Defined Contribution Plans

Basic training for sales people who are new to selling

retirement plans

Why do employers offer retirement plans?

Attract and retain employeesAdditional form of compensation Help employees plan for their financial futureProvide employees means of saving on tax-

favored basis (a huge advantage in building wealth for retirement)

Build employee loyalty and commitment Means of incenting employees and rewarding

loyalty (vesting schedule, company stock)

What are some of the options available to employers?

401(k) plans403(b) plansProfit sharing plans (401(a))

– Cross tested plansESOPs, kSOPsDefined benefit plansCash balance plansSIMPLE plans, SEPs

What differentiates the various programs?

Whether the employer wishes to promise a stated benefit at retirement age, or simply contribute to employee accounts and let market experience determine the ultimate benefit

Whether employee contributions will be permitted Whether employer contributions will be required or

discretionary The amount an employee can contribute each year The amount that can be deducted in a given year Whether a “vesting schedule” can be used Whether the benefits will be portable Other factors

What have been some general trends in the retirement plan

landscape?

Shift from DB to DC Move to participant direction Shift to daily valuation Internet access for participants, plan sponsors Demand for new types of investments Moving from fixed ER contributions to matching

formulas Tying ER contribution to profits Move to safe harbor designs

Why are 401(k)s the most popular program today?

Allow significant deferral of employee compensation ($16,500 plus $5,500 catch up)

Interest, dividends and capital gains not taxed until money is withdrawn

Balances are portableNew access technologies empower

participantsTax-deferred status gives 401(k) the

greatest leverage for investing towards retirement

Just how popular are 401(k) plans?

39 million 401(k) participants in U.S.$1.7 trillion in 401(k) assets (one fifth of all

mutual fund assets)45% of new mutual fund assets come from

401(k) plansAverage 401(k) balance now $43,000Availability of 401(k) has become

significant factor in job decision for employees

What are the tax consequences?

Pre-tax deferrals considered employer contributions Funds contributed by employee before federal (and

state) taxes are applied, reducing taxable income for current year

All contributions placed in trust; become plan assets protected by ERISA

Earnings, dividends and capital gains accumulate on tax-deferred basis

At retirement, funds withdrawn are taxable to employee as ordinary income

Often in lower tax bracket at retirement

What are the components of a 401(k)?

Plan document: establishes plan and spells out rules (contributions, vesting, loans, etc.)

Plan Administrator: handles day-to-day administration of plan as articulated in plan document

Participants: employees with balances in a 401(k) Fiduciary: a person with discretionary authority or

control over plan assets, or a plan administrator; must act in best interest of plan participants

What is the role of the plan sponsor in a 401(k)?

Determine plan design in creating plan document Oversee policy, procedural and administrative rules of plan

operation (e.g., adjudicating hardship withdrawals, determining loan policies, etc.)

Perform plan administration, or contract with outside firm (most common)

Keep plan in compliance (recordkeeper generally performs compliance tests)

Effect payroll changes and communicate payroll data to recordkeeper

Make contributions to trust in timely manner Communicate plan to participants

What is the role of the plan trustee?

Safeguard plan assets and hold in trust Process contributions, distributions, transfers and

other investment transactions Perform tax reporting on distributions Monitor service provider(s) to ensure plan

compliance Depending on arrangement, oversee plan

investment selection process Educate / counsel participants on plan investment

choices

What is the role of the plan recordkeeper?

Administer plan per terms of plan document Provide daily or periodic valuation of accounts Allocate earnings, losses, dividends, capital gains

to participant accounts Issue plan and participant statements Perform compliance testing and required reporting Depending on arrangement, assist with plan

consulting and plan document support

What’s the difference between ‘balance forward’ and daily

valuations?

Balance forward: Participant accounts valued periodically (e.g., quarterly, semi-annually)– Uses accrual accounting

Daily valuation: Participant accounts are valued on a daily basis– Uses cash (or share) accounting; ignores accruals– Every transaction is translated into its effect on the

participant’s share holdings– Since fund NAVs are known daily, value is easy to calculate– Daily valuation usually involves voice response unit (VRU)

What are the key advantages of daily valuation?

More frequent inquiry and trading Faster statements (usually 15 business days) Faster payout of distributions, loans Automation and efficiencies -- eliminates much

of the paper flow, answers routine questions, helps HR be more efficient

Addresses coordination problems of multi-state or dispersed employee populations

Sense of empowerment to participants Fairness issues

Daily valued 401(k) plans: A superior benefit program

Employees have the most efficient way to save (401(k))

Many options for employer contributions (discretionary, matching, or none at all)

Employees are empowered; perceive the most value in their plan

Technology streamlines many tedious tasks Retirement plan becomes an attraction and

retention tool

Banks partnered with Federated Investors

State-of-the-art program includes daily valuation and voice response technology

Entire product managed and delivered by First Citizens

Local, personalized service Strong commitment to employee education One of nation’s ten largest fund families Partnership with specialty recordkeeper who

administers 120,000 participants Full slate of investment options Cost-effective pricing