The Ledger

RET IREMENT SERV ICES

SUMMARY OF LEGISLATIVE, JUDICIAL, AND REGULATORY RETIREMENT NEWS

TABLE OF CONTENTS

Regulatory Updates ....................... 1-2

Legislative Update ......................... 3-5

Court Updates ............................... 6-8

The Beacon ..................................... 9

Retirement Services Guidance .......... 10

SAMUEL A. HENSON, JDVice President,

Director of Legislative & Regulatory Affairs

AUTHORREGULATORY UPDATES

DOL Ratchets Up ERISA Violation PenaltiesOn July 1, 2016, the Department of Labor (DOL) announced significant

penalty increases for ERISA violations. The increases will apply to

civil penalties assessed after August 1, 2016, even if the violations

occurred prior. With the Federal Civil Penalties Inflation Adjustment Act

Improvements Act of 2015, the DOL required federal agencies to adjust the

penalty amounts for inflation and to increase deterrence. Initial adjustments

make up for years of modest or no penalty increases. Going forward,

penalties will change annually with inflation. The DOL has little choice in

the matter as the act also mandates specific calculations to determine the

amount of the increase.

This chart from the DOL cites specific penalty changes.

Description of ERISA Violations Subject to Penalty

Current Penalty Amount

New Penalty Amount

Failure to furnish reports (e.g., pension benefit statements) to certain former participants and beneficiaries or maintain records

Up to $11 per employee

Up to $28 per employee

Failure or refusal to file annual report (Form 5500) required by ERISA § 104

Up to $1,100 per day

Up to $2,063 per day

Failure to furnish automatic contribution arrangement notice under ERISA § 514 (e)(3)

Up to $1,000 per day

Up to $1,632 per day

Failure to furnish information requested by Secretary of Labor under ERISA § 104 (a)(6)

Up to $110 per day, not to exceed $1,100

per request

Up to $147 per day, not to exceed $1,472

per request

Failure to furnish a blackout notice under section 101(i) of ERISA or notice of the right to divest employer securities under section 101(m) of ERISA

Up to $100 per day

Up to $131 per day

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DOL Moving Forward on Form 5500 and Lifetime Income Illustration ChangesThe DOL may publish new Form 5500 regulations in late summer, and expects an updated Form 5500 to be available for

the 2019 plan year. The DOL wants to add more granular disclosures about plan asset types and to include more IRS

questions about plan coverage and nondiscrimination testing.

The Department also anticipates proposing its lifetime income illustration pension statement rule this summer. The DOL

first introduced the inclusion of lifetime income illustrations on pension benefit statements in May 2013. Debate over

whether the illustration should include a point in time illustration or a future projection of income at anticipated retirement

age has delayed progress.

Multiple Form Roth Distributions Get Some HelpHistorically, participant accounts, including both pre-tax 401(k) contributions and Roth contributions, rolling over via

a check versus direct plan transfer to multiple plans or IRAs, were required to allocate pro rata shares of the pre-tax,

post-tax, and/or Roth funds. Those who wanted to roll plan distributions to both a Roth IRA and a standard IRA had to

allocate pre-tax funds to the Roth IRA, which it could not receive. As a result, employees had to either delay distributions

until they worked for an employer that permitted Roth contributions, keep their account in their former employer’s plan,

or arrange a direct rollover.

To solve this, the IRS issued Notice 2014-54, which requires:

� Plans to change participant tax notices about the distribution.

� Changes to distribution or rollover instructions, and distribution administrative procedures and distribution reporting.

� Possible changes to distribution and rollover information in summary plan descriptions.

The new rules are effective January 1, 2016. The final rules do not change the tax treatment of rollovers made between

September 18, 2014, and January 1, 2016, or the notices provided with respect to those distributions.

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offered here. LEGISLATIVE UPDATES

Auto Enrollment Mandate for Government Contractors ProposedCongressman Joseph Crowley (D-New York) sent a letter to President Obama requesting an executive order to require

federal contractors to auto-enroll their employees into retirement plans. The May 5, 2016, letter was signed by 65

other House Democrats. It suggests directing federal contractors to either auto-enroll their employees into a company’s

traditional 401(k) plan or into the Federal myRA program, if an employer does not offer a plan. Representative Crowley

wants the executive action to apply to part-time and full-time employees and require immediate vesting in whatever plan

is being offered.

