Retirement Plan Challenges Chapter Meeting - Des Moines ISCEBS West Des Moines, IA September 7 th, 2011 Presented By: Jean Duffy, AIFA®, FLMI, ARPC Financial.

Retirement Plan Challenges

Chapter Meeting - Des Moines ISCEBS

West Des Moines, IA

September 7th, 2011

Presented By:

Jean Duffy, AIFA®, FLMI, ARPC

Financial Advisor

CAPTRUST Financial Advisors

www.captrustadvisors.com

PRESENTATION AGENDA

I. Current State of Retirement Plans

II. Overview of Recent and Upcoming Changes to Retirement Plans

III. Understanding Your Role and Responsibilities as a Fiduciary

Current State of Retirement Plans

• As of 2010, retirement plans assets in the United States totaled $17.5 trillion. Defined contribution plans represented $4.5 trillion of that total.

• The median plan participant balance is $26,926 and the average plan participant balance is $79,077 for 2010.

• The average plan participant rate for 2010 was 74%.

• The average deferral rate was 6.8% and the median was 6.0% in 2010.

• The average number of funds being offered by retirement Plan Sponsors in 2010 was18.6 (target date fund offerings are counted as a single option). The average number of funds used by participants was 3.3.

RETIREMENT PLAN DATA

Source: How America Saves 2011 - Vanguard

• Currently, the traditional retirement age for American workers is 65.

• Workers estimate their retirement savings needs at $600,000 (median), but in comparison, fewer than one-third (30 percent) have currently saved more than $100,000 in all household retirement accounts.

• Most workers, regardless of age or household income, agree that they could work until age 65 and still not have enough money saved to meet their retirement needs.

• Of those who plan on working past the traditional retirement age of 65, the most commonly cited reasons are of need versus choice.

• 39% of workers plan to work past age 70 or do not plan to retire.

• 54% of workers expect to plan to continue working when they retire.

• 40% now expect to work longer and retire at an older age since the recession.

PARTICIPANT REALITY

Source: The New Retirement: Working – Transamerica Center for Retirement Studies

In 2008, participant balances declined by 27% to just over $50,000.

Thru the second quarter of 2009, participant balances increased on average by 13.5% to about $53,900.

Fidelity Perspectives: An Unprecedented Year - August 12, 2009 reporting.

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Average Account Balances

PARTICIPANT ACCOUNT BALANCES

PARTICIPANT DEFERRAL RATES

• Despite a disastrous year in the financial markets in 2008, 96% of participants continued making deferrals into their DC plans.

• So far in 2009, employee participation has been increasing and is up 4% since 2007, moving from 73% to 77%.

• Fidelity reported the percentage of participants who stopped contributions during Q2 2009 was 1.3%, which is in line with the historical average of about 1%.

DateDow Jones Industrial Average Market Events

Jan 4, 1999 9,212DJIA moves from 5000 in 1995 to 11,000 in mid 1999

Jan 3, 2000 11,501Market closes at all time high in January, 2002

Jan 2, 2003 8,342Market drops through late 2002 to 7,200 and begins to rebound in early 2003

Jan 1, 2007 12,459 Market continues on a five year upswing

Jan 1, 2009 8,772Market peaks in Oct 2007 and experiences over a 50% drop through March 2009

TUMULTOUS MARKET ACTIVTY

Allocation Trends

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

1999 2000 2003 2007 2009

GIC/ STABLE/ MM BOND ASSET ALLOCATION EQUITIES CO STOCK OTHER

Hewitt 401(k) Index

ASSET ALLOCATION TRENDS

Overview of Recent and Upcoming

Changes to Retirement Plans

CURRENT FOCUS

• Fee Disclosure

• Participant Investment Advice & Guidance

• Plan Design Options

• New Industry Offerings

FEE DISCLOSURE

• ERISA 408(b)(2) – Effective January 1, 2012

• Requires disclosures by plan service providers to plan sponsors/

fiduciaries of fee and service information

• ERISA 404(a)(5) – Effective November 1, 2011

• Proposed extension provides 120 days after plan year’s beginning

to furnish disclosures

• Requires plan fiduciaries to disclose certain plan, fee and

investment-related information to participants and beneficiaries.

FEE DISCLOSURE

• Plan Sponsors must understand new regulations (Fiduciary Role)

• Plan Sponsors must disclose two types of information:

• Details about retirement plan itself

• Information about the investments

• Plan Sponsors need to understand all expenses relating to retirement

plan to help participants understand.

Communicating fees & expenses in an uncomplicated manner

is the cornerstone of the participant disclosure rules.

