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Director of Retirement Systems State of North Carolina

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0 Best Practices – Plan Design
The National Association of Government Defined Contribution Administrators, Inc. (NAGDCA) presents 2014 NAGDCAST #3: Best Practices – Plan Design

1 Director of Retirement Systems State of North Carolina
Program Introduction Steve Toole Director of Retirement Systems State of North Carolina

2 Many Thanks to Our 2014 NAGDCAST Sponsors!

3 There will be a Q&A Session at the end of today’s presentation:
Live Written Questions: Use the Q&A Panel located on the right side of your screen.

4 Today’s PowerPoint Presentation and Speaker Bios
Still need to download the PowerPoint presentation for today’s NAGDCAST? Go to and click on the link in the “News and Events” section located on the homepage screen. You can also view the speakers’ bios on the NAGDCA website.

5 Continuing Education Credit
Credits: This NAGDCAST is worth 1 continuing education credits to InFRE CRA and CRC designees as well as CPE and CFP designees! To Receive Credit: InFRE designees must report attendance at a NAGDCAST when they submit continuing education with their annual certification renewal. NAGDCA will provide InFRE with a final participant list (not registrant list) so that those seeking certification credits can be verified. Individuals must be signed in separately to receive continuing education credits. NAGDCAST participants seeking CPE continuing education credits must complete the polling questions during the webcast to receive credit.

6 The evaluation will be emailed following the webcast and takes
Please complete the online NAGDCAST evaluation – NAGDCA needs your continued input about the NAGDCAST series! The evaluation will be ed following the webcast and takes 2 minutes to complete! THANK YOU!

7 Today’s Presenters Speaker: Jeffrey H. Snyder,
Cammack Retirement Group Speaker: Martha Spano, Buck Consultants

8 BEST PRACTICES Jeffrey H. Snyder Vice President, Senior Consultant
Cammack Retirement Group

9 Overview Participant Services
Hardship and Unforeseeable Emergency Withdrawals Loans Investment Advice Plan Features Rollovers Roth Options Automatic Plan Features Employer Match

10 Participant services

11 Hardship and Unforeseeable Emergency Withdrawals
Common practice in 401(k) and 403(b) plans Withdraw to cover an “immediate and heavy” financial need Safe harbor reasons: Medical expenses Buying a principal residence Tuition/educational expenses Payments to avoid eviction/foreclosure Early distribution penalties apply to 401(k) and 403(b) participants under the age of 59 ½

12 Hardship and Unforeseeable Emergency Withdrawals
457(b) withdrawals for “unforeseeable emergencies” Illness or accident Loss of property due to casualty Other similar extraordinary and unforeseeable circumstance due to events beyond control Clear and consistent policies and procedures are critical

13 Loans Two types: General purpose loans
Principal residence purchase loans Borrow up to 50 percent of vested balance or up to $50,000 (whichever is less) Limits cumulative across all vendors (recordkeepers) When loans are offered it is best practice to: Restrict number of loans taken Charge a fee for initiating a loan to discourage use Most common repayment process is payroll deduction Can be detrimental to participant savings

14 Investment Advice Methods for providing participant advice:
Managed account service via recordkeeper paired with call center One-on-one financial planning sessions May improve diversification and reduce total volatility Key items to monitor in search of managed account services/phone-based advisors: Fees Revenue-sharing transparency Appropriateness of the asset-allocation model Accuracy of the reflection of DB and Social Security benefits Investment fund selection process transparency

15 Plan Features

16 Rollovers Allow participants to control savings
Remove some of the burden of multiple accounts Differing laws affect choices of “rollable” assets New laws allow “Roth” funds to rollover Adds levels of complexity due to new distribution and tax laws

17 Roth Options Most governmental plans can have Roth plans
Considered best practice to offer a Roth option, when available Tax-deferred savings vs. tax-free accumulation (on after-tax contributions) “Designated Roth” – Roth component within 401(k), 403(b), and 457(b) plans IRS regulations differ between a Designated Roth plan and a Roth IRA Important to note differences in the Designated Roth and Roth IRA for: Designing and communicating the plan’s provisions Reporting purposes regarding payroll Reading tax information (participants)

