3There 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.
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11Hardship and Unforeseeable Emergency Withdrawals Common practice in 401(k) and 403(b) plansWithdraw to cover an “immediate and heavy” financial needSafe harbor reasons:Medical expensesBuying a principal residenceTuition/educational expensesPayments to avoid eviction/foreclosureEarly distribution penalties apply to 401(k) and 403(b) participants under the age of 59 ½
12Hardship and Unforeseeable Emergency Withdrawals 457(b) withdrawals for “unforeseeable emergencies”Illness or accidentLoss of property due to casualtyOther similar extraordinary and unforeseeable circumstance due to events beyond controlClear and consistent policies and procedures are critical
13Loans Two types: General purpose loans Principal residence purchase loansBorrow 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 takenCharge a fee for initiating a loan to discourage useMost common repayment process is payroll deductionCan be detrimental to participant savings
14Investment Advice Methods for providing participant advice: Managed account service via recordkeeper paired with call centerOne-on-one financial planning sessionsMay improve diversification and reduce total volatilityKey items to monitor in search of managed account services/phone-based advisors:FeesRevenue-sharing transparencyAppropriateness of the asset-allocation modelAccuracy of the reflection of DB and Social Security benefitsInvestment fund selection process transparency
16Rollovers Allow participants to control savings Remove some of the burden of multiple accountsDiffering laws affect choices of “rollable” assetsNew laws allow “Roth” funds to rolloverAdds levels of complexity due to new distribution and tax laws
17Roth Options Most governmental plans can have Roth plans Considered best practice to offer a Roth option, when availableTax-deferred savings vs. tax-free accumulation (on after-tax contributions)“Designated Roth” – Roth component within 401(k), 403(b), and 457(b) plansIRS regulations differ between a Designated Roth plan and a Roth IRAImportant to note differences in the Designated Roth and Roth IRA for:Designing and communicating the plan’s provisionsReporting purposes regarding payrollReading tax information (participants)
18Automatic Plan Features Automatic enrollment and automatic contribution escalation go hand in handIn ERISA market, fiduciary safe harbor protections led to major increase in automatic featuresAutomatic features help raise participation rates by percentMajority of assets remain in default investmentsDefault contribution levels (typically 3 percent) tend to remain close to the sameAdopting both creates high participation rates and rising contribution ratesImportant to review state laws and, if applicable, bargaining agreementsAlternative option “active choice” gives new employees a choice to opt-in or outQuick enrollment procedures may be available
19Employer MatchMore common with increased use of hybrid retirement programsHigher rate of participation when contribution is required to receive matchIncentive for participants to be more engaged in their savings plansAllows employer to provide additional future income without inflating other benefit costsMatch contributions may be FICA tax free to both the employee and the employerConsider plan design issues when contemplating a matching planWhen paying Social Security and FICA taxes, contributions to a 457(b) plan subject to FICA taxesMost employers add matching to qualified 401(a) and/or 403(b) plansCan be used as a retention tool when attaching a vesting periodFor ERISA plans, minimum requirements for vesting periods and use of forfeited assets
22Investment Policy Statement (IPS) as a Roadmap Establishes the purpose of the planOutlines roles and responsibilitiesSets the assets/investment options to be usedDefines performance standardsDefines risk parametersCreates the process for dealing with problemsThe 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 auditsNegates second-guessing and ensures the continuity of investment strategy if there is committee turnoverCreates a calming effect in times of market volatilityProvides a baseline for monitoring performance of the fund, the vendors and the money managersPurpose and Background: A general statement of the plan’s purposeStatement of objectivesGuidelines and Investment Policy: risk tolerance, time horizon, assets classes and expected returnsSecurities GuidelinesMinimum quality and diversification standardsProxy voting, self-directed brokerage and administrative policy issuesSelection of vendors –fund/money managers, custodian, trusteeControl procedures- all duties and responsibilities are definedProcedures for reviewing resultsDue diligence requirements for selecting the plan’s investmentsPerformance expectations relative to peer groups, benchmarks and indicesReview of costs and expenses and reasonablenessControl procedures- continuedProcedures for reviewing metrics and resultsAdministrative costsMoney management feesCustody feesBrokerage costs- best executionSoft dollar arrangementsRevenue share arrangementsSecurities lending revenue and arrangements
