SST Benefits Consulting AGRIP / CAJPA 2001

SST Benefits Consulting AGRIP / CAJPA 2001 Bill Tugaw, President SST Benefits Consulting & Insurance Services, Inc. “Defined Contribution Plans 457, 403(b) and 401(k) & 401(a)”

SST Benefits Consulting Overview Public Sector / Nonprofit Retirement Plans Small Business Jobs Protection Act of 1996 Fiduciary Responsibility ACWA / JPIA Project Future Changes

SST Benefits Consulting 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

SST Benefits Consulting 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

SST Benefits Consulting What is 403(b) Tax Sheltered Account? Teachers and Eligible Non-Profits Voluntary Salary Deferral Up to 25% of pay - $10,500 Annual Maximum Defined Contribution Loans Potential Early Withdrawal Taxation

SST Benefits Consulting Public Sector 401(k) Profit vs. Surplus Tax Reform Act of 1986 Tax Payor Relief Act of 1997 Loans Potential Early Withdrawal Taxation

SST Benefits Consulting What are 401(a) plans? Proliferation since Taxpayer Relief Act of 1997 exempted public sector from nondiscrimination testing Mandatory or Voluntary Deferral Up to 25% of pay - $30,000 Annual Maximum Vesting

SST Benefits Consulting 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

SST Benefits Consulting 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.

SST Benefits Consulting 401(a) Guidelines, continued There is a one time option to be excluded from the plan if a mandatory contribution is required.

SST Benefits Consulting 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

SST Benefits Consulting 401(a) Plan Features, continued Employer may permit loans and establish loan criteria Employer may establish more than one 401(a) plan

SST Benefits Consulting 401(a) Plan Features, continued 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)

SST Benefits Consulting 401(a) Plan Features, continued 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

SST Benefits Consulting Vesting Employee’s contributions and associated earnings are always 100% vested Employer may establish a vesting schedule for employer contributions

SST Benefits Consulting 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

SST Benefits Consulting 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

SST Benefits Consulting 401(a) Objectives Provide qualified pension plan atlternative to CalPERS –Benefits younger participants –Attract employees from private sector Alternative to Social Security

SST Benefits Consulting 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

SST Benefits Consulting 401(a) Objectives - continued Provide alternative to costly defined benefit plan enhancements Encourage organization wide EE participation in retirement savings

SST Benefits Consulting 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

SST Benefits Consulting Small Business Jobs Protection Act of 1996 Reaction to Orange County SBJPA created a structure –Trust –Custodian –Annuity No standard of conduct

SST Benefits Consulting Who is a Fiduciary? Fiduciary by Title (Trustee) Fiduciary by Conduct (discretionary control)

SST Benefits Consulting 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.

SST Benefits Consulting 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

SST Benefits Consulting 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)

SST Benefits Consulting 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

SST Benefits Consulting Practical Steps to meet Fiduciary Liability Establish procedure for monitoring performance –Benchmark indices Educate and communicate to participants regarding plan restrictions and investment options Decisions made consistently

SST Benefits Consulting Practical Steps to meet Fiduciary Liability Due process to resolve disputes Require periodic audit –independent financial audit –compliance audit of contractors

SST Benefits Consulting Practical Steps to meet Fiduciary Liability 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

SST Benefits Consulting Training Trustee Committee Members Staff Management Union Leadership

SST Benefits Consulting 457 University Basic 457 Parameters IRS Parameters Employer Options Responsibilities Hardship Withdrawals Selection of Providers Future Changes

ACWA / JPIA Project

SST Benefits Consulting Project Goals Research §457 Competitiveness –Investment Returns –Expenses and Fees –Administrative Service Analyze Current §457 Plan Providers Involve Plan Participants

SST Benefits Consulting Project Description Solicit Request For Proposal (RFP) Bids Determine Primary Selection Criteria –Historical Investment Returns –Investment Expenses and Fees –Administrative Bookkeeping Services

SST Benefits Consulting Project Description Determine Secondary Selection Criteria –Support Services/Customer Guarantees –Information / Report Services –Transition Services / References

SST Benefits Consulting Competitive Analysis §457 “Bundled” Providers Solicited Respondents –Current Size of ACWA/JPIA Plan –Number of Participants / Total Assets

SST Benefits Consulting Advanced RFP Technology Automated RFP –“Grid” Comparisons –Data Management –Graphic Representation

SST Benefits Consulting Primary Criteria Investment Standards Weighting –Stable Value (Savings Account) –Growth & Income Funds –Growth Funds

SST Benefits Consulting Primary Criteria - cont. Investment Time Horizon 5 Year $100 per month 5 Year $10,000 Lump Sum

Primary Criteria - cont. Expenses and Fees

SST Benefits Consulting Net Return to Participant

SST Benefits Consulting Net Return to Participant

SST Benefits Consulting Net Return to Participant

SST Benefits Consulting Current Provider Expense & Fee Reduction Actual RFP currently in process No decline in services offered Increased communication commitment

SST Benefits Consulting Secondary Criteria Group Meetings Participant Education Face-to-Face Counseling Informational Services –Internet Capabilities –Voice Response –Reporting Capabilities

SST Benefits Consulting 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

SST Benefits Consulting Committee Options Determine Available Provider Options –Retain Incumbent Provider(s) –Select New Provider(s) –Retain Incumbent and Add New Provider(s)

SST Benefits Consulting Improvement to Plan Reduced Fund Expenses Eliminated Deferred Sales Charge Provided a Self-Directed Brokerage Option

SST Benefits Consulting Self-Directed Brokerage Option Mutual Funds $50 Annual Fee Potential Transaction Charges “Big Guy” Letter

SST Benefits Consulting ACWA / JPIA Project

SST Benefits Consulting Future Changes Legislation –Maximum Amount –Portability –Withdrawal Options –Distribution Options

SST Benefits Consulting 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 El Camino Real, Suite 200 Los Altos, CA Fax