retirement plans today – an update for the plan sponsor
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11Roadways to Retirement
Retirement Plans Today –An update for the plan
sponsorPresented by:John Smith, Vice President
First National Bank315-555-6000
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A quote“The President has proposed the creation of Employer Retirement Savings Accounts (ERSAs) to simplify employer-sponsored retirement plans. ERSAs would consolidate 401(k)s, SIMPLE 401(k)s, 403(b)s and 457 defined-contribution accounts. They would be merged into a single plan that can be easily established by any employer.
The simplified ERSA addresses the number one concern we hear from small business about 401(k)s and other retirement savings plans—that they are too complicated! And through simplification, ERSAs would lower administrative costs of the plans.”
- Elaine Chao, U.S. Secretary of Labor, at ASPPA Conference Washington , D.C.April 26, 2005
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…What actually
happened
Pension Protection Act of 2006
401(k), 403(b), 457 plans remain very different
New complexities in the regulations
New safe harbors
New notice requirements
New communication, disclosure rules
New provisions pertaining to advice
New rules for automatic enrollment and default investment vehicles
New rules for beneficiaries, IRA rollovers
Bottom line? While there are some positive developments in the new regs, retirement plans have only become more complicated. And we don’t see that changing anytime soon.
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Today’s Agenda
A view of the retirement landscape
Highlights from the PPA
Trends and issues we see with plan sponsors
Ways we can help
A view of the retirement landscape
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Over 62 million Americans now enrolled in 401(k) Plans
Average combined 401(k) balance = $61,000 (per Fidelity Investments)
Average annual income: $27,640 per capita, $44,389 household
That’s 2.2 times annual income for individuals, 1.4 times per household
Considering that most people will need 12 – 15 times annual income to retire one day, that’s a scary thought
Key statistics
at a glance
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Average company contribution = 4.5% of payroll (combining all types of employer contribution)
Avg. Deferral = 5.4% NHCEs and 6.7% HCEs
Avg. Participation Rate = 83% (plans with a match), 70.4% (plans without a match)
Avg. Match = 50% on the first 6%. (This is the most common; 33% pay more).
Avg. # of funds = 18 in 2005, 13 in 2000; only 16% offered 10 or more in 1995
Advice offered = 55.6% (most common in smaller plans)
Key statistics
at a glance
Source: 48th Annual Survey of Profit Sharing/401(k) Council (www.PSCA.org)
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Automatic enrollment = offered by 10.5% of all plans (2004 survey)
– Likely to increase dramatically
42.1% of plans are self-trusted; 36.3% use Bank trustees; 21.6% use non-bank trustees (small plans are more often self-trusted, while larger plans usually employ a corporate fiduciary: 80.1%)
92.3% of plans offer Internet access
Key statistics
at a glance
Source: 48th Annual Survey of Profit Sharing/401(k) Council (www.PSCA.org)
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A dramatic increase in Automatic Enrollment
Plan size/Participants 1-49 50-199 200-999 1,000-4,999 5,000+ All Plans
% of Plans 2004 0.9% 3.4% 9.8% 18.2% 30.6% 10.5%
% of Plans 2005 3.5% 8.1% 19.1% 23.9% 34.3% 16.9%
Default Deferral Percentage with Auto Enrollment
Default Deferral % of Pay 1% 2% 3% 4% 5% >5%
Percent of Plans 3.2% 15.4% 60.3% 10.9% 3.2% 7.1%
PSCA Survey: Reported in Defined Contribution Insights Sept / Oct. 2006 issue
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Lifestyle orTargetBalanced
Stable Value
Money Market
The Default Fund option for auto-deferrals
37% LifestyleOr TargetedMaturity Fund
17% Balanced Fund
30.3% Stable Value Fund
9.7%MoneyMarket
PSCA Survey: Reported in Defined Contribution Insights, Sept/Oct 2006 Issue
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56% passed test without adjustments or advance limitations on deferrals
9.5% passed by prospectively limiting HCEs to a lower contribution percentage (announced at beginning of year)
8.0% passed by limiting HCEs to a lower percentage of pay as stated in the plan’s design
19.7% passed by paying refunds to impacted HCEs
3.2% passed by re-characterizing HCE excess amounts to a non-qualified plan
13.1% passed through bottom-up QNECs or other approaches
ADP testing
remains a battle
Source: 48th Annual Survey of Profit Sharing/401(k) Council (www.PSCA.org)
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Average 401(k) balance: $22,586
On average, 2,100 calls to PSRs per month (approximately 2.6% of participants opt out in any given month, or 31% in any given year)
Distributions now average 6-7% of plan assets each year (including all types)!
