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

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

Agenda

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History of the 403 (b)/457(b) MarketHistorical 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

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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

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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

• 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)

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

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The Regulations

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

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The Regulations

Regulation Highlights

90-24 transfers/information sharing

Written plan/plan document requirement

Universal availability

Distributions & loans

Contribution timing

Plan terminations

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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

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Questions?Questions?

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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?

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What can you do?

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Multiple vs. Single Vendor Considerations

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Summary of Comparative FindingsMulti-Vendor

Higher fees are likely because as the number of providers increases, $s invested per provider decreases

Reduces likelihood participants will have a secure retirement

Investment liquidity decreases due to loads and surrender charges

Participant must choose best provider among a potentially

“bewildering“ number based on investment options and fees

Too many providers makes monitoring for malfeasance costly

School systems function as a clearinghouse for providers

Single Vendor

Combines assets to reduce fees and charges

Accumulates more real retirement wealth because of

lower fees

Assets are portable/No surrender charges

Easier for participants to make choices because of single

provider with multiple investment options

Increases equity, i.e. similar participants will achieve similar

retirement outcomes

Increases retirement savings by reducing fees

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Multi vs. Single Vendor Conclusion?“While there are 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 Higher Retirement Balancesequals

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• 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

Single Vendor ModelIt is a “Best in Class” model that…

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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

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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

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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)

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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)

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Time to shift from current

provider-centered model to

participant-centered model

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Mutual FundInvestment Managers

(i.e. Fidelity, Vanguard, etc.)

Mutual FundInvestment Managers

(i.e. Fidelity, Vanguard, etc.)

Vendor/Recordkeeper/Provider • Investment Platform (open architecture vs. proprietary)

• Recordkeeping

• Participant Web-Site

• Education Services

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.

Revenue Sharing

PLAN SPONSOR403(b)

PLAN SPONSOR403(b)

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.

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.RevenueSharing

RevenueSharing

Concept ofOperations

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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

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Questions?Questions?

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