1 Keys to Deliver Superior Customer Service Karen Gridley, KMG Enterprises, LLC Business Owner – Professional Speaker, Coach & Consultant Karen Gridley, KMG Enterprises, LLC Business Owner – Professional Speaker, Coach & Consultant Karen Gridley specializes in helping companies and professionals who value work-life balance, personal leadership skills and high-performance. Utilizing her vast experience in service-based industries; combined with her background as a former scientist and a Recovering Excuse Maker™ herself; Karen gives practical tools to implement immediately for diverse teams and business professionals. Individuals and teams improve performance, decrease stress and know what they do makes a difference as they save time and increase the bottom line. Clients rave about her down-to-earth, matter-of-fact and humorous style as they gain insights and take action. She is the owner of KMG Enterprises, LLC.
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Keys to Deliver Superior Customer Service - … · 1 Keys to Deliver Superior Customer Service Karen Gridley, KMG Enterprises, LLC Business Owner – Professional Speaker, Coach &
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1
Keys to Deliver Superior Customer Service
Karen Gridley, KMG Enterprises, LLC
Business Owner – Professional Speaker, Coach & Consultant
Karen Gridley, KMG Enterprises, LLC Business Owner – Professional Speaker, Coach & Consultant
Karen Gridley specializes in helping companies and
professionals who value work-life balance, personal leadership
skills and high-performance. Utilizing her vast experience in
service-based industries; combined with her background as a
former scientist and a Recovering Excuse Maker™ herself; Karen
gives practical tools to implement immediately for diverse teams
and business professionals. Individuals and teams improve
performance, decrease stress and know what they do makes a
difference as they save time and increase the bottom line.
Clients rave about her down-to-earth, matter-of-fact and
humorous style as they gain insights and take action. She is the
• Age Discrimination started with interest credits
• IBM District court
• Cash balance plans are age discriminatory
• Younger participants have more interest credits at retirement
• Appeals Courts & Congress: not the case
• But what if interest credits really high? (15%?)
• At some point, higher interest credits become discriminatory against older participants
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Interest Credits - PPA
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27 Year Old 55 Year Old
Compensation $50,000 $50,000
Interest Crediting Rate 5% 5%
Pay Credit $600 $600
Value of Pay Credit at
Age 62 (5% Growth)
$3,309.61 $844.26
Annuity Conversion at
Age 62
$13 $13
Annuity at Age 62 $254.59 (3,309.61 / 13)
$64.94 (844.26 / 13)
Annuity as % of
Compensation
0.51% (254.59 / 50,000)
0.13% (64.94 / 50,000)
Congress is OK with this.
Interest Credits - PPA
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27 Year Old 55 Year Old
Compensation $50,000 $50,000
Interest Crediting Rate 15% 15%
Pay Credit $25 $25
Value of Pay Credit at
Age 62 (15% Growth)
$3,329.39 $66.50
Annuity Conversion at
Age 62
$13 $13
Annuity at Age 62 $256.11 (3,329.39 / 13)
$5.12 (66.50 / 13)
Annuity as % of
Compensation
0.51% (256.11 / 50,000)
0.01% (5.12 / 50,000)
Congress is not OK with this.
Result: Congress limited interest credits with PPA 2006
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Interest Credits - PPA
• IRC §411(b)(5)(B)(i)(I):
• An applicable defined benefit plan shall be treated as failing to
meet the requirements of paragraph (1)(H) unless the terms of
the plan provide that any interest credit … for any plan year shall
be at a rate which is not greater than a market rate of return.
• A plan shall not be treated as failing to meet the requirements of
this subclause merely because the plan provides for a
reasonable minimum guaranteed rate of return or for a rate of
return that is equal to the greater of a fixed or variable rate of
return.