18 Automatic Plan Features
Automatic enrollment and automatic contribution escalation go hand in hand In ERISA market, fiduciary safe harbor protections led to major increase in automatic features Automatic features help raise participation rates by percent Majority of assets remain in default investments Default contribution levels (typically 3 percent) tend to remain close to the same Adopting both creates high participation rates and rising contribution rates Important to review state laws and, if applicable, bargaining agreements Alternative option “active choice” gives new employees a choice to opt-in or out Quick enrollment procedures may be available

19 Employer Match More common with increased use of hybrid retirement programs Higher rate of participation when contribution is required to receive match Incentive for participants to be more engaged in their savings plans Allows employer to provide additional future income without inflating other benefit costs Match contributions may be FICA tax free to both the employee and the employer Consider plan design issues when contemplating a matching plan When paying Social Security and FICA taxes, contributions to a 457(b) plan subject to FICA taxes Most employers add matching to qualified 401(a) and/or 403(b) plans Can be used as a retention tool when attaching a vesting period For ERISA plans, minimum requirements for vesting periods and use of forfeited assets

20 Best Practices Martha Spano Principal Buck Consultants

21 Investment Policy Statement

22 Investment Policy Statement (IPS) as a Roadmap
Establishes the purpose of the plan Outlines roles and responsibilities Sets the assets/investment options to be used Defines performance standards Defines risk parameters Creates the process for dealing with problems The Investment Policy Statement codifies the standards for managing the plan. At a minimum, it should be reviewed annually. Provides a paper trail of policies, practices and procedures for investment decisions. Lays the foundation for good stewardship, Can be used in litigation defense and compliance audits Negates second-guessing and ensures the continuity of investment strategy if there is committee turnover Creates a calming effect in times of market volatility Provides a baseline for monitoring performance of the fund, the vendors and the money managers Purpose and Background: A general statement of the plan’s purpose Statement of objectives Guidelines and Investment Policy: risk tolerance, time horizon, assets classes and expected returns Securities Guidelines Minimum quality and diversification standards Proxy voting, self-directed brokerage and administrative policy issues Selection of vendors –fund/money managers, custodian, trustee Control procedures- all duties and responsibilities are defined Procedures for reviewing results Due diligence requirements for selecting the plan’s investments Performance expectations relative to peer groups, benchmarks and indices Review of costs and expenses and reasonableness Control procedures- continued Procedures for reviewing metrics and results Administrative costs Money management fees Custody fees Brokerage costs- best execution Soft dollar arrangements Revenue share arrangements Securities lending revenue and arrangements

23 Elements of an IPS Components of the Investment Policy Statement
Introduction and purpose Establishes reason for the plan and the IPS Elements of an IPS Roles and responsibilities Discusses what the obligations and responsibilities are for the people involved with the plan Plan investment options Establishes reason for the plan and the IPS Options providing different risk/return characteristics Information access Outlines the options to be included in the plan Investment objectives and performance standards Provides the benchmark and peer group performances over defined periods of time

24 Components of the Investment Policy Statement
Investment manager and investment fund guidelines Provides for the following standards: Compliance with ERISA/fiduciary responsibility Compliance with IPS and all agreements Market value determination Diversification standards Investment monitoring and reporting Establishes measurement criteria such as: Peers and benchmarks Investment style Process and philosophy Watch list Describes the criteria for putting investment managers under heightened security Discusses how a manager is taken off the watch list and the time limit for remaining on the watch list

25 Components of the Investment Policy Statement
Investment and fund selection and termination Details the criteria for selecting a fund or manager Describes the criteria for terminating a manager and the process of liquidation and transfer of assets Fee policy Defines how the plan will pay the fees The use/non-use of revenue sharing Discusses how fees are charged Review process Participant disclosure This section discuss all of the participant disclosures such as fees, investment alternatives, how participants should deliver investment instructions, etc. Note: The IPS should be detailed enough to effectively manage the plan, but not so detailed as to “handcuff” decision makers.