Pension “Lost and Found” Service ProposedThe Retirement Savings Lost and Found Act of 2016, introduced by Senators Elizabeth Warren (D-Mass.) and Steve

Daines (R-Mont.), would create a national, online database for Americans’ retirement account information. For the

most part, it will include data plan sponsors already share on terminated participants who have vested account

balances remaining in the plan. Additional information would include the names of previously reported participants who

subsequently took plan distributions, the names of participants automatically rolled over to an IRA along with the name

and address of the IRA trustee or issuer, and the name and address of the annuity contract issuer, if an annuity was

issued on behalf of the participant. The only information a participant could see would be current contact information for

the plan sponsors associated with the participant’s accounts. Plan information will be protected to prevent someone from

fraudulently claiming another person’s benefit. A participant could opt out of inclusion in the Lost and Found.

The Act also increases the account balance limit on automatic rollovers from $5,000 to $6,000, and makes it easier for

plan sponsors to roll over accounts into age-appropriate target-date funds to maximize investment returns. Plan sponsors

would be required to transfer account with balances of $1,000 or less, to the Treasury:

� Six months after a participant is notified of the benefit and makes no election.

� Six months after distribution, if the participant fails to cash the check.

Plans that currently automatically roll over accounts below $1,000 may need to adjust their procedures if the Act is

approved and put in place. The ability to send small account and uncashed check balances to the Treasury could be a

welcome option for many plan sponsors who struggle to manage these within their plans.

4

House GOP Sets Retirement AgendaThe GOP released its retirement security agenda in June, which includes issues covered previously in Lockton

publications:

PBGC Premiums � Increases in PBGC premiums topped the list, driven by concerns that the hikes may be driving employers out of the

system, exacerbating the agency’s existing funding challenges. The report noted that “changes to pension policies

should be in the best interest of workers, employers, and retirees, rather than funding Washington’s spending

priorities,” perhaps alluding to Congressional use of PBGC premiums solely to offset federal legislation costs.

Fiduciary Rule � Not surprisingly, the report reiterated the GOP’s belief that the DOL’s fiduciary rule will limit low- and middle-income

families’ access to advice and will cause fewer small businesses to offer retirement plans due to a loss of affordable

retirement advice.

Open MEPs � The recommendation to make Multiple Employer Plans (MEPs) available to more employers made the list, an idea that

also has been proposed in President Obama’s latest budget. These “open” MEPs would allow many different types of

small employers to participate together in a single retirement plan.

E-Disclosure � The issue of restrictions that limit delivery of retirement benefit information electronically was last on the list. To

reduce costs for workers and retirees, the GOP recommends that Congress modernize and streamline electronic

delivery rules.

The GOP agenda is largely just an exercise to please supporters and will doubtfully produce any legislation. While

some of the issues are supported by both parties, the nature of the current election cycle is unlikely to produce any

bipartisan legislation.

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Update: State-Mandated Retirement PlansStates continue to look at, and initiate, state-run retirement plans to encourage private sector retirement coverage. These

programs generally take the form of payroll-deduction IRAs, state-sponsored multiple employer plans, or retirement

marketplaces. Most recently, Maryland, Connecticut, and Colorado have considered these initiatives:

Maryland � In May, Maryland passed the Small Business Retirement Savings Program and Trust, creating a state-run IRA

arrangement. The bill applies to private-sector employers who have been in business for at least the last two years,

pay employees through a payroll system or service, and do not currently offer or have not offered in the last two

years an employer plan. After the program is implemented, these employers will automatically enroll employees over

the age of 18 into payroll-deposit IRAs. The bill takes effect July 1, but actual implementation will follow confirmation

that the program qualifies for favorable tax treatment.

Connecticut � Signed into law May 27, the Connecticut Retirement Security Program will begin operation in 2018. Private-sector

employers (with five or more employees who earned at least $5,000 in the previous year), that do not already offer

a 401(k) or other payroll deduction retirement option, are required to participate. These employers will automatically

enroll employees age 19 or older, who have worked for the employer at least 120 days, into Roth IRAs.

Colorado � Colorado indefinitely postponed a vote on the state’s Secure Savings Plan. The Colorado proposal called for automatic

payroll deposit into Roth IRAs. Legislation on this may be reintroduced in the 2017 session.