• See also Reg. §1.411(b)(5)-1(d)(1)(i)
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Interest Credits - PPA
• So: • … shall be treated as failing to meet … (1)(H)…
• A rate in excess of a market rate results in plan DQ
• shall not be treated as failing to meet …this subclause merely because the plan provides for a reasonable minimum guaranteed rate of return
• Statute provides for „reasonable‟ minimum
• Regs appear a bit more restrictive, at least if equity based
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Interest Credits - Regs
• Final regulations provide exclusive list of rates
that qualify as market rates
• i.e., cannot argue something else (e.g. LIBOR
rate) is market rate
• Reg. §1.411(b)(5)-1(d)(1)(iii)
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Interest Credits - Regs
• Acceptable interest rates under final regs
• Fixed rate up to 6%
• Reg. §1.411(b)(5)-1(d)(4)(v)
• First, second or third segment for funding or 417(e)
• Reg. §1.411(b)(5)-1(d)(3); §1.411(b)(5)-
1(d)(4)(iv)
• Treas. rates and COLI, with margins, from Notice
96-8
• Reg. §1.411(b)(5)-1(d)(4)(ii) / (iii)
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Interest Credits - Regs
• Acceptable interest rates under final regs (cont)
• Investment return on plan assets
• If assets diversified to minimize volatility of returns
• Reg references ERISA §404(a)(1)(C):
• “by diversifying the investments of the plan so
as to minimize the risk of large losses, unless
under the circumstances it is clearly prudent
not to do so.”
• Reg. §1.411(b)(5)-1(d)(5)(ii)(A)
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Interest Credits - Regs
• Acceptable interest rates under final regs (cont)
• Investment return on “subset” of plan assets
• Subset diversified to minimize volatility of returns
• 10% limit in subset on employer securities / R.E.
• Market value of assets in subset must
approximate liabilities for benefits to which
subset relates
• Reg. §1.411(b)(5)-1(d)(5)(ii)(B)
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Interest Credits - Regs
• Acceptable interest rates under final regs (cont)
• Investment return on mutual funds (RICs)
• Must be the rate of return on an actual mutual fund
• As opposed to an index
• Not significantly more volatile than US markets
• No industry sector;
• No single country other than U.S.
• OK to track indices such as S&P 500 or Russell
2000 through a mutual fund
• Reg. §1.411(b)(5)-1(d)(5)(iv)
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Interest Credits - Regs
• “Greater of” rates
• In general a plan may not provide an interest credit
equal to greater of two otherwise compliant rates
• Reg. §1.411(b)(5)-1(d)(6)(i)
• Exceptions (discussed herein) exist for
• Certain minimum rates
• Changing from one compliant rate to another
• Post retirement increases
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Interest Credits - Regs
• Acceptable minimum rates
• 4% annual for segment rates
• Reg. §1.411(b)(5)-1(d)(6)(ii)(A)
• 5% annual for 96-8 rates
• Reg. §1.411(b)(5)-1(d)(6)(ii)(B)
• 3% cumulative (not annual) for any rates
• Reg. §1.411(b)(5)-1(d)(6)(iii)
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Interest Credits - Regs
• Reality
• Most new plans are using either
• Fixed rate, or
• ROR on assets, possibly with cap (and/or
floor)
• Or some combination of the two
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Interest Credits - Regs
• What is an interest credit?
• “an interest credit for purposes of this paragraph … means the … adjustments to a participant‟s accumulated benefit under a statutory hybrid benefit formula, to the extent not conditioned on current service …”
• Reg. §1.411(b)(5)-1(d)(1)(ii)
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Interest Credits - Regs
• What is an interest credit?
• Some plans have an “interest credit rate” that is
greater for active employees
• E.g., the rate is 6% while employed but 4% after
separation from service
• Under regs piece dependent on service (i.e. the
extra 2%) not an interest credit
• And is therefore a pay credit and treated as such
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Changing interest rate
• Can interest rate be changed?
• Why would you want to?
• May be having testing issues with current
(otherwise compliant) rate
• Current rate non-compliant
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Changing interest rate
• Relief for Interest Crediting changes
• Interest crediting is a right to which participant is
entitled once the pay credit has accrued
• i.e., once pay credit for a year has been earned,
the right to interest at current rate through
distribution is guaranteed
• Cannot cut future interest credits, even before
they‟re credited
• Except in narrow relief provided in 2014 regs
• Reg. §1.411(b)(5)-1(e)(3)(i)
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Changing interest rate
• OK to change from one compliant rate to another
• Wear-away approach on old balance
• i.e. payout greater of • balance at date of change, plus interest at old rate, or
• such balance, plus pay credits, plus interest at new rate
• But not for those not active (or no longer benefiting) at amendment date.
