Retirement Legislation & Regulation

RETIREMENT LEGISLATION & REGULATION Quarterly Bulletin – Q3

Prepared for Franklin Templeton by Davis & Harman LLP September 2019

We believe it is important to keep you informed on the latest proposals and regulations impacting the retirement industry, as well as implications to your business. As such, we are pleased to share the latest edition of the Retirement Legislation and Regulation Quarterly Bulletin, prepared by experts at Davis & Harman LLP.

The return of Congress from its August recess not only signals the end of summer in Washington each year, but it also sparks a flurry of year-end activity, as the remaining four months of the year leave little time for even a well- functioning Congress to accomplish much beyond its must-do agenda. This year is no exception, and the added pressure of the looming 2020 elections means that time is especially short to accomplish anything before a new Congress – and possibly a new Administration – take their seats. On the legislative side, opportunities to enact the bipartisan and House-passed Setting Every Community Up for Retirement Enhancement (SECURE) Act (H.R. 1994) remain but are becoming increasingly limited for 2019. And on the regulatory side, the Trump Administration is expediting its work on a number of regulations as time is running short to ensure that any new rules are effective prior to the time at which they risk invalidation by the next Congress under the Congressional Review Act. These items and more are discussed below.

Legislative Update

SECURE Act Stalled. After the full House passed the SECURE Act by a vote of 417-3 in May, proponents of the broad retirement legislation were cautiously optimistic as the bill appeared to have a real chance of being passed by the Senate soon thereafter. That optimism slowly fizzled over the summer, however, after a handful of Senators prevented it from being passed by unanimous consent. The few Senators who objected, all of whom were Republicans, expressed concern about provisions not directly related to the core of the SECURE Act or had procedural issues. Senate Majority Leader Mitch McConnell (R-KY) has declined to bring the bill to the Senate floor to avoid protracted debate over tax and budget issues.

Efforts were recently made to attach the SECURE Act to a continuing resolution (CR) to fund the government past September 30th. The CR cleared the House on September 19th and the Senate on September 26th, and will fund the government until November 21st, at which point Congress will need to act again. The CR does not, however, include any provisions from the SECURE Act. Opportunities to pass the SECURE Act in 2019 are now waning, with a year- end government funding bill presenting perhaps the most realistic chance for the SECURE Act’s passage. Support for the retirement legislation remains strong, including from Senate Finance Committee Chairman Charles Grassley (R- IA) and Ranking Member Ron Wyden (D-OR). Senator Rob Portman (R-OH) also recently indicated that the SECURE Act remains the #1 focus as he contemplated some potential paths forward for the bill in the Senate. A description of select provisions of the SECURE Act was provided in last quarter’s Quarterly Bulletin.

Prospects for Other Retirement Legislation. With passage of the SECURE Act this year far from certain, the goal of also enacting some form of “Retirement 2.0” legislation in 2019 has now shifted to 2020 or beyond. These include the Retirement Security and Savings Act, which was reintroduced by Senator Portman and Senator Ben Cardin (D- MD) in May, as well as a retirement simplification bill and a retirement plan mandate bill introduced in 2017 by current Ways and Means Committee Chairman Richard Neal (D-MA). A description of select provisions in the Portman-Cardin bill was provided in last quarter’s Quarterly Bulletin.

A possible exception to this outlook for other retirement legislation in 2019 is the Retirement Security Preservation Act (RSPA) of 2019 (S. 2352), which was introduced by Senators Cardin and Portman on July 31st. The RSPA would address a critical issue being faced by an increasing number of companies that have chosen to transition away from a

RETIREMENT LEGISLATION & REGULATION Quarterly Bulletin – Q3

Prepared for Franklin Templeton by Davis & Harman LLP

September 2019

defined benefit plan by closing their plan to new hires, converting the plan from a traditional plan to a cash balance plan, or acquiring an entity and maintaining the plan for a closed group. These actions may, over time, cause the defined benefit plan to violate the Internal Revenue Code’s nondiscrimination rules. Violations can occur because the participants in the plan can become disproportionately highly compensated simply due to normal occurrences such as promotions and salary increases that eventually turn many non-highly compensated employees into highly compensated employees. To avoid a violation, some plan sponsors have been forced to completely freeze their defined benefit plans, resulting in the loss of any future benefit accruals. Although the IRS has provided partial relief from some of these testing issues for closed defined benefit plans for plan years beginning before January 1, 2021, the RSPA would provide a more comprehensive legislative fix. The same measure is also included in the SECURE Act, but due to the time-sensitive nature of this issue, Senators Cardin and Portman introduced the solution as a stand-alone bill when passage of the SECURE Act in 2019 started to become more uncertain.

