1. Copyright © 2007, The American College. All rights reserved. Used with permission. Planning for Retirement Needs Plan Funding and Investing— Part II Chapter 12

2. Copyright © 2007, The American College. All rights reserved. Used with permission. Overview Investment guidelines Investment classes Group pension products Life insurance products as a funding vehicle

3. Copyright © 2007, The American College. All rights reserved. Used with permission. Investment Guidelines Written instructions that provide structure for those involved in investing plan assets. A funding policy provides procedures for carrying out a program consistent with the plan’s objectives and ERISA requirements

4. Copyright © 2007, The American College. All rights reserved. Used with permission. Establishing Investment Guidelines Why? Fiduciary obligations (set procedures and clarify responsibilities) First line of defense (against DOL and participant litigation) Investing in a vacuum (need clear objectives) Funding policy “Establish procedures for establishing and carrying out a funding policy” Driven by plan’s objectives

5. Copyright © 2007, The American College. All rights reserved. Used with permission. Plan Objectives Defined-benefit plans Provide funds to pay current and future benefits Minimize long-term contributions Defined-contribution plans Provide for retirement needs of retirees

6. Copyright © 2007, The American College. All rights reserved. Used with permission. Guidelines Investment responsibilities for specific parties Investment policy (degree of risk) Investment goals (set benchmarks) Monitoring investment management (track performance) Reviewing investment guidelines (annual review)

7. Copyright © 2007, The American College. All rights reserved. Used with permission. Investment Considerations Tax treatment-plans are tax exempt and do not need redundant investment in tax exempt municipal bonds Liquidity-convert to cash in a short period of time in order to pay plan benefits Stability-little fluctuation in value

8. Copyright © 2007, The American College. All rights reserved. Used with permission. Unrelated Business Income Tax If the plan is deemed to operate an unrelated trade or business, any earnings will be taxable income to the trust. Generally avoid the tax Reduces return on investments Complicates plan administration File tax return and report on Form 5500

9. Copyright © 2007, The American College. All rights reserved. Used with permission. Unrelated Business Income Tax Operating trade or business on a regular basis either directly or as a partner Objective is to eliminate a source of unfair competition for taxable enterprises Any activity carried on for the production of income from the sale of goods or performance of services

10. Copyright © 2007, The American College. All rights reserved. Used with permission. Mortgage Loan Program The qualified plan continually held a substantial number of mortgage loans Trust received hundreds of loan applications Indirectly advertised Conducted on a year-round basis

11. Copyright © 2007, The American College. All rights reserved. Used with permission. Unrelated Business Income Tax Legal opinion for any partnership investment Debt-financed property Exception- A loan to an ESOP

12. Copyright © 2007, The American College. All rights reserved. Used with permission. Investment Classes Cash equivalents Define: fixed return, one year or less Important to meet the plan’s cash needs Bonds Defined: corporate or government borrows Provide cash when it will be needed Equities Defined: ownership interest Long-term inflation beaters Mutual funds

13. Copyright © 2007, The American College. All rights reserved. Used with permission. Separate-Investment Accounts Similar to mutual fund Pre-established investment mix Stated investment philosophy Minimum contribution requirement Not subject to claims of insurance company’s creditors

14. Copyright © 2007, The American College. All rights reserved. Used with permission. Guaranteed Investment Contracts (GIC) Guaranteed rate of return Guaranteed principal Pay out at specified date Sometimes build in earlier withdrawal flexibility to meet cash flow needs Also, allow penalty-free withdrawals for participants changing investment options Minimum required deposit

15. Copyright © 2007, The American College. All rights reserved. Used with permission. GICs uBullet –Guaranteed rate –Guaranteed principal –Specified contributions –Defined-benefit plans uWindow –Uncertain contributions –Contributions within window period eligible for guaranteed rate –Defined contribution

16. Copyright © 2007, The American College. All rights reserved. Used with permission. Investment Guarantee (IG) Contracts Typical contract 5 years with level contributions Guaranteed rate of return for year one and floor guarantee for future years Rate of return is the higher of guaranteed rate or actual experience Varieties: compare real to guaranteed rates each year or wait until end of 5-year contract Minimum required deposit

17. Copyright © 2007, The American College. All rights reserved. Used with permission. Life Insurance Split-funding means life insurance as well as a traditional investment fund Ordinary life policies—level premium over the entire life of participant (versus paying over a shorter period)

18. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions Separate-investment account contracts are similar to mutual funds. Bullet GICs are easier to sell when interest rates are low and are expected to rise. IG contracts are easier to sell when the market is unstable and the client wants to retain flexibility.

19. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions The plan’s investment guidelines should specify exactly who is responsible for what investment decisions. Separate-investment account contracts are similar to mutual funds. Bullet GICs are easier to sell when interest rates are low and are expected to rise. IG contracts are easier to sell when the market is unstable and the client wants to retain flexibility.