• Otherwise would be receiving greater of two compliant rates
• Reg. §1.411(b)(5)-1(e)(3)(iii)
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Changing interest rate
• Consider plan using 30-year Treasury rate
• Recall IRS requires .5% accrual to be receiving
meaningful benefit for IRC 401(a)(26)
• 30-year rate for December 2014 is 2.83%
• Consider employee age 37, NRA 62
• Compensation = $50,000; pay credit 2% of comp.
• APR 2015 applicable table = 156.595 (13.05
annual)
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Changing interest rate
• Pay credit = $50,000 * .02 = $1,000
• To NRA = $1,000 * (1.0283 ^ 25) = $2,009.07
• Benefit = $2,009.07 / 13.05 / 50,000 = .31%
• Not meaningful
• What if change interest crediting rate to 5% fixed?
• To NRA = $1,000 * (1.05 ^ 25) = $3,386.36
• Benefit = $3,386.36 / 13.05 / 50,000 = .51%
• Meaningful
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Changing interest rate
• Re change from 30-year rate to fixed rate • Must keep track of pre-amendment balance and
continue to credit interest at 30-year rate
• At date of distribution such balance would be compared to actual balance
• Must track through distribution date since if interest rates rise substantially the old rate could re-appear 10 years later. • Particularly for those receiving no pay credits
• Of course if 30-year rates stay where they are will be non-issue
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Changing interest rate
• Non-compliant rates
• General rule: correct in most straightforward way • Reg. §1.411(b)(5)-1(e)(3)(vi)
• Examples: • Fixed at 7%: reduce to 6%
• 30-year Treasury yield, with floor of 6%: reduce floor to 5%
• Special rules apply for more complicated situations
• In general switch to 3rd segment OK
• Effective January 1, 2017 • Need to amend prior to first day of first plan year beginning on
or after January 1, 2017
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Using ROR
• Why use rate of return (ROR) for interest crediting?
• Goal is to invest assets to mirror crediting rate
• And shift investment risk to employees
• Losses do not create a funding shortfall
• Goal is to simply deposit pay credits
• Especially for multi owner situations
• Ala a money purchase plan!
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Using ROR
• Issues with using ROR
• Potentially lower 415 Limits
• Potentially harder to pass 401(a)(4) / 401(a)(26)
• Interim interest credits
• Potential 411(a)(9) issue
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Using ROR
• It is important to recall that a cash balance plan is a DB plan and IRC §411(a)(7) provides that the accrued benefit is a life annuity payable at NRA
• PPA added IRC §411(a)(13)(A) to allow the accrued benefit to be defined as the account balance in a CB plan, but only for purposes of
• allowing the account balance to be paid as a lump sum - i.e. ignoring §417(e), and
• age discrimination
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Using ROR
• To determine the accrued benefit in a cash
balance plan the account balance is projected to
NRA with interest credits and converted to an
annuity using plan factors
• AB = acct bal * (1 + int) ^ (nra – aa) / apr (NRA)
• If crediting Actual ROR, what is “int” ?
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Using ROR
• IRS position-> project at current ROR
• “The IRS has taken the position that the hypothetical account balance must be projected to normal retirement date using the interest crediting rate in effect on the date the projection is made.”
• IRS hybrid training manual
• Consistent with recent cash balance LRMs
• And §1.401(a)(4)-3(d)(5)(iii)(H) of old 1991 regs
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Using ROR - 415
• CB Plan‟s early retirement reduction performed at
greater of 5% or interest credit rate
• Recall max benefit = $210,000 per year at age 62,
reduced for years of participation less than 10
• Let‟s look at a case where ROR is being used and
• Recall math from earlier slide re change in crediting rate • Pay credit = $50,000 * .02 = $1,000
• To NRA = $1,000 * (1.0283 ^ 25) = $2,009.07
• Benefit = $2,009.07 / 13.05 / 50,000 = .31%
• Not meaningful
• What if interest crediting rate 5% fixed?