Regulatory Update While the retirement industry waits to see if Congress can get anything accomplished in the final months of 2019, stakeholders are holding onto their hats for what could be a whirlwind of agency guidance affecting plans and service providers. A number of regulatory projects are expected to move forward this fall, including several at the Department of Labor (DOL) where some key leadership changes do not appear to be hindering the agency’s progress (and could even be ushering the progress along). Leadership and Structural Changes at DOL. On July 12th, Secretary Alexander Acosta announced his resignation following continued attention to his previous work as a federal prosecutor in Miami. Patrick Pizzella, the Deputy Labor Secretary, was promptly named Acting Secretary. President Trump has since nominated Eugene Scalia, son of the late Supreme Court Justice Antonin Scalia, to head the DOL. Scalia previously served as DOL Solicitor under President George W. Bush following his recess appointment, but those in the retirement industry perhaps know him better for his role as the lead litigator on behalf of a number of industry groups in successfully challenging the Obama Administration’s DOL fiduciary rule. On September 24th, the Senate Health, Education, Labor, and Pensions (HELP) Committee moved Scalia’s nomination forward and he was confirmed by the full Senate on September 26th in a party line vote (53-44). In another recent change at DOL that is expected to have implications for the retirement industry, Assistant Secretary Preston Rutledge, who leads the Employee Benefits Security Administration (EBSA), announced in late August a restructuring plan that will add a third deputy assistant secretary position to EBSA effective October 1st. The new deputy will have responsibility for DOL’s regional offices. Rutledge's plan also calls for shifting responsibility for DOL’s rulemaking and exemptions from Deputy Assistant Secretary Timothy Hauser, a career staffer, to Principal Deputy Assistant Secretary Jeanne Klinefelter Wilson, a political appointee. Hauser will retain responsibility for national office operations and education and outreach. Fiduciary Rule. All indications continue to be that DOL could soon send a notice of proposed rulemaking (NPRM) regarding a revised fiduciary rule to the Office of Management and Budget (OMB) for review. Once the proposal is released, which is typically within 60-90 days of being sent to OMB, the public will have an opportunity to see how closely DOL coordinated its new proposal with the Securities and Exchange Commission’s (SEC) Regulation Best Interest (Reg BI). Another outstanding question regarding the proposal – albeit a relatively new one – is whether Labor Secretary-Nominee Scalia will recuse himself from matters involving the fiduciary rule due to his significant involvement in industry litigation against the prior fiduciary rule. In the meantime, it hasn’t been all smooth sailing for the SEC as Reg BI, which was finalized in June and has a compliance date of June 30, 2020, is now the subject of multiple law suits – including one brought by several state attorneys general – claiming that the SEC did not go far enough to protect investors through Reg BI.

RETIREMENT LEGISLATION & REGULATION Quarterly Bulletin – Q3

Prepared for Franklin Templeton by Davis & Harman LLP

September 2019

Focus on Retirement. Notwithstanding the turnover of the Labor Secretary, progress has picked up on several retirement-focused agency regulatory projects as we head into fall, including in particular several guidance items that were prompted by President Trump’s August 2018 Executive Order (EO) 13847, Strengthening Retirement Security in America. As we reported in previous quarters, one of those projects was a rule modifying DOL’s long-standing interpretation of ERISA’s definition of “employer” and creating a new type of multiple employer plan (MEP) called an association retirement plan (ARP) for certain groups and associations. DOL released the final rules for ARPs in late July 2019. Below we highlight some other active regulatory projects that will affect the retirement industry but are not yet complete.

