SST Benefits Consulting AGRIP / CAJPA 2001 SST Benefits Consulting AGRIP / CAJPA 2001 Bill Tugaw,...

SST Benefits Consulting

AGRIP / CAJPA 2001


AGRIP / CAJPA 2001

• Bill Tugaw, President• SST Benefits

Consulting & Insurance Services, Inc.

• “Defined Contribution Plans 457, 403(b) and 401(k) & 401(a)”


Overview

• Public Sector / Nonprofit Retirement Plans

• Small Business Jobs Protection Act of 1996

• Fiduciary Responsibility

• ACWA / JPIA Project

• Future Changes


Pubic Sector / Nonprofit Retirement Plans

• Defined Benefit Plans– CalPERS– 1937 Act County

• Defined Contribution Plans– §457 Deferred Compensation– 403(b) Tax Deferred Annuity– 401(k) Cash or Deferred Arrangement– 401(a) Defined Contribution


What is §457 Deferred Compensation?

• Government Employees

• Voluntary Salary Deferral

• Up to 25% of pay - $8,500 Annual Maximum

• Defined Contribution Retirement Plan

• Self-Directed


What is 403(b) Tax Sheltered Account?

• Teachers and Eligible Non-Profits

• Voluntary Salary Deferral


• Defined Contribution

• Loans

• Potential Early Withdrawal Taxation


Public Sector 401(k)

• Profit vs. Surplus

• Tax Reform Act of 1986

• Tax Payor Relief Act of 1997

• Loans

• Potential Early Withdrawal Taxation


What are 401(a) plans?

• Proliferation since Taxpayer Relief Act of 1997 exempted public sector from nondiscrimination testing

• Mandatory or Voluntary Deferral


• Vesting


401(a) Guidelines (from ICMA RC)

• Qualified Retirement Plan

• Contributions may be made by employer or employee

• Employee contributions may be structured with pre-tax dollars

• Earnings accrue tax-deferred

• Employee my contribute to both a 401(a) and 457/403(b) plan


401(a) Guidelines, continued

• Employee contributions must b e made with after-tax dollars unless the employer elects the “pick-up provision”. If the pick-up is elected, the contribution made by the employee must be mandatory and all employees in a plan must contribute the same amount or percentage of base pay.


401(a) Guidelines, continued

• There is a one time option to be excluded from the plan if a mandatory contribution is required.


401(a) Plan Features

• Each participant has their own account

• Employer contributes a percentage of base salary and may establish a mandatory employee contribution

• Employer contribution are made pre-tax

• Earnings on the assets grow tax deferred

• Taxes are paid upon withdrawal

• Employer may establish a vesting schedule


401(a) Plan Features, continued

• Employer may permit loans and establish loan criteria

• Employer may establish more than one 401(a) plan



• Everyone within each plan must be treated equally– Employer must contribute the same amount to

everyone in a plan– Employees mandatory, pre-tax contribution

must be the same amount for everyone in a plan

• One-time option to be excluded from the plan upon inception (if mandatory)



• Early withdrawals may be subject to a 10% early withdrawal penalty– Penalties not assessed in the event of

• Death

• Disability

• Equal payments over single or joint life

• Payments made after age 59 1/2

• Payments made after separation of service after age 55


Vesting

• Employee’s contributions and associated earnings are always 100% vested

• Employer may establish a vesting schedule for employer contributions


Loans

• Minimum loan amount $1,000

• Only one loan per year, maximum of five outstanding loans

• Maximum loan amount for all outstanding loans is the lesser of $50,000 or 1/2 of your vested balance

• Both the principal and interest payment go directly to the employee’s account


401(a) Benefits

• May contribute to both a 401 and 457 plan

• Participant directed investments

• Loans from participant’s account may be allowed

• Portable to another 401(a) or IRA

• Flexible payout options


401(a) Objectives

• Provide qualified pension plan atlternative to CalPERS– Benefits younger participants– Attract employees from private sector

• Alternative to Social Security


401(a) Objectives - continued

• Alternative to existing defined benefit plan• Enhanced pension benefit for defined group• Enhanced pension benefit for a broad

employee group– Broad salary range makes mandatory EE

contribution more difficult for lower wage earners– Annual step increases in EE match can make

affordable


401(a) Objectives - continued

• Provide alternative to costly defined benefit plan enhancements

• Encourage organization wide EE participation in retirement savings


401(a) - Things to Consider

• What is the objective of your group?

• Do you have a definable group?

• If you want a mandatory, pre-tax employee contribution, can everyone in the group agree on the percentage of base pay?

Defined Contribution Plans

A New Game with New Rules


Small Business Jobs Protection Act of 1996

• Reaction to Orange County

• SBJPA created a structure– Trust

– Custodian

– Annuity

• No standard of conduct


Who is a Fiduciary?

• Fiduciary by Title (Trustee)

• Fiduciary by Conduct (discretionary control)


Who is a Fiduciary?