FEE DISCLOSURE

• Consider developing Disclosure Checklist

• Review & Understand Disclosure Regulations

• Determine & Document Administrative & Investment Fees

• Perform benchmarking study

• Undertake formal competitive bid process

• Work with service provider on fee disclosure information

• Review annual plan sponsor fee disclosure statement

• MONITOR

• Recommended Every 3-5 Years

• When to Seek Fee Benchmark / RFI / RFP

• Marriage of Best Practices with Culture, Objectives & Cost

• Fiduciary Documentation

BENCHMARKING

• Education programs have been around for decades

• Historically education and guidance has been delivered by vendors

• Tools include: o Print materials like risk questionnaires and model allocationso Computer based programso Asset allocations funds (risk based and target date)

• Concerns: o Cost of delivery (hard and soft dollar) o Conflicts of interest o Effectiveness

EDUCATION & GUIDANCE

• Next step beyond education

• Specific investment advice to individuals that need it most

• Many don’t have access to advice, understand investments nor want to understand investments

• Answer two questions: o How much should I save? o Where should I invest my money?

PARTICIPANT ADVICE

• Pension Protection Act of 2006 introduced the concept of advice to help provide a greater number of participants with access to individual advice

• Original regulations say that an “eligible investment advice arrangement” is participant advice offered under either of these two methods:

1. Based on a computer model

2. “Level fee” arrangement

• 2010 regulations reaffirmed basic concepts

• Advice appears to be the future – Financial professionals could be considered

ERISA Fiduciaries and will want to consider impact.

WHAT IS ADVICE?

• Choose the right model for your organization o Computer based o Face to face, level fee provider

• Computer based program should be sophisticated enough to be meaningful but not so complex that participants “opt-out”

• Face to face provider should have o Experience giving individual advice (preferably plan level) o Sufficient number of retirement clients so as to:

Understand the process Posses necessary tools Be able to deliver meaningful advice at a reasonable cost

• NO CONFLICTS

KEYS TO A SUCCESFUL ADVICE PROGRAM

• Data Driven

• Snapshot – demographicso Participationo Deferralo Allocation

• Don’t look at averageso By age group, location, etc.

• Quality Driveno Questionnaire

HOW TO MEASURE SUCCESS

•Accelerated Eligibility and Entry

•Automatic Enrollment and Automatic Increase Programs

•Safe Harbor Options: Match versus NEC

•Withdrawal Limits / Flexible Term/Retirement Options

•Qualified Default Investment Options

•Balanced Funds, Target Date Funds, Asset Allocation Models

PLAN DESIGN CONSIDERATIONS

ON THE HORIZON

• Electronic Delivery of Information – DOL has requested

information on what the rules should state for electronic

delivery. Guidelines will not be in place prior to 11/1/11.

• Lifetime Income – Proposed legislation intended to

educate participants on monthly income their account

could provide. They are also considering encouraging

participants to annuitize at least a portion of their

balance.

ON THE HORIZON

• Automatic IRAs – would require employers that do not

sponsor a retirement plan to offer a direct-deposit IRA.

• Alleviating Leakage in 401(k) Savings Plans – intended to

protect 401(k) plans by providing flexibility in repayment

of loans & limiting # of loans permitted by plan.

I. Stable Value Products• Wrap provider exposure, capacity, and cost• Is Market Value/Book Value Ratio acceptable?• Interest Crediting Rate reasonable?• Underlying holdings

II. Target Date Investment/Allocation Tools• Asset Allocation Assumptions – Are the funds

appropriate for your participant population?• Comfortable with the Glide Path• Have participants been educated properly?

III. Overall Plan Costs & Revenue Sharing• New 5500 Schedule C Disclosure Requirements• Revenue sharing – Who is receiving it and how

much?• 408(b)2 & 404a regulations• I shares a consideration

IV. Investment Options• Prudent process to select / monitor / deselect

funds• Bundled provider: Fund family exposure• Are all asset classes represented with limited

overlap

V. Fiduciary Liability• Independent Co-Fiduciary – Provide advice &

share responsibility• Recordkeeper – Provide guidance

VI. Income Products• Have you reviewed industry options?• What is available from your plan provider?• Is this appropriate for participants?

VII. Plan Management• Plan design review – can participants

maximize deferrals• Formal Committee meetings and meeting

minutes• Plan is operational compliance?• Reviewed auto features\safe harbor\QDIA?• Have you reviewed Roth features?