26 Fund Lineup

27 Investing is a Challenge for Most Participants
Research from Rutgers University, Boston College, Universities of Texas, and Pittsburgh

28 Designing Optimal Investment Lineup
Offers something for everyone: Asset allocation funds provide a one-stop option to meet needs of most participants Passive funds offer low fees and market returns; avoid issue of underperformance Core funds provide diversification, opportunity to outperform, fill gaps Sophisticated investors can access additional choices via SDBA* Many plans use a tiered structure: Present the lineup that identifies who may be best served by which funds Primarily communications tool Some plans are moving to three tiers, dropping the Active core SDBA* Active Core Passive Asset Allocation Higher sophistication Lower * Self-Directed Brokerage Account

29 NAGDCA Members on Investments
NAGDCA –Public Sector DC plan Survey Report, March 2014

30 Only 7 percent of participants rebalance over time2
Number of options offered and used % of participants using Options offered have stabilized over the past several years at around 181 Only 7 percent of participants rebalance over time2 Participants rarely utilize new options Note: Number of options treats lifecycle funds as a single fund Data shows participants use simple math to allocate among funds. The more choices there are, the more they select by simply dividing their funds evenly. And this is not because they are trying to diversify!! Focus on streamlining the line-up Some large plans are moving to all-index line-up with TDF and SDBA Recordkeeping firms are responding with new ideas Sources: 1Vanguard – How America Saves 2011, 2JP Morgan Retirement Services

31 Fund Lineup Capital Preservation Domestic Fixed Income Domestic Equity Foreign/International Equity Pre-Diversified Funds Non-Traditional Assets

32 Constructing a Fund Lineup: Selecting Asset Classes

33 Constructing a Fund Line-Up: Importance of Diversification
Best Performing Asset Classes :

34 What is a Stable Value Fund?

35 Domestic Equity How to Implement? -Passive LC Core Fixed-Income
Market capitalization Active vs. passive Growth vs. value How to Implement? -Passive LC Core -Active mid-cap and small-cap Fixed-Income Core vs. specialty Other sectors: high-yield, long duration, international, emerging markets How to implement ? -Diversified total return fund with small discretionary allocations to High Yield and international Bonds

36 Non-Traditional Inflation-protected securities (most commonly known as TIPS) Real estate Commodities International fixed income How to Implement? REITS Diversified real asset fund Foreign/International Capitalization ranges Exposure to currencies Countries and regions How to Implement? Core vs. Specialty Best Practice is to have exposure to: Developed markets (MSCI EAFE index) International developed small- and mid-cap equities Emerging market equities, developed, and small- and mid-cap, (MSCI ACW IMI index)

37 Pre-Diversified Funds
Benefits A single option that offers a fully-diversified portfolio Automatic rebalancing A risk-return profile that changes with the participant’s age Pre-determined glide path Selection of a portfolio by age Can be customized to reflect the demographics and savings patterns of employees Can utilize other asset classes such as inflation protected securities, real estate, international bonds, and even commodities Adding annuities to TDFs Types Target Date Funds Target Risk Funds Balanced Fund Target date funds are still the most common default option Need to conduct better due diligence on selection and monitoring of TDFs DOL publishes Tips for Reviewing TDFs Need to align with participant demographics and risk tolerances

38 Reviewing TDFs: Several Important Considerations
Asset allocation Structural Differ in asset classes Traditional asset classes vs. TIPs, REITs, alterative Sub-asset classes can make a big difference International vs. US Over-diversification Too many proprietary funds Roll-down process Implementation – active vs. passive Rebalancing and tactical allocations If Plan sponsor want to offer a TDF then need to conduct more due diligence on the funds- peel back the onion of this investment and look at the asset allocation, the assets themselves, the glidepath how quickly does it roll down to a higher fixed income position Recognized that there is a difference in philosophy between TDF that a have a “to” or “through” approach “To” ends at 65 and participant takes out their money “Through” means that participant leaves money in the plan and the fund will have to create wealth accumulation through retirement to age 85 – So the “to” approach has less equities in the roll down at age 65 than does the through approach by about % So TDF today We saw markets rebounded in 2009 and 2010 but in 2011 TDF were pretty much flat. Headlines were screaming that TDF are still broken! But I believe that TDF are still the answer for the majority of participants because of the investing behavior.