From our book of
business…
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Loans are available in 86% of 401(k) plans as a whole (79% for plans with < 200 employees)
For plans with a loan feature, approximately 24% of participants have a loan outstanding
Average loan amount is $6,368
For plans with loans, loans account for 2% of plan assets
The big challenge: how to keep loans from taking on a life of their own, and how to keep plan assets invested for retirement
Loans
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Distributions 45.5%
Help with loans 18.9%
Account Balance Inquiries 5.1%
Hardship 4.9%
Address Changes 4.1%
Help with PIN 4.0%
Investment questions 3.3%
Statements 2.1%
Website questions 1.8%
Verify Fax 1.1%
Sponsor calling 0.7%
Census questions 0.6%
VRU help 0.2%
Other 7.8%
100.0%
When participants ask for help (opt-out calls to our call
center)
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Last five years in
the market
The DJIA (Dow Jones Industrial Average)
The DJIA (Dow Jones Industrial Average)
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Last five years in
the market:
changing dynamics
Annualized Returns for as of 9/30/2006for various Morningstar categories
1 year 3 years 5 years 10 years
Large Cap Blend
9.15 11.62 6.59 7.62
Mid Cap Blend
8.16 14.77 12.35 10.70
Small Cap Blend
7.62 15.63 13.63 10.62
Foreign Large Growth
17.65 19.57 12.37 5.94
Highlights from the Pension
Protection Act
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Pension Protection
Act of 2006
Background
– Passed by House July 28, 2006
– Passed by Senate Aug. 3, 2006
– Signed into law August 17, 2006
Affects all qualified retirement plans, IRAs, 403(b) plans, 457 plans
Effective dates vary by provision
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Defined Contributi
on Provisions
EGTRRA permanence – 2010 sunset eliminated
Contribution and deferral limits
Catch-up contributions
Expanded portability
Automatic rollovers
– State laws preempted !
Qualified Roth contribution program
Saver’s credit
Faster vesting for matching contributions
Restrictions regarding reducing future benefits
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A new safe-
harbor for automatic enrollmen
t!Minimum
Maximum
Yr. 1
Yr. 2
Yr.3
Yr. 4+
3%
4%
5%
6%
10%
10%
10%
10%
(Effective plan years after 12/31/2007)Automatic deferrals
Automatic deferral increase
– Initial deferrals: 3% minimum
– Increased annually to 10% maximum
Matching or non-elective contributions
Notice to employees
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Need not apply to current employees with election in effect or those who affirmatively elected not to participate
Auto election must cease to apply if the employee makes an affirmative election or election out of the deferral.
Defaulting the default option concern: Not knowing who made an affirmative election to the old default fund can be covered by disclosure and providing time to make another affirmative election.
New safe harbor, cont’d
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The employer
contribution side of the new Safe Harbor
Matching or nonelective contribution
– Matching contribution
• 100% of deferrals up to 1%, plus
• 50% of deferrals between 1% and 6%
or
– Nonelective contribution
• at least 3% of compensation
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Defined Contributi
on Provisions
(cont.)
Notice to employees
– Right to opt out of automatic enrollment
– How automatic enrollment contributions will be invested
– Timing – reasonable opportunity to make an election
Other
– Employees will have the right to opt out and request return of automatic deferrals within the first 90 days of being automatically enrolled.
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Defined Contributi
on Provisions
(cont.)
Investment advice options enhanced
– “Fiduciary adviser” defined
– Solving the advice issue with two alternatives (computer models or level compensation)
– Annual audit of advice program
– Notice requirements
Default investment guidance required of DOL
– within 6 months of enactment
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Defined Contributi
on Provisions
(cont.)
Periodic benefit statements
– (Generally effective plan years after 12/31/2006)
• Quarterly for self-directed accounts
• Annually for other accounts
Simplifies Form 5500 filing
– (Effective plan years after 12/31/2006)
• Form 5500-EZ threshold raised to $250,000
• Simplified Form 5500 for plans with 25 or fewer participants
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Defined Contributi
on Provisions
(cont.)