• To NRA = $1,000 * (1.05 ^ 25) = $3,386.36
• Benefit = $3,386.36 / 13.05 / 50,000 = .51%
• Meaningful
• Lower rate can cause a26 failure – mitigate with 5% fixed for NHCs
37
ROR – Interim Interest Credits
• 2015 Grey Book Q28
• Under the final hybrid regulations, a plan is not required to provide interest credits to participants whose benefits commence during an interest crediting period before the interest crediting date, but may provide such interest credits. Can a cash balance plan provide an interest credit for the current partial year based on a different acceptable interest credit basis than is used for the full period?
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ROR – Interim Interest Credits
• 2015 Grey Book Q28 (cont.) RESPONSE
• No. Regulation §1.411(b)(5)-1(d)(1)(iv)(D) provides that “. . a plan is not treated as failing to meet the requirements of this paragraph (d) merely because the plan calculates increases or decreases to the participant's accumulated benefit by applying a rate of interest or rate of return (including a rate of increase or decrease under an index) to the participant's adjusted accumulated benefit (or portion thereof) for the period.” The reference under this regulation to “a rate of interest or rate of return” means the plan‟s rate of interest or rate of return.
• SO … When crediting annual ROR will want to NOT credit interim interest and get folks paid ASAP
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Using ROR – 411(a)(9)
• IRC §411(a)(9) and Reg. §1.411(a)-7(c)(1) provide
that “periodic benefit” (i.e., annuity) payable at any
point cannot be less than previously available amount
• Most cash balance plans provide for immediately
payable lump sums upon termination of employment
• Reg 1.401(a)-20 Q&A 17 provides that if a non de-
minimis (over $5K) lump sum is available at any point
(referred to as “earliest retirement age” in the reg) then
qualified annuity forms must be available at same time
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Using ROR – 411(a)(9)
• Assume acct balance $1.5 million at age 64
• Age 64 417e/2015 5% APR = 149.47;
• Life annuity = $10,035
• Loss results in age 65 balance of $1 million
• Even after preservation of capital rule, as there were
substantial previous gains
• Age 65 417e/2015 5% APR = 145.819;
• Life annuity = $6,858
• Participant has right to $10,035 life annuity at 65
• VERY EXPENSIVE
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ROR - Sub pools of assets
• New option in 2014 regs:
• Credit return on “sub-pool” of plan assets
• Sub-pool option intended to accommodate cash
balance conversions:
• Pool 1: Assets invested to pay traditional DB
benefits
• Pool 2: Assets invested to pay interest credit =
ROR on CB accounts
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ROR - Sub pools of assets
• But Preamble to regs also states:
• “…a plan sponsor may wish to credit interest
based on a rate of return that differs for different
groups of participants (such as using a more
conservative, or less volatile, subset of plan
assets for long service employees)”
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ROR - Sub pools of assets
• Lead to lifestyle/target date CB plans?
• Each sub-pool is a separate investment policy
• Participants assigned to particular sub-pool
• Segment participants by age?
• Age discrimination a risk?
• See inter-sector notes on following slide
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ROR - Sub pools of assets
• October 15, 2014 inter-sector notes:
• “The IRS/Treasury representatives explained that
any sort of age-based criteria would take you out of
the age discrimination safe harbor for lump sum-
based plan formulas, which means that the plan
would have to satisfy the general age discrimination
requirements of IRC section 411(b)(1)(H)(i). They
commented that they were careful that the example
they provided in the preamble depended on service,
not age.”
45
ROR - Sub pools of assets
• Does the ability to use sub-pools equate to
individual direction as some have implied?
• In the words of the great philosopher Eric
Theodore Cartman
• “Uh, no”
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Late Retirement
• With respect to a participant with an annuity starting date after NRA, a cash balance plan must either
• provide an actuarial increase after NRA, or
• satisfy the requirements for suspension of benefits under §411(a)(3)(B).