VIII. Participant Education/Advice• Education / Guidance from plan provider• Advice & Planning from independent

specialist• Global allocation DC, DB & outside assets• Need for one on one planning

IX. Executive Compensation Plans• Reviewed the need for a Nonqualified Plan• Fee based vs. commission approach

X. Participant Data• Participation rates & savings rates in line with

peers• Asset allocation at a macro level acceptable

ISSUES FACING PLAN SPONSORS

Understanding Your Role and

Responsibilities as a Fiduciary

• Has discretionary authority over the management or administration of the plan or its assets

• Exercises any control, authority, or influence over the management or administration of the plan or its assets

• Renders investment advice for compensation

Automatic Fiduciaries:

• Plan Administrator, named fiduciary, trustee

NOT a Fiduciary:

• A person who performs purely ministerial tasks (e.g. calculates benefits, prepares government forms)

According to ERISA a Fiduciary is any person(s) who:

WHO IS THE PLAN FIDUCIARY?

• Act solely in the interest of plan participants

• Act for the exclusive purpose of providing benefits to participants

• Carry out duties with care, skill, prudence and diligence of a

prudent person

• Follow plan documents

• Diversify plan investments

• Review and pay reasonable plan expenses

FIDUCIARY STANDARDS & RESPONSIBILITIES

• Informal

• Few rules

• Simple reporting

• Few fiduciary obligations

• Limited duty to oversee program

• Limited vendor involvement

• No plan document

• Little employer involvement

• No employer vetting of investments

• Outdated regulations

• “Not my problem”

THE OLD RULES

• Formal

• Written document

• Lots of rules, audits, policies and procedures

• Compliance testing and costs

• Employer makes key decisions

• Single vendor (duty to monitor)

• Choice means “fund choice”

• Audits

• Employer selects and monitors provider/investments

• Clear fiduciary obligations for plan sponsor, committees, trustees, and individuals

• Employer accountable for understanding costs as well as educating participants

• Frequent rule changes

• Congressional and DOL focus

• “Now it is my problem!”

THE NEW RULES

1. Duty Of Loyalty & Impartiality

2. Duty To Be Prudent

3. Duty To Ensure Reasonable Costs

4. Duty To Monitor & Supervise

5. Duty To Avoid Prohibited Transactions

6. Duty To Diversify

FIDUCIARY DUTIES

PROCESS, PROCESS, PROCESS

• Train fiduciaries in responsibilities and potential liability

• Follow the plan document

• Implement clear, consistent procedures for decision making and compliance

• Seek out alternatives and options when making decisions

• Document everything: meetings, decisions, alternative, information, analysis, the basis for decisions, compliance with procedures

WAYS TO SATISFY FIDUCIARY DUTIES

• Create a fiduciary structure

• Appoint plan fiduciaries

• Document authority Don’t forget liability insurance and bonding

• Document fiduciary responsibilities

• Establish regular meetings and maintain records Evaluate and document service provider

selection and monitoring (fee structure transparency, quality of service, value received)

• Create prudent process for investment selection

• Monitor plan investments

• Maintain plan documents

• Monitor plan administration

BEST PRACTICES

Follow an investment policy statement

Investments should be diverse

Document activities and decisions

Use level of expertise to make decisions

Costs should be evaluated and compared

Interest of plan participants should be top priority

Avoid conflicts of interest and prohibited transactions

Retain qualified service providers to ensure prudent standard is met

YOU are the Fiduciary

IN SUMMARY: PRACTICAL STRATEGIES OF A FIDUCIARY

DEFINING SUCCESS IN YOUR RETIREMENT PLAN

Employees are properly versed and

financially prepared to transition into

retirement.

Retirement Readiness

The retirement program is

competitively structured and priced.

Corporate Stewardship

Proper fiduciary practices are known,

documented, and followed.

Fiduciary Fitness

True success can be measured

when all three key areas of

retirement plan oversight are

aligned.

Retirement

Readiness

Corporate

Stewardship

Fiduciary

Fitness

QUESTIONS?

FOR MORE INFORMATION

The information provided in this presentation is for

educational purposes and should not be construed

as individualized investment advice. This is not a

solicitation or an offer to buy any security or

instrument or to participate in any trading strategy.

CAPTRUST Financial Advisors does not render legal,

accounting, or tax advice. Clients should consult

their tax professional or legal counsel for such

advice.

Member FINRA/SIPC© 2011 CAPTRUST Financial Advisors

Jean Duffy, AIFA®, FLMI, ARPC

Vice President, Financial Advisor

[email protected]

CAPTRUST Financial Advisors

3001 Westown Parkway, Suite 100

West Des Moines, IA

1.515.657.4102

www.captrustadvisors.com