Provides for retirement plan rollovers directly to Roth IRAs (Effective after 12/31/2007)
– QRPs, government 457(b), 403(b) plans
– Roth IRA conversion rules apply
– Taxable portion taxed in year rolled over
Nonspouse beneficiaries may roll plan assets to IRAs (Effective for distributions after 12/31/2006)
– QRPs, government 457(b), 403(a), 403(b) plans
– IRA maintained as “inherited” IRA
– Cannot roll to nonspouse’s own IRA
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Defined Contributi
on Provisions
(cont.)
Greater portability of after-tax assets between employer-sponsored plans(Effective after 12/31/2007)
– Plan must separately account for after-tax assets
– Opens door for direct rollovers of Roth 401(k), 403(b) accounts
Hardship distribution definition includes nonspouse, nondependent beneficiary hardships (Effective on date of enactment)
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Defined Contributi
on Provisions
(cont.)
Extends distribution notice period – 402(f) noticeto 180 days (Effective plan years after 12/31/2006)
Allows penalty-free distributions for guardsmen and reservists (Effective after 9/11/2001)
Called to active duty after Sept. 11, 2001 and beforeDec. 31, 2007
Called for 180 or more days, or for indefinite period
Distributions from IRAs, or of deferrals made to 401(k) plans, 403(b) plans, and certain pre-ERISA trusts
2-year repayments to IRAs
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Defined Contributi
on Provisions
(cont.)
Accelerates vesting in DC plans, top-heavy vesting schedules apply to all DC plans
– 6 year graded or 3 year cliff
IRS has authority to modify sanctions under EPCRS (correction program)
Prohibits forcing participants to purchase company stock with Employee contributions
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Defined Contributi
on Provisions
(cont.)
Missing participant relief – PBGC
Employer security diversification enhanced
Penalty and bonding limits changed
Mandates qualified domestic relations order (QDRO) regulations (timing)
Plan amendments – 2009
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IRA Provisions
EGTRRA provisions made permanent
Increased IRA, SEP, and SIMPLE contribution limits
Catch-up contributions
Expanded rollovers
Saver’s credit
Small employer plan start-up credit
Trends and issues we see with
plan sponsors
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The “juggling act” for today’s Plan Sponsor
Shifting needsOf
Baby Boomers
Shifting needsOf
Baby Boomers
Keepingplan document
up-to-date
Keepingplan document
up-to-date
Fund selection,review processFund selection,review process
Participant education /
advice
Participant education /
advice
Satisfying404(c)
Satisfying404(c)
Fiduciaryresponsibility
Fiduciaryresponsibility
Corporate goalsand objectives
Corporate goalsand objectives
Maximizingbenefits to
key EEs
Maximizingbenefits to
key EEs
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“Can you get me ‘out of the middle’ on loans, distributions and other activities?”
“I don’t want to be the one telling participants how to invest.”
“Who are the fiduciaries to our plan?”
“What is 404(c) again?”
Still a lack of understanding over fees
Best intentions versus actual execution: ongoing investment review, due diligence
Concerns we hear
in discussion
s with prospects
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“Do we really need a Trustee? Can’t we
just buy an insurance policy?”
Regulations have become quite complicated
IRS, DOL audit programs are more aggressive, and automation / computerization has facilitated this trend
Cost of “doing it wrong” is higher than ever before
Many retirement programs have multiple firms involved, which can place ultimate accountability back with the plan sponsor
Until they invent an insurance policy that will jump out of a file cabinet and do these things, it is far from enough
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Real-life circumstan
ces
Question of whether an investment-knowledgeable committee can be assembled internally
– Sporadic / inconsistent fund review process
– Committee essentially “picks the hot funds”
Much time was spent to create an IPS, but it was never followed up
A few vocal / influential participants create a menu that is cluttered with options, confusing everyone else
Individual employees unwittingly ended up serving as trustee – creating personal liability
Significant balances reside in money market fund due to inertia (as opposed to a deliberate choice)
Lack of understanding that ensuring reasonableness of fees is just as important as monitoring fund performance in ‘fiduciary duty’
Thinking 404(c) is automatic, or initiated by the provider
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Make the technology do more
– Plan sponsor site becomes a workstation; online delivery of all reports
– Changing deferral rates (larger plans)
– Take “speedbumps” out of loan, distribution process
– Eliminate many paper forms
– Place SPD, fact sheets online
– Electronic enrollment
– Enabling plan sponsor site for transactions
Do more for the plan sponsor
– Eligibility determination
– Approving hardships
– One-on-one calls with participants to review plan and funds
– Online guidance and education
HR trends
How we can help
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As Trustee, we ensure that the overall program meets the client’s needs. We assist with many fiduciary and plan-related responsibilities, including fund selection / review and ERISA 404(c). We meet with participants on a regular basis to help them understand the plan and make sound investment decisions. We are the “eyes and ears” of our program on the ground, giving clients the onsite attention they need while BPA handles the operational, administrative and back-office functions.
