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

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Presentation on theme: "The National Association of Government Defined Contribution Administrators, Inc. (NAGDCA) presents 2014 NAGDCAST #3: Best Practices – Plan Design."— Presentation transcript:

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

2 1 Program Introduction Steve Toole Director of Retirement Systems State of North Carolina

3 2 Many Thanks to Our 2014 NAGDCAST Sponsors!

4 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.

5 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.

6 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.

7 6 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!

8 7 Today’s Presenters Speaker: Jeffrey H. Snyder, Cammack Retirement Group Speaker: Martha Spano, Buck Consultants

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

10 Overview I.Participant Services i.Hardship and Unforeseeable Emergency Withdrawals ii.Loans iii.Investment Advice II.Plan Features i.Rollovers ii.Roth Options iii.Automatic Plan Features iv.Employer Match 9

11 Participant services 10

12 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 11

13 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 12

14 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 13

15 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 14

16 Plan Features 15

17 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 16

18 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) 17

19 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 18

20 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 19

21 Best Practices Martha Spano Principal Buck Consultants

22 Investment Policy Statement 21

23 The Investment Policy Statement codifies the standards for managing the plan. At a minimum, it should be reviewed annually. 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 22

24 Elements of an IPS Introduction and purpose Establishes reason for the plan and the 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 Components of the Investment Policy Statement 23

25 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 Components of the Investment Policy Statement 24

26 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. Components of the Investment Policy Statement 25

27 Fund Lineup 26

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

29 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 Active Core Passive Core Passive Core Asset Allocation Higher sophistication Lower sophistication * Self-Directed Brokerage Account 28

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

31 Options offered have stabilized over the past several years at around 18 1 Only 7 percent of participants rebalance over time 2 Participants rarely utilize new options Sources: 1 Vanguard – How America Saves 2011, 2 JP Morgan Retirement Services Note: Number of options treats lifecycle funds as a single fund % of participants using Number of options offered and used 30

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

33 Constructing a Fund Lineup: Selecting Asset Classes 32

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

35 What is a Stable Value Fund? 34

36 Domestic Equity –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 35

37 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) Non-Traditional –Inflation-protected securities (most commonly known as TIPS) –Real estate –Commodities –International fixed income How to Implement? REITS Commodities Diversified real asset fund 36

38 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 37

39 Reviewing TDFs: Several Important Considerations A.Differ in asset classes Traditional asset classes vs. TIPs, REITs, alterative B.Sub-asset classes can make a big difference 1.International vs. US 2.Over-diversification 3.Too many proprietary funds A.Roll-down process B.Implementation – active vs. passive C.Rebalancing and tactical allocations Asset allocationStructural 38

40 White Label Funds Managed Accounts Brokerage Window Special Investments 39

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

42 White Labeling as the Plan Sponsor Sees It 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. Equity Large Cap -17% Large Growth SA -17% Large Value SA -17% Large MF -50% Russell 1000 CIT Real Assets -28% Global Property SA - 28% Global Listed Infrastructure SA - 20% Real Asset MF - 20% Real Asset CIT - 30% TIPS 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 41

43 Pros and Cons of Manager of Manager or White Label Funds Pros –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 42

44 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 43

45 Pros and Cons of Managed Accounts Pros –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 44

46 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 45

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

48 Self-Directed Brokerage Accounts—Prevalence Source: 2014 Callan DC Index

49 Investment Vehicles 48

50 Pros and Cons of Collective Trusts in DC Plans Pros –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 49

51 Pros and Cons of Separate Accounts/Unitized Funds 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 Cons –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 50

52 Does your plan offer the following investment types within the fund lineup?* Prevalence of Investment Types Offered 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. * Multiple responses were allowed. Source: 2014 Callan DC Survey na 51

53 52  Live Written Questions: Use the Q&A Panel located on the right side of your screen.

54 53 Steve Toole State of North Carolina Jeffrey Snyder Cammack Retirement Martha Spano Buck Consultants Contact Information:

55 54 Thanks for joining today’s NAGDCAST! Please check your and complete the quick evaluation of today’s event.

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