Pension funds, managers sharpen blades for battle

A threat that federal policymakers might try to trim the amount of tax-deferred contributions that can be made to retirement plans next year is causing such a ruckus among money managers that industry lobbyists already are fine-tuning arguments against the concept.

“The (retirement) incentives don't eliminate taxation, they defer taxation,” said Paul Schott Stevens, president and CEO of the mutual fund industry's Investment Company Institute, Washington, in an interview.

“Savings and investment of this sort helps to grow the economy, and that in turns helps address the long-term deficit,” Mr. Stevens added.

“We're going to have to educate policymakers about the negative impact that (cutting back on retirement savings incentives) would have,” added Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401(k) Council of America, Chicago.

Preventing the nation's retirement savings incentives from getting run over by the deficit-cutting express will not be the only major challenge during the year ahead for pension and money manager executives. Public pension plan executives will have to fight their own legislative battle. And along with keeping an eye out on Capitol Hill, money manager and pension executives will have to try to protect their interests as the federal agencies churn out a series of important regulations implementing key financial reform legislation approved this year.

A big threat to state and local public pension plans on Capitol Hill during the new year is expected to come in the form of legislation by Rep. Devin Nunes, R-Calif. A bill he is expected to reintroduce early in the new Congress would require public pension plans to use standardized actuarial assumptions for the first time to disclose their finances to the U.S. Treasury, thereby revealing the precarious financial positions some plans may be in.

Also being tracked on the radar screen for 2011 are the continuing efforts of federal executive branch agencies to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Key provisions in the law that are now being rolled out could subject the nation's largest money managers to special regulatory oversight and subject money managers for the first time to regulation by the Financial Industry Regulatory Authority or some other self-regulatory organization.

At the Department of Labor, controversy is expected to continue on a proposal to extend fiduciary obligations to cover consultants that offer advice to retirement plans on proxy voting and the hiring of investment managers, in addition to broker-dealers who make securities recommendations to plans.

Of all the threats to the pension industry in the year ahead, lobbyists say they are most concerned about potential cutbacks to defined contribution plan contributions. Such a reduction, backed recently by two blue-ribbon panels — including President Barack Obama's National Commission on Fiscal Responsibility and Reform — could have a devastatingly negative impact on retirement savings, the lobbyists said.

A key proposal included in the fiscal commission's report suggested limiting the total combined tax-deferred contributions that employees and employers could make to DC plans to 20% of an employee's annual pay or $20,000, whichever is smaller. The current combined employer/employee cap is $49,000 a year.

The report was approved by 11 of the commission's 18 members — three short of the 14 votes needed for official endorsement, according to Mr. Obama's Feb. 18 executive order establishing the group (P&I Daily, Dec. 3).

But Mark Ugoretz, president of the ERISA Industry Committee, Washington, said just because the commission failed to get the 14 votes “doesn't mean that the curtailment of retirement savings is off the table.”

“The big issue is going to be deficit reduction, and it is going to put retirement limits in play,” said Mr. Ugoretz. “I can't recall a deficit-reduction bill in the last 30 years that did not take a hit on retirement.”

One key development related to Dodd-Frank that money managers are watching closely could result in their regulation for the first time by an SRO such as FINRA. A provision in the new law requires the Securities and Exchange Commission to study whether more regulatory oversight of money managers is warranted, and the agency is supposed to make a recommendation to Congress by January on whether an SRO should be assigned to conduct the oversight.

Money managers, which are now regulated directly by the SEC, oppose FINRA regulation in part because of the cost that would involve underwriting a new kind of inspection program.

Some lobbyists say the political momentum might favor a recommendation for self-regulation because money to beef up the inspection process at the SEC is unlikely to be available in an era when lawmakers are focused on reducing the federal deficit.

“The current financial situation means that additional funds for federal activities are going to be rare,” said David Tittsworth, executive director of the Investment Adviser Association, Washington.

Among the issues that the SEC's staff is studying, according to Mr. Tittsworth, is whether to recommend that money managers be required for the first time to take tests to demonstrate their qualifications to offer financial advice.

Said ICI's Mr. Stevens: “The people at Fidelity or Vanguard don't need FINRA coming in and saying, "Please take a test.' ”

Mr. Nunes' public fund legislation, meanwhile, is causing major indigestion to executives at state and municipal plans. Besides requiring public funds to publicly disclose their finances, the measure would bar the federal government from bailing out public plans and deny federal tax exemption to bonds issued by government entities that don't comply with the new disclosure requirements.

Lobbyists say the DOL's proposed fiduciary regulations — which are open for public comment until Jan. 20 — could have a chilling effect on investment advice offered to retirement plan executives by consultants, appraisers and other advisers because the agency's proposal is allegedly so expansive.

But Phyllis Borzi, assistant secretary of Labor for the Employee Benefits Security Administration, said during an Oct. 21 teleconference for reporters on the proposed rule: “If it dries up the schlocky advice that ... fiduciaries are getting, I don't have a problem with that.”