403 b 457 b Solutions for Compliance TPAs and other Headaches

403(b)/457(b) Solutions for Compliance, TPAs and other Headaches

Agenda § History of the 403(b)/457(b) market § Review 403(b)/457(b) legislative changes § Pros & Cons of 403(b)/457(b) models § Next steps 2

History of the 403 (b)/457(b) Market Historical Model § § Supplement to traditional pension plans No ongoing employee communication § No employer oversight responsibility § No compliance responsibility § Multiple provider environments § Individual contracts § Retail buyers § Loads/Surrender charges to compensate financial advisors (sales people) § Primarily annuity products (80%) § 1974 allowed non-insurance products 3

History of the 403 (b)/457(b) Market (cont. ) Problems with Historical 403(b)/457(b) Model § Not utilizing group purchasing power § Expenses significantly cut into retirement account balances § No monitoring of employee actions (loans, distributions, deferrals) Problems and concerns about the pension and Social Security system have caused the government to revisit the 403(b)457(b) plan as an important retirement savings vehicle 4

What were the Drivers behind this new approach to 403(b)? • • IRS Regulations announced in the summer of 2007 and effective in 2009 impacted Districts, their Participants and their Providers These regulations created greater Compliance, Administration and Fiduciary Oversight on the part of Districts were struggling under the traditional (any willing provider) “open access model” due to many moving parts and lack of collective buying power There was a desire on the part of Districts for a holistic solution that was a “win -win” for all stakeholders (Districts, Participants, Providers) 5

The Regulations § Released July 23, 2007 § First legislation relating to 403(b)/457(b) plans in 40 years § General effective date January 1, 2009 § Intentions of new regulations § Increase employer attention/oversight § Enhance plan compliance § Move toward a 401(k) model § Enhance employee retirement outcomes 6

The Regulations DO NOT § Impose fiduciary duties § Subject 403(b)/457(b) plans to ERISA or ERISA fiduciary duties § Require districts to select a single retirement plan provider, though that is an option and there are good reasons to do so 7

The Regulations Regulation Highlights § 90 -24 transfers/information sharing § Written plan/plan document requirement § Universal availability § Distributions & loans § Contribution timing § Plan terminations 8

The Regulations Important Definitions § 90 -24 transfer - a transfer of account to an investment provider not part of an employer’s 403(b) plan § Plan document - a document that describes the features of an employer sponsored retirement plan § Information sharing agreement – a sharing of information between plan sponsor and providers to facilitate plan-level compliance § Universal availability - once a plan sponsor permits any employee to elect a salary deferral into the 403(b), the opportunity must be extended to all employees of the organization 9

Questions? 10

Questions for the School District § Is your current 403(b)/457(b) “just another payroll slot, ” or a true benefit that helps employees plan for their retirement? § Is your current 403(b)/457(b) sales-centered or participant centered with a focus on employee education? § Is it time to shift the paradigm? 11

What can you do? 12

Multiple vs. Single Vendor Considerations 13

Summary of Comparative Findings Multi-Vendor Single Vendor üHigher fees are likely because as the number of providers increases, $s invested per provider decreases üCombines assets to reduce fees and charges üReduces likelihood participants will have a secure retirement üAccumulates more real retirement wealth because of lower fees üInvestment liquidity decreases due to loads and surrender charges üAssets are portable/No surrender charges üParticipant must choose best provider among a potentially “bewildering“ number based on investment options and fees üEasier for participants to make choices because of single provider with multiple investment options üToo many providers makes monitoring for malfeasance costly üIncreases equity, i. e. similar participants will achieve similar retirement outcomes üSchool systems function as a clearinghouse for providers üIncreases retirement savings by reducing fees 14

Multi vs. Single Vendor Conclusion? “While there a number of economic reasons for the disparity in fees based on administrative structure, we conclude that… …controlled access provides a better model for maximizing the likelihood that teachers achieve their retirement goals. ” What does that mean? Lower Fees equals Higher Retirement Balances 15

Single Vendor Model It is a “Best in Class” model that… • First & foremost… we believe it can improve retirement outcomes for Participants! • Lowers fees and makes them transparent • Provides diversified investment options through a single trading platform • Can offer both actively managed & low cost passively managed (index fund) investment options • Seeks “Best in Class” investments with quarterly monitoring & oversight which is missing now • Focuses on education and retirement outcomes, not on sales and marketing • Uses salaried, non-commissioned, licensed Financial Advisors who are measured for their support to Participants and not tied to sales of investments • Ensures tax compliancy for the District and ultimately for the Participants • Is faster and more flexible (example is addition of Roth 403(b)/457(b) • Eliminates District issues with compliance, record keeping • Puts all providers (including prior ones) under one umbrella • Saves Districts time and money which helps allocate valuable resources to other pressing needs 16

Single Vendor Summary • The Participant Experience – Education / Planning tools from One Source – Transactions are simplified and administratively efficient – Increases to participation • Purchasing Power of the Institution – Economies of Scale/Pricing Leverage • Ease of Administration – Audit/Necessary Filings • One-Stop shop model for Investments – Investment Policy Statement / Goverance items – Clarity & Simplicity – Transparent Fee Structure 17

Single Vendor Benefits • • • Simplification of Compliance under IRS/DOL Regulations An improved process for plan administration Economies of scale through pricing negotiation Improved fee transparency to participants and plan Improved vendor relationship – sole provider with greater accountability 18

Models of Operation: Pros/Cons of Single vs. Multiple Vendors Single Vendors § Pros • • • Pricing/cost Breakpoints are hit quicker Pure education vs. sales Easy to understand (employees) Easy to communicate (district) Administrative burden to district lower than having multiple providers (no need for a TPA or additional provider services and fees) § Cons • Depending on product chosen, lack of choice (not relevant for open architecture products and/or products with self-directed brokerage feature) 19

Models of Operation: Pros/Cons of Single/Multiple Vendors (cont’d) Multiple Vendors § Pros • Employees have the option to choose from more than one product (most relevant if products include proprietary mutual funds or a limited investment platform) § Cons • Pricing/cost • Breakpoints not offered and/or not hit as quickly • “Communication” is really sales, not education due to competing products (i. e. old 403(b) model) • Difficult for employees to understand (which one do I pick? ) • Difficult for the district to communicate (more employee questions, etc) • Greater administrative burden (need for TPA, more provider services, therefore, higher expenses) 20

Time to shift from current provider-centered model to participant-centered model 21

Vendor oftentimes shares revenue collected by your 403(b) plan with TPA’s & Advisors to offset their fees and receives revenue from Investment Managers to offset their recordkeeping services. Mutual Fund Investment Managers (i. e. Fidelity, Vanguard, etc. ) Concept of Operations Revenue Sharing Vendor/Recordkeeper/Provider • Investment Platform Revenue Sharing (open architecture vs. proprietary) • Recordkeeping • Participant Web-Site • Education Services PLAN SPONSOR 403(b) Revenue Sharing Third Party Administrator • Plan Documents • Compliance • Administration • 5500 Report • Loan Tracking Advisor/Consultant • XYZ Financial Solutions • RFP Services • Fiduciary Oversight • Investment Monitoring • Education Services • Etc. 22

Marketing Challenges and District Scenarios Challenges § Provide enough investment choices to earn buy-in by participants § Reduce opposition by current providers Three Scenarios-District § Eliminate 403(b) entirely and move all participants to Coop § Maintain current 403(b), grandfather in current participants and providers, but all new contributions into Coop § Maintain current 403(b), grandfather in current participants and allow future contributions into existing providers, but shift all new participants into Coop 23

Questions? 24