NEW RULES FOR NON-TRADITIONAL

RETIREMENT PLANS:

A New World for Plan Sponsors,

Employees, and Advisors

Presented by Jerry Kalish

PresidentNational Benefit Services, Inc.

John Marshall Law School“Non-Traditional Retirement Plans”

EB 368aBUOctober 31, 2009

Hat tip to Rick Bales at Workplace Prof Blog: http://lawprofessors.typepad.com/laborprof_blog

Retirement Therapy

403(b) Regulations Timeline

• 1958 Added to Internal Revenue Code

• 1964 Regulations first issued that detailed some of basic statutory provisions

• 1964-2004 Hodgepodge of regulations, exam guidelines, revenue rulings, and notices

• 2004 Proposed Regulations issued

• 2007 Regulations finalized

• 2009 Final Regulations effective

20071964 1964-2004 20041958 2009

The world has changed since 1964 when 403(b) regs first proposed

2009:

The New Economic

Realities

Work Force• Veterans: 1922-1945

• Baby Boomers: 1946-1964

• Generation X” 1965-1980

• Generation Y: 1981-2000

403(b) and 457 PlansThe View From 30,000 Ft.

403(b) Market Size and Scope

• 20% - 25% of defined contribution market

• $600 - $700 million estimated assets

• $900 billion estimated assets in 2011

• 58% < $1 million

• 31% between $1 million to $10 million

• 40% ERISA, 60% Non-ERISA

Source: Edward Jones 2008 research

Type of

Sponsor

No. of Plans

(000)

No. of

Active Participants (000,000)

Assets

(000,000,0000)

Public/Private K-12 18.4 3.0 $180

Higher Education 3.6 2.2 $295

NFP Hospitals and Healthcare

1.1 1.5 $105

Charitable and Other

11.3 0.4 $30

Total 403(b) Market 34.4 7.1 $610

Source: RG Wuelfing & Associates, 2008 Retirement Research

403(b) Market by Type of Plan Sponsor

at 2008 Year-End

The current state of fiduciary performance and risks: • Only 58% maintain minutes of meetings (down from 79% last year: Grant Thornton Survey

• Top ten ERISA class action settlements totaled $17.7 billion in 2008 (up from $1.818 billion in 2007) Seyfarth Shaw Survey

What are plan sponsors actually doing?

• Doing nothing (or much)

• Eliminating the plan

• Simplifying the plan

• Scaling down to only one provider

• Keeping multiple providers

How the 403(b) providers see it:

• 86% of providers believe 403(b) margins are as great or greater than in other DC plans

• Highest impact of regs on their business model Written plan document: 57% Elimination of 90-24 transfers: 57% Permissive aggregation of employers: 43% Certification of distributable event: 29% Source: Cerulli Associates 2007 Report: State of the 403(b) and 457 Marketplace:Challenges and Opportunities

What are investment providers doing

• Dropping out

• Becoming the low cost provider

• Becoming the high-service provider

• Becoming a one-stop shop (fully bundled)

• Doing nothing (what and see)

Players at the table

403(b) and 457: Investment Program with Specific Administrative Requirements

Administration Enrollment Employee communication Recordkeeping Compliance

Investment Asset groups Funds Investment managers Investment reporting and monitoring

Who are the service providers

• Investment providers

• Investment consultant/broker

• Common remitter

• Third party administrator (TPA)

• Legal counsel

Service Models

• Bundled

•Alliance

•Unbundled

Best Practices

Fiduciary Best Practices

• Theory vs. Practice

• Investment Policy Statement

• The Retirement Outcome

Classic risk management

• Decide on a plan that could be interpreted as acting in good faith

• Review that plan on a periodic basis and take remedial action if necessary

• Make decisions based on expert recommendations and advice

• Document the decision-making process

• Establish directed investment accounts for defined contribution plans

• Appoint an investment manager and monitor his or her performance

The practical side of being a fiduciary

• Appoint an individual or committee as plan administrator

• Consider the financial strength of your service providers

• Carefully review the principal policy provisions of fiduciary liability insurance you have/are considering

• Be aware of the scope of indemnification coverage

• Make sure investment responsibility has been properly delegated

• Understand that selection of service providers is a fiduciary function

• Assume your plan will be audited

Why have an investment policy statement

• Presents the strategic vision for the investments

• Describes a plan’s investment objectives and decisions

• Helps plan sponsors reduce their fiduciary liability

• Defines how investments are selected and monitored

1988 to 2008Source: DALBAR Quantitative Analysis of Investor Behavior (QAIB) Study 2009

The Cost of Going It Alone

Source: AllianceBernstein

403(b) and 457: Investment Program with Specific Administrative Requirements

Administration Enrollment Employee communication Recordkeeping Compliance

Investment Asset groups Funds Investment managers Investment reporting and monitoring

Coming Attractions: Selecting a Plan Provider

A Framework For Selecting A Plan Provider

• Using “procedural prudence”

• Plan administration and investments appropriate for employee group

• Change emphasis from sell side to buy side

Evaluating plan provider’s experience, capabilities, and fees

• How are administration, recordkeeping, custodial or trust services provided

• What investments are available

• How is the plan sponsor insulated from fiduciary liability

• How is employee communication and investment education provided

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