23Elements of an IPS Components of the Investment Policy Statement Introduction and purposeEstablishes reason for the plan and the IPSElements of an IPSRoles and responsibilitiesDiscusses what the obligations and responsibilities are for the people involved with the planPlan investment optionsEstablishes reason for the plan and the IPSOptions providing different risk/return characteristicsInformation accessOutlines the options to be included in the planInvestment objectives and performance standardsProvides the benchmark and peer group performances over defined periods of time
24Components of the Investment Policy Statement Investment manager and investment fund guidelinesProvides for the following standards:Compliance with ERISA/fiduciary responsibilityCompliance with IPS and all agreementsMarket value determinationDiversification standardsInvestment monitoring and reportingEstablishes measurement criteria such as:Peers and benchmarksInvestment styleProcess and philosophyWatch listDescribes the criteria for putting investment managers under heightened securityDiscusses how a manager is taken off the watch list and the time limit for remaining on the watch list
25Components of the Investment Policy Statement Investment and fund selection and terminationDetails the criteria for selecting a fund or managerDescribes the criteria for terminating a manager and the process of liquidation and transfer of assetsFee policyDefines how the plan will pay the feesThe use/non-use of revenue sharingDiscusses how fees are chargedReview processParticipant disclosureThis 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.
27Investing is a Challenge for Most Participants Research from Rutgers University, Boston College, Universities of Texas, and Pittsburgh
28Designing Optimal Investment Lineup Offers something for everyone:Asset allocation funds provide a one-stop option to meet needs of most participantsPassive funds offer low fees and market returns; avoid issue of underperformanceCore funds provide diversification, opportunity to outperform, fill gapsSophisticated 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 fundsPrimarily communications toolSome plans are moving to three tiers, dropping the Active coreSDBA*ActiveCorePassiveAsset AllocationHighersophisticationLower* Self-Directed Brokerage Account
29NAGDCA Members on Investments NAGDCA –Public Sector DC plan Survey Report, March 2014
30Only 7 percent of participants rebalance over time2 Number of options offered and used% of participants usingOptions offered have stabilized over the past several years at around 181Only 7 percent of participants rebalance over time2Participants rarely utilize new optionsNote: Number of options treats lifecycle funds as a single fundData 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-upSome large plans are moving to all-index line-up with TDF and SDBARecordkeeping firms are responding with new ideasSources: 1Vanguard – How America Saves 2011, 2JP Morgan Retirement Services
35Domestic Equity How to Implement? -Passive LC Core Fixed-Income Market capitalizationActive vs. passiveGrowth vs. valueHow to Implement?-Passive LC Core-Active mid-cap and small-capFixed-IncomeCore vs. specialtyOther sectors: high-yield, long duration, international, emerging marketsHow to implement ?-Diversified total return fund with small discretionary allocations to High Yield and international Bonds
36Non-TraditionalInflation-protected securities (most commonly known as TIPS)Real estateCommoditiesInternational fixed incomeHow to Implement?REITSDiversified real asset fundForeign/InternationalCapitalization rangesExposure to currenciesCountries and regionsHow to Implement? Core vs. SpecialtyBest Practice is to have exposure to:Developed markets (MSCI EAFE index)International developed small- and mid-cap equitiesEmerging market equities, developed, and small- and mid-cap, (MSCI ACW IMI index)
37Pre-Diversified Funds BenefitsA single option that offers a fully-diversified portfolioAutomatic rebalancingA risk-return profile that changes with the participant’s agePre-determined glide pathSelection of a portfolio by ageCan be customized to reflect the demographics and savings patterns of employeesCan utilize other asset classes such as inflation protected securities, real estate, international bonds, and even commoditiesAdding annuities to TDFsTypesTarget Date FundsTarget Risk FundsBalanced FundTarget date funds are still the most common default optionNeed to conduct better due diligence on selection and monitoring of TDFsDOL publishes Tips for Reviewing TDFsNeed to align with participant demographics and risk tolerances
38Reviewing TDFs: Several Important Considerations Asset allocationStructuralDiffer in asset classesTraditional asset classes vs. TIPs, REITs, alterativeSub-asset classes can make a big differenceInternational vs. USOver-diversificationToo many proprietary fundsRoll-down processImplementation – active vs. passiveRebalancing and tactical allocationsIf 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 positionRecognized 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 todayWe 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.