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COURT UPDATES

Fee Cases � American Airlines, Inc., has been sued, alleging it filled its own 401(k) plan with an affiliated investment management

company’s poorly performing, overpriced mutual funds. The lawsuit targets the relationship between the airline and

American Beacon Funds, an investment company owned in part by the airline’s parent company. The plaintiffs, more

than 75,000 plan participants, allege American Airlines used this relationship to force airline workers into high-fee

mutual funds that were “complete failures in the marketplace,” thereby profiting at the expense of workers’ retirement

savings.

� M&T Bank Corp. has been sued alleging it breached its ERISA fiduciary duties by retaining expensive,

underperforming proprietary mutual funds in the company’s 401(k) plan. Participants said that, in late 2010, eight

of the plan’s 23 designated investment alternatives were M&T Bank proprietary mutual funds. These funds had

expenses that the complaint alleges were, on average, approximately 90 percent higher than comparable funds

found in similarly sized DC plans. All but one of the M&T-affiliated funds had underperformed its benchmark index

over the past year and the past 10 years. M&T not only failed to remove those funds, it greatly expanded the lineup

of proprietary plan options following the purchase of the distressed Wilmington Trust, adding six of Wilmington’s

nine mutual funds to the Plan. This was done despite the funds’ high expenses and poor or nonexistent performance

history. Over the next five years, despite the ongoing poor performance and high expenses of the funds, M&T kept

these proprietary investments, reluctantly removing a few only because the funds themselves ceased operations.

� Transamerica Corp. has come to terms with participants of its own plan who alleged fiduciary obligations were

violated by putting relatively high-fee, in-house investment funds on the plan menu. In addition to $3.8 million in

monetary damages, Transamerica agreed to a number of plan design changes in the settlement, including:

h Capping the fees on its separate account investments.

h Adding a third-party, low-fee bond fund to the plan’s lineup.

h Maintaining a low-fee S&P 500 index fund in the plan’s lineup.

h Using an unaffiliated investment consultant to annually review the plan’s lineup.

h Revising and clarifying the plan’s summary plan description.

h Rebating mutual fund revenue sharing and sub-adviser fees.

h Providing record-keeping services at no cost.

h Offering a “wide range” of nonaffiliated mutual funds through a brokerage window.

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� Invesco has agreed to pay a total of $10.27 million to settle the DOL’s claims that it violated ERISA. Invesco operated

the Invesco Short-Term Investment Fund (ISTIF), a multibillion-dollar collective fund composed of ERISA plan assets.

The DOL contended that Invesco violated ERISA when it undertook measures to keep the ISTIF trading at $1,

although the fund’s net asset value had fallen below that. The DOL said that one measure Invesco took was having

an affiliate enter into a series of agreements to provide financial support without adequately informing the fund’s

investors. Invesco also retained a portion of the income earned by the ISTIF to increase the fund’s net asset value

instead of distributing that income to investors, according to the DOL. Retaining a portion of the ISTIF’s income in

the fund would not only reduce distributions to investors, but also reduce Invesco’s affiliate’s obligations under the

support agreements. The DOL concluded that Invesco did not adequately disclose these measures to ERISA plan

investors, and that Invesco’s actions resulted in losses to ERISA plan clients. The settlement agreement addresses

both of these findings by requiring Invesco to regularly disclose to ERISA plan investors the ISTIF’s holdings, its actual

market value, and the existence of any supporting measures used to bolster the ISTIF’s net asset value. Additionally,

Invesco must restore client losses that resulted from the ISTIF’s retention of income.

� MassMutual has agreed to a settlement of $30.9 million for attorney fees, administrative expenses, and compensation

to participants in its 401(k) plan. The lawsuit, filed in 2013 by 14,000 plan participants, alleged that MassMutual

violated ERISA, by having “larded” the company’s retirement plan with unreasonably priced, proprietary investment

options. The case alleged that the plan fiduciaries were conflicted by their roles as MassMutual executives and

investment managers of the products being offered to participants. Participants took issue with the fact that the

plan had 38 investment options, of which almost all were MassMutual proprietary funds. In addition to the monetary

settlement, MassMutual has agreed to:

h Use an independent consultant with specific stable value investment expertise.

h Consider, within one year, a general account investment versus a separate account or synthetic model.

h Make sure that its participants were charged no more than $35 for recordkeeping services for a period of four years.

h Make sure that the fees paid to the plans’ recordkeeper will not be set or determined on a percentage-of-plan-assets basis.

h Identify fiduciaries and their job titles in an annual participant statement.

h Require plan fiduciaries to attend fiduciary responsibility training provided by experienced ERISA counsel and an independent investment consultant.

h Review and evaluate all investment options offered in the plans with the assistance of the independent consultant, and to consider:

� The lowest-cost share class available for any particular mutual fund.