The Employees Retirement Income Security Act of 1974 (ERISA) defines a fiduciary as any person who has any power of control, management, or disposition over the funds or other property of any employee benefit plan.

ERISA made fiduciaries personally liable for their actions.


What Fiduciary Protections are Available?

• California Government Code Section 995 et seq.– Defense of public employees by the public

employer

• California Government Code Section 825 et seq.– Indemnification of public employees by the public

employer– Potentially no punitive damages


What Fiduciary Protections are Available?

• Fiduciary Liability Insurance– Waiver of Recourse provision for plan

fiduciaries– Plan assets cannot be used to pay non-recourse

coverage (exclusive benefit of participants & beneficiaries)


Practical Steps to meet Fiduciary Liability

• Plan design complies with federal/state laws and fair to all– current laws– new legislation

• Develop an investment policy statement

• Structured process to select or remove vendors/investments



• Establish procedure for monitoring performance– Benchmark indices

• Educate and communicate to participants regarding plan restrictions and investment options

• Decisions made consistently



• Due process to resolve disputes

• Require periodic audit– independent financial

audit

– compliance audit of contractors



• Meet minimum requirements set forth in ERISA 404(c) - “safe harbor”– offer at least three diverse investment options with

different risk & return characteristics– participants must have discretion over investment

decisions– periodic investment changes must be allowed – communicate information– monitor investment performance


Training

• Trustee• Committee Members• Staff• Management• Union Leadership


457 University

• Basic 457 Parameters• IRS Parameters• Employer Options• Responsibilities• Hardship Withdrawals• Selection of Providers• Future Changes

ACWA / JPIA Project


Project Goals

• Research §457 Competitiveness– Investment Returns– Expenses and Fees– Administrative Service

• Analyze Current §457 Plan Providers

• Involve Plan Participants


Project Description

• Solicit Request For Proposal (RFP) Bids

• Determine Primary Selection Criteria– Historical Investment Returns– Investment Expenses and Fees– Administrative Bookkeeping Services


Project Description

• Determine Secondary Selection Criteria– Support Services/Customer Guarantees– Information / Report Services– Transition Services / References


Competitive Analysis

• §457 “Bundled” Providers Solicited

• Respondents– Current Size of ACWA/JPIA Plan– Number of Participants / Total Assets


Advanced RFP Technology

• Automated RFP – “Grid” Comparisons

– Data Management

– Graphic Representation


Primary Criteria

• Investment Standards Weighting– Stable Value (Savings

Account)

– Growth & Income Funds

– Growth Funds


Primary Criteria - cont.

• Investment Time Horizon

• 5 Year Performance @ $100 per month

• 5 Year Performance @ $10,000 Lump Sum

Primary Criteria - cont.

•Expenses and Fees


Net Return to Participant

Investment Fund Fees & Expenses

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

Growth & Income Growth

Provider A

Provider B

Provider C

Provider D



Growth & Income - $100 Periodic Payment

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

1994 1995 1996 1997 1998

Provider A

Provider B

Provider C

Provider D



Growth - $100 Periodic Payment

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

1994 1995 1996 1997 1998

Provider A

Provider B

Provider C

Provider D


Current Provider Expense & Fee Reduction

Current Provider Before/After

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

G&I Average Growth Average

Before

After

• Actual RFP currently in process

• No decline in services offered

• Increased communication commitment


Secondary Criteria

• Group Meetings• Participant Education• Face-to-Face

Counseling• Informational Services

– Internet Capabilities

– Voice Response

– Reporting Capabilities


•Purpose - Finalist Interviews

• Negotiate Best Proposal

• Transform Weaknesses to Strengths– Enhance Investment Choices– Reduce Expenses and Fees– Eliminate Deferred Sales Charges

• Clarify Issues and Concerns

• Provide Advance Notice to Respondents


Committee Options

• Determine Available Provider Options– Retain Incumbent Provider(s)– Select New Provider(s)– Retain Incumbent and Add New Provider(s)


Improvement to Plan

• Reduced Fund Expenses

• Eliminated Deferred Sales Charge

• Provided a Self-Directed Brokerage Option


Self-Directed Brokerage Option

• 1600+ Mutual Funds

• $50 Annual Fee

• Potential Transaction Charges

• “Big Guy” Letter


ACWA / JPIA Project


Future Changes

• Legislation– Maximum Amount– Portability– Withdrawal Options– Distribution Options


Review

• Public Sector / Nonprofit Retirement Plans

• Small Business Jobs Protection Act of 1996

• Fiduciary Responsibility

• AWCA / JPIA Project

• Future Changes

AGRIP / CAJPA 2001

Visit us at www.sstbenefits.com

4966 El Camino Real, Suite 200

Los Altos, CA 94022

650-940-1111 Fax 650-940-1583

SST Benefits Consulting AGRIP / CAJPA 2001 SST Benefits Consulting AGRIP / CAJPA 2001 Bill Tugaw,...

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