39 White Label Funds Managed Accounts Brokerage Window
Special Investments White Label Funds Managed Accounts Brokerage Window

40 White Labeling as the Participant Sees It
Plan sponsor seeks to simplify lineup and increase flexibility through manager of manager approach. U.S. Equity Large Cap U.S. Smid Cap Equity Non-U.S. Equity Real Assets

41 White Labeling as the Plan Sponsor Sees It
Real Assets - 28% Global Property SA - 28% Global Listed Infrastructure SA - 20% Real Asset MF - 20% Real Asset CIT - 30% TIPS CIT U.S. Equity Large Cap 17% Large Growth SA 17% Large Value SA 17% Large MF 50% Russell 1000 CIT Non-U.S. Equity 19% EAFE SA 19% Global MF 19% Non-U.S. Growth SA 19% Non-U.S. SA 19% Emerging Markets MF 3% ACWI ex USA CIT U.S. Smid Cap Equity 32% Smid Core 22% Small Core SA 22% Small Growth SA 22% Small Value SA 3% Russell 2000 CIT

42 Pros and Cons of Manager of Manager or White Label Funds
Reduce plan complexity/streamline for participants Reduce opportunities for momentum market timing Eliminate mapping issues for those funds Potential ability to introduce alternatives and illiquid assets Cons Not all recordkeepers support Challenges in setting up Rebalancing challenges Other challenges similar to separate accounts such as governance and unitization

43 Managed Accounts An investment advisor manages and monitors the retirement account. Typically: Offered by the same independent third-party that provides online advice Use the same investment methodology, features, etc., as for online investment advice Advise on drawing down income through retirement Geared for do-it-for-me investors, as the provider implements the advice by taking discretionary control of the participant’s account Paid via an asset-based fee deducted from participant account Solutions may be opt-in or opt-out 36.2 percent of large plan sponsors offer managed accounts < 5 percent offer as default Source: 2014 Callan DC Survey

44 Pros and Cons of Managed Accounts
Professional management Tailored solution Leverages funds within the plan Advice can extend to contribution levels and drawdowns Cons Fees Limited utilization of tailoring Materially better than target date fund but requires participant input

45 Self-Directed Brokerage Accounts
What they are: Full window, including mutual funds, ETFs, individual securities Limited window, typically with only mutual funds Administered through brokerage—not part of recordkeeping system Brokerage firm typically opens accounts, monitors accounts, accepts orders, maintains records, responds to account questions May have separate entities executing trades, preparing statements, custodian accounts

46 Pros and Cons of Self-Directed Brokerage Accounts
Low utilization Cost Loss of revenue sharing Loss of economies of scale Pros Provides wide array of investments for vocal minority of do-it-yourselfers Can facilitate efforts to streamline core lineup

47 Self-Directed Brokerage Accounts—Prevalence
2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: 2014 Callan DC Index.

48 Investment Vehicles

49 Pros and Cons of Collective Trusts in DC Plans
Typically less expensive and offer tiered fee schedules Standardized and customized revenue sharing Fewer mutual fund “issues” Transaction penalties Registration and other costs Investment limitations Morningstar and Lipper coverage has increased Fact sheets and disclosure statements are available Cons Must be maintained by a bank No ticker symbol Less reporting and data availability More set-up time/steps than mutual funds No board of directors, product not registered with SEC Revenue sharing not always available There is a drawback with CITs that advisors should keep in mind for their clients: Participants can't roll over their CIT-balances when they leave the 401(k) because the trusts do not trade on open markets. Consequently, the participant must choose between leaving the assets with the previous employer (if permitted) or liquidating his or her CIT holdings and then rolling over the cash position to the new employer's plan or an IRA.

50 Pros and Cons of Separate Accounts/Unitized Funds
Requires trustee/custodian to be hired for unitization Requires customized fact sheets and, if desired, other strategy details Communications challenges (fund descriptions, manager strategy, etc.) Possible implementation challenges: many moving parts Not traded on NSCC Not a regulated/registered fund No revenue sharing High minimums Pros May provide lowest fees for large plans Customizable investment policy guidelines Allow for customized, equitable administrative fees Access to greater set of institutional managers May allow plan sponsor to leverage DB plan managers

51 Prevalence of Investment Types Offered
Does your plan offer the following investment types within the fund lineup?* Most plans (71.6 percent) have at least one institutionally structured fund, such as a separate account, collective trust, or unitized/private label fund in their lineup. na * Multiple responses were allowed. Source: 2014 Callan DC Survey

52 Live Written Questions: Use the Q&A Panel located on the right side of your screen.

53 State of North Carolina steve.toole@nctreasurer.com
Contact Information: Steve Toole State of North Carolina Jeffrey Snyder Cammack Retirement Martha Spano Buck Consultants

54 Thanks for joining today’s NAGDCAST!
Please check your and complete the quick evaluation of today’s event.


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