40White Labeling as the Participant Sees It Plan sponsor seeks to simplify lineup and increase flexibility through manager of manager approach.U.S. Equity Large CapU.S. Smid Cap EquityNon-U.S. EquityReal Assets
41White 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 CITU.S. Equity Large Cap17% Large Growth SA17% Large Value SA17% Large MF50% Russell 1000 CITNon-U.S. Equity19% EAFE SA19% Global MF19% Non-U.S. Growth SA19% Non-U.S. SA19% Emerging Markets MF3% ACWI ex USA CITU.S. Smid Cap Equity32% Smid Core22% Small Core SA22% Small Growth SA22% Small Value SA3% Russell 2000 CIT
42Pros and Cons of Manager of Manager or White Label Funds Reduce plan complexity/streamline for participantsReduce opportunities for momentum market timingEliminate mapping issues for those fundsPotential ability to introduce alternatives and illiquid assetsConsNot all recordkeepers supportChallenges in setting upRebalancing challengesOther challenges similar to separate accounts such as governance and unitization
43Managed AccountsAn investment advisor manages and monitors the retirement account.Typically:Offered by the same independent third-party that provides online adviceUse the same investment methodology, features, etc., as for online investment adviceAdvise on drawing down income through retirementGeared for do-it-for-me investors, as the provider implements the advice by taking discretionary control of the participant’s accountPaid via an asset-based fee deducted from participant accountSolutions may be opt-in or opt-out36.2 percent of large plan sponsors offer managed accounts< 5 percent offer as defaultSource: 2014 Callan DC Survey
44Pros and Cons of Managed Accounts Professional managementTailored solutionLeverages funds within the planAdvice can extend to contribution levels and drawdownsConsFeesLimited utilization of tailoringMaterially better than target date fund but requires participant input
45Self-Directed Brokerage Accounts What they are:Full window, including mutual funds, ETFs, individual securitiesLimited window, typically with only mutual fundsAdministered through brokerage—not part of recordkeeping systemBrokerage firm typically opens accounts, monitors accounts, accepts orders, maintains records, responds to account questionsMay have separate entities executing trades, preparing statements, custodian accounts
46Pros and Cons of Self-Directed Brokerage Accounts Low utilizationCostLoss of revenue sharingLoss of economies of scaleProsProvides wide array of investments for vocal minority of do-it-yourselfersCan facilitate efforts to streamline core lineup
47Self-Directed Brokerage Accounts—Prevalence 200620072008200920102011201220132014Source: 2014 Callan DC Index.
49Pros and Cons of Collective Trusts in DC Plans Typically less expensive and offer tiered fee schedulesStandardized and customized revenue sharingFewer mutual fund “issues”Transaction penaltiesRegistration and other costsInvestment limitationsMorningstar and Lipper coverage has increasedFact sheets and disclosure statements are availableConsMust be maintained by a bankNo ticker symbolLess reporting and data availabilityMore set-up time/steps than mutual fundsNo board of directors, product not registered with SECRevenue sharing not always availableThere 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.
50Pros and Cons of Separate Accounts/Unitized Funds Requires trustee/custodian to be hired for unitizationRequires customized fact sheets and, if desired, other strategy detailsCommunications challenges (fund descriptions, manager strategy, etc.)Possible implementation challenges: many moving partsNot traded on NSCCNot a regulated/registered fundNo revenue sharingHigh minimumsProsMay provide lowest fees for large plansCustomizable investment policy guidelinesAllow for customized, equitable administrative feesAccess to greater set of institutional managersMay allow plan sponsor to leverage DB plan managers
51Prevalence 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
52Live Written Questions: Use the Q&A Panel located on the right side of your screen.
53State of North Carolina firstname.lastname@example.org Contact Information:Steve TooleState of North CarolinaJeffrey SnyderCammack RetirementMartha SpanoBuck Consultants
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