• Accordingly, a cash balance plan that does not properly suspend benefits violates the requirements of §411(a) if the balance of the hypothetical account is not “increased sufficiently” for post NRA distributions
• Reg. §1.411(a)(13)-1(b)(2)(i)
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Late Retirement
• Consider a plan crediting interest based on the
ROR of plan assets (or other equity based rate)
• Absent a minimum rate such a plan could violate
the rules for post NRA increases in years with
low or negative returns
• But a minimum rate would violate the market
rate requirement (absent relief)
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Late Retirement
• Reg. §1.411(b)(5)-1(e)(4) provides such relief
• “A statutory hybrid plan is not treated as providing an
effective interest crediting rate that is in excess of a market
rate … merely because the plan provides that the
participant‟s benefit, as of each annuity starting date after
normal retirement age, is equal to the greater of--
• (i) The benefit based on the accumulated benefit
determined using an interest crediting rate ... not in
excess of a market rate …; and
• (ii) The benefit that satisfies the requirements of section
411(a)(2).”
49
Late Retirement
• Of course this is not an issue if significant
pay credits are still being received
• i.e. post retirement actuarial increase is only
required if adjusted NRA accrual would
result in a benefit greater than that received
under the terms of the plan including
continued accruals
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26
Late Retirement
• Consider balance at NRA (65) of $500,000
• Interest credit based on ROR plan assets
• APRs based on 2015 417(e) table and 5% • Age 65 = 145.819
• age 66 = 142.109
• Assume „reasonable‟ rate for post retirement increase is 5% - note there is no guidance here
The existing fee disclosure requirements under ERISA Section 408(b)(2) provide a covered service provider (“CSP”) with a unique opportunity to win new engagements by demonstrating a mastery of the compliance obligations which goes beyond the general disclosures typically provided.
During this session, a CSP will be informed as to the appropriate approach for conducting a 408(b)(2) Compliance Assessment using a Checklist process created by FRA PlanTools that will apply specifically to advisor services.
“The Department does not believe that responsible plan fiduciaries should be entitled to relief provided by the class exemption absent a reasonable belief that disclosures required to be provided to the covered plan are complete. To this end, responsible plan fiduciaries should appropriately review the disclosures made by covered service providers. Fiduciaries should be able to, at a minimum, compare the disclosures they receive from a covered service provider to the requirements of the regulation and form a reasonable belief that the required disclosures have been made.” [77 FR 5647-48 (2-3-12)]
No Relief Absent a Reasonable Belief Disclosures are Complete
A Reasonable Belief is Dependent on a Comparative Assessment
The court found that the plan fiduciaries failed to monitor the reasonableness of expenses… According to the court, ERISA…required that the fiduciaries engage in a “deliberative” process…plan fiduciaries are expected to know the exact amount of revenue sharing expenses and whether the amount is competitive... Recent ERISA Fee Litigation: Key Lessons For Plan Fiduciaries, Orrick Law Firm Client Alert, 4-26-12
“Further, the Court noted that the fiduciaries…did not investigate the market price for comparable fees…Comparing the ABB plan to other plans, the Court found that ABB overpaid... While ABB noted that it did monitor the reasonableness of the overall expense ratio, the Court concluded that this was not enough. This was insufficient because it does not show how much revenue is flowing, does not show the competitive market for comparable funds, and fails to take into account the size of the plan…*T+he Court explained, if a fiduciary opts for revenue sharing, “it also must have gone through a deliberative process for determining why such a choice is in the Plan’s and participants’ best interest.” Dorsey & Whitney LLP, April 2012.
the court found that the fiduciaries could not…engage in a deliberative process to justify that the fee arrangement…it is not clear whether participants may initiate lawsuits with a basis on the newly disclosed information and claim first-time knowledge of alleged fiduciary breaches similar to those found in Tussey.” Littler Mendelson, P.C, April 2012 The fiduciaries did not obtain a benchmark cost of Fidelity’s services prior to choosing revenue sharing...” Haynes and Boone April 2012 Also, ABB did not get a benchmark of costs for Fidelity’s services before choosing the revenue sharing arrangement…The Court also rejected ABB’s argument that its monitoring of the overall expense ratio of the funds was sufficient because this monitoring did not show how much revenue Fidelity Trust was receiving or provide a basis for ABB to compare its revenue sharing arrangement to the market…the Court emphasized that "if a plan sponsor opts for revenue sharing as its method for paying…it must have gone through a deliberative process for determining why such choice is in the Plan’s and participants’ best interest" Trucker Huss, April 2012 (Emphasis added)