal would amend both the DOL regulation on qualified default investment alternatives (QDIAs), which was adopted in 2007, and the DOL regulation on participant-directed plan disclosures, which was adopted in October 2010.

The proposed rules would require much more specific disclosures to plan participants on the features of target date retirement funds, including how the fund’s asset allocation will change over time (the so-called “glide path”); an explanation of the age group for which the fund is designed; and a statement that the fund can suffer losses near or even following the retirement date. In addition to dealing with target date funds, the proposal would more generally conform the QDIA disclosure requirements to the new participant-directed plan disclosure rules. The comment period on the proposal closes on January 14, 2011.

This is the most recent in a series of developments in the target date fund area. These funds became more popular after the DOL’s QDIA regulation recognized them as a permitted form of default investment for participant-directed plans. However, they received increased scrutiny following the 2008 market decline, during which 2010 target date funds, which were in theory the most conservatively invested, suffered significant and varying levels of investment losses. The DOL and the Securities and Exchange Commission (SEC) held a joint public hearing in June 2009, and subsequently published a joint “Investor Bulletin” on target date funds. Then, earlier this year, the SEC proposed rules on disclosure for target date funds that are registered as investment companies under federal securities law (which is the case for many, but not all, such funds). The proposed DOL rules are similar to the proposed SEC rules, although not as detailed—the DOL requested comments as to whether its rules should take the SEC’s rules into account. The DOL also intends to publish a series of tips to assist plan fiduciaries in evaluating and monitoring target date funds as investment options for participant-directed plans.

Regulatory/Legislative Outlook for 2011

We expect much of the focus in 2011 to be on compliance with the disclosure regulations that DOL adopted during the last half of 2010, as well as on the changes to the definition of an ERISA fiduciary that DOL proposed in October:

Service provider disclosures to plan sponsors/fiduciaries under section 408(b)(2) of ERISA. By July 16, 2011, “covered” service providers must provide the required disclosures for their service arrangements with “covered” plans. The regulation was issued in interim final form. DOL intends to issue a finalized regulation in early 2011, providing guidance on questions raised in comment letters on the interim rule and on whether there is a need for a “summary” disclosure document.
Disclosures to participants in participant-directed individual account plans. While the effective date of these disclosure rules is January 1, 2012 (for calendar-year plans), and the initial disclosures would not be due until March 2012, plan administrators and service providers will want to start preparing disclosure materials during 2011. In addition, as described above, the DOL has proposed more specific disclosure rules for target date retirement funds that may be finalized prior to the 2012 effective date.
Proposed changes to the definition of an ERISA fiduciary. As described in last month’s report, the DOL has proposed a controversial regulation to expand the definition of a fiduciary under ERISA that is directed at, among others, investment consultants. The comment period closes on January 20, 2011. We expect many financial services firms and associations to comment on the proposal, and also to request a hearing. In view of the likely comments on the proposal, it is difficult to predict the final form of the regulation. We would not expect a final regulation before the latter part of 2011, at the earliest.

DOL also can be expected to begin enforcement efforts in line with its new rules emphasizing disclosure of “indirect” compensation and related service arrangements, focusing on plan service providers (such as consultants) that are compensated through payments from mutual funds or other third parties.

To complete its efforts in the disclosure area, DOL is working on further guidance on individual participant benefit statements. The guidance would deal with the new pension benefit statement requirements added by the Pension Protection Act of 2006 that came into effect in 2007.

DOL is planning to complete its work in early 2011 on the Pension Protection Act exemption for participant investment advice. This is a controversial project that was adopted, then withdrawn, and then reproposed with changes. It would provide relief from ERISA prohibitions for the furnishing of investment advice to plan participants under limited circumstances.

In Congress, we do not expect significant benefits legislation in 2011 affecting pension consultants. While the Senate continues to have a Democratic majority, the House now has a Republican majority, and the new Republican chairman of the House Education and Labor Committee, unlike his predecessor, is not expected to push for new pension legislation. He is likely to focus his efforts in the benefits area on oversight of the DOL’s employee benefits program.