FEDERAL SAVINGS POLICY AT A CROSSROADS Randy Hardock Davis

1
FEDERAL SAVINGS POLICYAT A CROSSROADS Randy
Hardock Davis Harman LLP Schwab Plan
Administrator ServicesNational
ConferenceSeptember 9, 2005
The Benefits Group of Davis Harman LLP
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Overview

• Political Landscape
• Budget Picture
• Social Security Reform
• Defined Benefit Crises
• Defined Contribution Changes
• SEC Activity
• Tax Reform

3
Political Landscape

• Republican Electoral Victory
• Bush Focus on Legacy and Interest in Fundamental
  Reforms
• Philosophical Underpinnings
• Individual Initiative and Control
• Ownership/Wealth Creation
• Skepticism Re Government and Employment-Based
  System

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Key Constraints on Control

• Bush Mandate Unclear and Getting Stale
• Growing Divides in Republican Ranks
• Closely Divided Electorate Leads to Decisions
  Based on Politics Not Policy
• Structural Impediments Senate Rules
• Tough Issues No Easy Answers No

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Budgetary PoliticsIts In the Numbers -- Part I
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Social Security Reform

• Bush Game Plan and Reform Proposals
• Pressure Red State Democrats
• Voluntary Personal Accounts
• Progressive Indexing
• Stakeholder and Public Perspectives
• Critics Have Been Active and Apparently
  Successful
• Congressional Response To Date
• Debate Among Republicans
• Unity Among Democrats

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Defined Benefit Crises

• 30-Year Treasury Rate Replacement
• Airline Pension Problems
• PBGC Solvency Concerns
• Plan Funding Reforms
• Hybrid Plans Litigation

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Pension Funding Proposals

• The Bush Proposals
• Tough New Funding Rules
• Higher PBGC Premiums
• New Disclosure Requirements
• Employer Views
• The Legislative Dance
• Four Committees Share Jurisdiction
• Long Road Ahead

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Legislative Process(1) on Pension Legislation A
Long Road Ahead
President signs into law
?
Legend
Final committee draft submitted for consideration
? Action still required
Senate Floor ?
Returned to Senate for vote
House of Representatives
?
Agreed Upon Bill Conference Report ?
Returned to House for vote
House of Representatives
?
Conference Committee ?
House Rules Committee ?
Submit single House Bill
100 Senators Offering Amendments
?
Submit single Senate Bill
House Ways and Means Committee ?
Senate Floor ?
House Ed, Workforce Committee (HR 2830)
Attempt to Merge Bills
Senate HELP Committee ?
Senate Finance Committee (S. 219)
____________________ (1) Diagram meant to
increase understanding of legislative process and
highlight complexity of passing a bill into law.
This does not represent the only method in which
pension reform can be passed and should not be
relied upon for accuracy and/or investment
decisions. Based on initial work by Gordon
Latter.
August 2, 2005
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Defined Benefit Funding Issues

• Tougher Funding Rules w/ Generous Transition
• 30-Year Treasury Rate Replacement -- Corporate
  Bond Yield Curve
• Other Changes in Definition of Liability (Spot
  Valuation, Mortality Tables, and Lump Sums)
• Looser Deduction Rules
• Disclosure
• PBGC Premium Increases
• Credit Rating, Credit Balance, and Cash
  Balance?

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Hybrid Plans Proposals

• Bush Administration/Finance Committee
• All Changes Prospective Only No Inference
  Language For Past
• Age Discrimination Design Clarification
• No Whipsaw If Market Rate Of Interest
• Special Conversion Rules (Must Offer Choice,
  Greater Of, Or 5-year Hold Harmless)
• Education and the Workforce Committee
• All Changes Prospective Only No Inference
  Language For Past
• Age Discrimination Design Clarification
• No Whipsaw If Market Rate Of Interest
• No Special Conversion Rules (Wear-Away Permitted)

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Hybrid Plans Next Steps

• HELP Committee Rumored Package
• Prospective And Retroactive Changes With
  Litigation Carve-out
• Age Discrimination Design Clarification
• No Whipsaw If Market Rate Of Interest
• Special Conversion Rules (Must Offer Choice,
  Greater Of, Or 5-year Hold Harmless)
• Retroactive Conversion Protection If Satisfy
  Special Conversion Rules
• Ways Means Committee?

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Possible DC Plan Changes

• Company Stock and Other Enron-Motivated Changes
• Auto-Enrollment Incentives
• DB(k)
• Annuitization Incentives
• ERISA Reforms (Advice and PT Exemptions)
• Simplification

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SEC Activity

• Agency in Transition Donaldson to Cox
• Response to Enron/Worldcom/Etc. Is Continuing
• Late Trading -- Hard 4 p.m. Close
• Market Timing -- Redemption Fees
• 12b-1 Fees
• Pension Accounting?

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Tax Reform

• Presidents Agenda
• Outlook -- The Tax Train Wreck Is Coming
• 2001 Tax Cut Permanence Most Retirement Changes
  Expire 2010
• Bush Advisory Panel and Time Line
• LSAs, RSAs, and ERSAs
• Implications for Employment-Based System
• Implications for Business Community

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1986 Act Impact on Corporations

• Net Revenue Impact (1987-91 millions)

Source Clark Consulting
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Recap

• Social Security Reform on Life Support
• Defined Benefit Changes Likely
• Defined Contribution Employer Stock Changes
  Likely Other Changes Possible
• SEC Activity Will Slow
• Tax Reform Debate Is Inevitable
• Debate Will Start Fundamental, But Trend
  Incremental
• Be Ready -- Everything Will Be In Play

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FEDERAL SAVINGS POLICYAT A CROSSROADS Schwab
Plan Administrator Services National
ConferenceSeptember 9, 2005

• Randy Hardock
• Davis Harman LLP
• [phone]
• rhhardock_at_davis-harman.com

This presentation is prepared by, Randy Hardock
of Davis Harman LLP,  which is independent of
Charles Schwab Co., Inc. and its affiliate The
Charles Schwab Trust Company ( collectively, "
Schwab").  The information is not intended to
provide tax, legal or investment advice.  Neither
the presentation, nor any information or material
contained in it may be copied, assigned,
transferred, disclosured or utilized without the
express written consent of Schwab.
The Benefits Group of Davis Harman LLP