� Collective investment trusts and single client separate account investments.

� Passively managed funds for each category.

h Consider at least three finalists for any style or class of investment, and if collective investment trusts or separately managed accounts are utilized, to secure most favored-nations treatment for the benefit of the plans

The settlement calls for one-third of the Gross Settlement Amount, or $10.3 million, for the attorneys who brought

the case, as well as reimbursement for their costs incurred of no more than $75,000, with the seven named plaintiffs

receiving $15,000 each.

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T. Rowe Price Pays $194 Million to Mutual Fund ShareholdersT. Rowe Price Group will pay up to $194 million to compensate certain clients for a proxy voting error made in connection

with the 2013 leveraged buyout of Dell, Inc. The error impacted T. Rowe Price mutual funds, trusts, separately managed

accounts, and subadvised clients holding, in aggregate, approximately 31 million impacted shares. At the time of the

2013 Dell buyout, T. Rowe Price’s investment team “held a strong view that the merger consideration of $13.75 per share

offered by Dell significantly undervalued the company.” Several of the investment company’s funds, trusts, and clients

subsequently filed a petition to seek a fair value appraisal for their Dell shares. Due to a proxy voting error, though,

voting instructions for clients’ shares were ultimately submitted as “For” the merger, rather than “Against.” As a result,

T. Rowe Price’s fund, trust, and client shares were ineligible to pursue fair value. The court ruled that Dell’s fair value per

share was $17.62 and not $13.75, a difference of more than 28 percent, validating the firm’s original investment thesis.

Admitting fault, T. Rowe Price will start to make payments to affected clients to compensate them for the difference in

valuation, plus interest, resulting from the denial of appraisal rights. T. Rowe Price funds and portfolios that will receive

payments include the Equity Income Fund, Institutional Large-Cap Value Fund, Science & Technology Fund, Equity

Income Portfolio, Equity Income Trust, US Equities Trust–Large-Cap Value, and US Large-Cap Value Equity Fund–SICAV.

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THE BEACON , YEAR-TO-DATE

The President’s Budget: The Good, the Bad, and the Ugly—February 16, 2016

Little in the President’s final budget proposal will appeal to retirement plan sponsors. The effort was largely a political

gesture, but it provides insight into possible future policy recommendations.

DOL Rule Requires Federal Contractors to Provide Paid Family Sick Leave Beginning in 2017—March 3, 2016

The DOL’s new rule requiring federal contractors to pay family sick leave could be difficult to administer and drive up costs

for employers and taxpayers alike.

Fiduciary Rule—April 11, 2016

The DOL released final rules designed to reduce conflicts of interest in advice and promote investor fee transparency

by naming investment consultants as ERISA fiduciaries, specifying level compensation requirements and clarifying the

difference between recommendations and advice.

Understanding the DOL’s Conflict of Interest Rule—April 25, 2016

With time to absorb the DOL’s rule on conflicts of interest, more detail is known about the limits on advisor pay and what

constitutes advice versus education.

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RETIREMENT SERVICES GUIDANCE , YEAR-TO-DATE

IRS Ease: Prohibition on Midyear Safe Harbor Plan Amendments—February 1, 2016

The new flexibility introduced by the IRS to allow midyear amendments to safe harbor 401(k) plans should prove especially

beneficial to employers involved in mergers and acquisitions.

PBGC Proposes Late Premium Relief to Defined Benefit Plans—May 5, 2016

The PBGC proposed relief to plan sponsors paying late premiums, which helped struggling plans by cutting penalties on late

payments as much as half.

Think Only Large Plans Get Sued? Think Again.—June 3, 2016

While billion-dollar 401(k) plans are commonly sued over fees, most thought smaller plans were immune until this $9 million

plan was taken by surprise with a lawsuit.

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