BPA-Harbridge provides daily valuation administration to each plan. This includes plan document services, plan design work, ongoing compliance testing, and processing of contributions, distributions and other activity. Most day-to-day operational matters are handled by BPA, in coordination with HR and the Trustee. The result is an extremely efficient program with no duplication of effort.
A wide array of mutual funds are offered in our program -- including equity, international, fixed income and stable value options from over 100 different fund families. BPA deals directly with fund families to buy and sell mutual funds per the instructions of participants on the voice response and internet systems.
Oursolution
First National BankFirst National Bank BPA-HarbridgeBPA-Harbridge
Mutual FundsMutual Funds
Plan Sponsors
Plan Sponsors
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Simplifying life for Human
Resources(administration
versus recordkeeping)
We track all employees on our system (not just those with a balance), and receive full census with each transmission
We perform a variety of edit checks then notify employer of amount to be funded
We determine eligibility by source, for all money types within plan
Online enrollment, deferral rate changes
Vesting updates with each contribution cycle
Streamlined process for loans, distributions
Greatly reduced workload on HR for year-end compliance testing, Form 5500 process
Ability to run ADP, ACP tests on demand
Interacting with HR through “Action Items” in plan sponsor website
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The latest features
and technology
Bilingual voice response unit, participant website, and sponsor website (English and Spanish)
Personalized rate of return (statements and web)
Automatic rebalancing
Automated loan and distribution processes
Online fact sheets and prospectuses
Quarterly statement archive (e-delivery)
All participant forms, SPD, confirms, and newsletter posted online
Self-directed brokerage account option
Robust plan sponsor workstation
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True open architectur
e on investment
s
Over 135 fund families currently traded across our platform (1,200+ funds in total)
No proprietary funds
Able to select the strongest possible mix of investments for the plan
Full range of A, Advisor and R shares, plus institutional shares
A critical distinction versus “asset gatherer” retirement programs
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A high level of
plan design and
ERISA expertise
Supporting every type of qualified retirement plan (DC and DB), as well as non-qualified plans
– Unbiased advice, since we handle all plan types
– A “total retirement solution” under one roof
Plan consulting offered as part of each engagement (initial and ongoing)
Peace of mind, simplified approach to compliance and communication
Clients expect us – as retirement professionals – to advise them on compliance and technical matters. We take that role seriously.
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Answering the call
on participan
t education
As Trustee, we conduct regular, onsite education meetings (semi-annually, quarterly, etc)
Quarterly statements and newsletters
Education and guidance via participant website
Enrollment booklets, workbooks, slide rules and other printed pieces (some from mutual fund families)
Customizable education pieces for various needs
Collaborating with HR to deliver the message, using a variety of media
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Other roles we play as Trustee
Bringing a much-needed fiduciary process to client retirement plans
– Constructing high-quality, diversified fund menus
– Creating and living out an Investment Policy Statement
– Assistance with ERISA 404(c)
Helping participants understand their plan, become energized to invest and select an appropriate mix of investments
Plan design assistance and consultation
Serving as relationship manager and the local point of contact
Brings the “best of all worlds” to a plan sponsor
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Thank you for your
participation today!
For more information, please call John Smith at First National Bank, 315-555-6000. Email is johnsmith@fnb.com
We welcome the opportunity to provide a proposal for your plan
Open for Q&A / discussion
Thank you for your participation!
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