• Open MEP Request for Information (RFI). Although DOL’s ARP final rule stopped short of allowing truly “open” MEPs (i.e., plans that cover employees of employers with no relationship other than their joint participation in the plan), DOL issued on July 31st an RFI on a broad range of issues relating to open MEPs. While there is some optimism that DOL could use its authority to facilitate open MEPs, many are holding out hope for a legislative solution such as the open MEP provision in the SECURE Act. • “One-Bad-Apple” Relief. On July 3rd, the Treasury Department and Internal Revenue Service (IRS) released proposed rules that would provide relief from the unified plan, or one-bad-apple, rule, if certain conditions are satisfied. Under existing Treasury and IRS interpretations, employers that maintain a MEP are treated as a single employer for certain qualification purposes, and the failure of one employer to satisfy a qualification requirement can result in the disqualification of the entire MEP for all participating employers. The proposal would provide relief from the unified plan rule when there is a known qualification failure attributable to one participating employer. The proposal would also provide relief in cases where a plan administrator reasonably believes that a qualification failure attributable to one employer exists, but is unable to determine whether a failure exists because the employer is unresponsive to information requests. The goal of this proposal is to make MEPs easier to administer by addressing a common problem of unresponsive participating employers by allowing a plan administrator of a MEP to implement a spinoff, followed by a subsequent termination of the spun-off plan. • E-Delivery of Retirement Plan Disclosures. The President’s August 2018 order directed DOL to review the actions it could take to make required retirement plan disclosures more understandable and useful while reducing the costs and burdens imposed on employers and other plan fiduciaries. If DOL determined that any such actions should be taken, the EO further directed DOL to consider proposing regulations or other guidance consistent with the order’s aims. On August 16th, OMB received for review a proposed regulation from DOL addressing this directive. Based on comments from DOL officials, we understand that this project will explore the expanded use of e-delivery, and many are hopeful that it will make it easier for plans to communicate required notices and disclosures electronically, which is expected to lower costs and increase participant engagement. As noted above, OMB typically takes 60-90 days to review a proposal, after which time it will be published for comment. • RMD Distribution Tables. The President’s August 2018 order directed the Treasury Department to examine the life expectancy and distribution period tables in the retirement plan regulations on required minimum distributions (RMDs) and “determine whether they should be updated to reflect current mortality data and whether such updates should be made annually or on another periodic basis.” Adjustments to the mortality tables would be expected to result in lower RMD distributions for plan participants and IRA owners, thus preserving more retirement savings in retirement accounts. In response to the President’s directive, Treasury sent proposed rules to OMB for review on August 13th. • Alternative Investments in Retirement Accounts. On June 18th, the SEC published a “concept release” on the harmonization of securities offering exemptions. The SEC uses concept releases to request public input

RETIREMENT LEGISLATION & REGULATION Quarterly Bulletin – Q3

Prepared for Franklin Templeton by Davis & Harman LLP

September 2019

on securities issues where the SEC is considering the need for future rulemaking. Under the Securities Act of 1933, unless an exemption is available, every offer and sale of securities must be registered with the SEC in order to ensure the full and fair disclosure of material information for investors. Among many other aspects of the exemption and registration requirements, the SEC is exploring whether it should revise its investor eligibility limitations to “focus more particularly on the sophistication of the investor, the amount of the investment, or other criteria rather than just the income or wealth of the individual investor.” The concept release could result in implications for retirement savings, as evidenced by the following two questions asked by the SEC (just two examples of the many dozens of questions on which the SEC requested comment): 1. If a target date retirement fund were to seek a limited amount of exposure to exempt offerings in its portfolio, what measures, if any, should we consider taking to enable this? 2. If investment advisory services, including robo-advisers, that are focused on retirement savings seek to include a limited amount of exposure to securities from exempt offerings as part of a diversified retirement portfolio that they recommend to retail investors, should we consider making any changes to our rules to enable this? If so, what types of changes?

Although SEC Chairman Jay Clayton has publicly expressed a desire to “increase the type and quality of opportunities for our Main Street investors in our private markets,” the next steps, and timing, after the concept release are uncertain.

Franklin Templeton is committed to bringing you timely updates on the latest legislative and regulatory activity

impacting the retirement industry. Visit our website for additional information.

RETIREMENT LEGISLATION & REGULATION Quarterly Bulletin – Q3

Prepared for Franklin Templeton by Davis & Harman LLP

September 2019

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