Retirement Plan Best PracticesPresentation By: Anthony J. Mirenda

September 30, 2015

Agenda Department of Labor (“DOL”) Updates Plan Fiduciaries 3(16), 3(21), 3(38) QDIA Updates Target Date Funds – Everyone’s Favorite Topic! Fiduciary File Automatic Enrollment/Auto Escalation

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DOL Updates

· Congress passes Employee Retirement Income Security Act of 1974 (ERISA)– Main purpose of legislation is to provide protection for individuals who

participate in ERISA-sponsored plans. · Department of Labor enforcement

– Employee Benefits Security Administration (“EBSA”)– Increase plan participant understanding and education– Avoid discrimination

– Fun Fact: Both COBRA and HIPPA are amendments to and part of ERISA

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DOL Updates cont.· EBSA Activity:

– FY 2014 $823.2M of collections· $356.2M – monetary benefit recoveries from informal resolution· $223.5M – prohibited transactions corrected· $204.9M - plan assets restored/participant benefits recovered· $20.2M – voluntary fiduciary correction program· $18.4M – abandoned plan program

– EBSA closed approximately 4,000 civil investigations within oversight of approximately 685,000 qualified plans.

– 64.7% investigations resulted in monetary results or other corrective action– Most common errors included:

· Failing to follow plan document provisions· Discriminating against rank-and-file, or non-highly compensated

employees (NHCEs)· Failing to deposit participant contributions to the plans in a timely manner· Filing 5500s late or not at all and failing to ensure participant loans

complied with plan provisionsUS DOL February 2015 Fact Sheet

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DOL Updates cont.· Tibble vs. Edison

– Supreme Court Decision 5/18/15 remanded case back to 9th Circuit Court for reconsideration· Challenges existing six year statute of limitations rule under ERISA

– When did the fund selection actually occur vs. the ongoing fiduciary duty because the funds remained in the 401(k) plan

· Edison acted imprudently by offering six higher priced mutual funds when materially identical lower priced mutual funds were available.

· DOL’s Fiduciary Proposal: Has implications at both plan level and personal level. As proposed, advisor would be considered a fiduciary under ERISA if the person provides advice to a plan fiduciary, participant, or beneficiary.

– As it relates to plans, an advisor who makes investment recommendations to 401(k) plans will almost always be a fiduciary and the advisor and any affiliates will therefore be required to have a “level” fee. · Will come into play with 12(b)1 fees· Exception – group annuity plan

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Plan 3(16), 3(21), and 3(38) Fiduciary

· Named Fiduciary – per 402(a) of ERISA, entity with the authority to control and manage the operation of the plan as named in the plan document.

· 3(16) Fiduciary - This entity agrees to take responsibility for either all of the daily operation of the plan or agrees to take responsibility for only certain functions– More administrative in nature vs. 3(21) and 3(38) investment advisory

· Evaluation of plan fees· Interpretation of plan documents (SPD, IPS, etc.)· Timely and accurate reporting and disclosure (5500, fee disclosures,

QDIA notices)· Distribution of benefits· Administration of loans· Hiring other plan service providers (TPAs)· Often times, a TPA will serve as a 3(16) fiduciary

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Plan 3(16), 3(21), and 3(38) Fiduciary cont.

· 3(21) Fiduciary - This entity agrees to take complete fiduciary responsibility for providing advice on the selection, making necessary plan option changes, and monitoring of all the plan’s investment options.

· Choosing plan QDIA· Ensuring QDIA is DOL approved· Building investment options within plan· Ensuring adhesion to IPS· Ongoing monitoring of plan investment options · Making necessary changes based on IPS stipulations

· IMPORTANT NOTE: When an employer hires a 3(21) fiduciary, the employer remains responsible for deciding to follow, or not follow, the non-discretionary advice. Thus, the employer remains responsible for any investment advice that is implemented, and both the employer and 3(21) fiduciary are jointly responsible for the plan’s investments.

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Plan 3(16), 3(21), and 3(38) Fiduciary cont.

· 3(38) Fiduciary - This entity agrees to take responsibility for providing advice on the selection and monitoring of all the plan’s investment options.

· Working with recordkeeper, or plan provider, to implement scope of plan provisions

· Building investment options within plan· Implement changes to plan investment options when deemed necessary· Ensuring adhesion to IPS· Ongoing monitoring of plan investment options

· IMPORTANT NOTE: When an employer hires a 3(38) fiduciary, the employer enjoys special legal protections under ERISA to the extent it appoints a 3(38) fiduciary (per the scope of the agreement). Employer is not responsible for the individual acts or omissions of the investment manager and advice is discretionary in nature and the 3(38) is responsible for the prudence of its day-to-day actions under ERISA.

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Qualified Default Investment Alternatives (“QDIAs”)

· Created by Congress and DOL by the enactment of the Pension Protection Act of 2006– QDIAs became an issue primarily due to the increase of automatic

enrollment and contribution arrangements, thus the significant increase of unallocated funds and increased liability on the part of plan sponsors.

· QDIAs are not required as part of an ERISA sponsored plan, however, if the plan sponsor wants to take advantage of the safe harbor fiduciary relief under ERISA 404(c)(5), they need to select a default fund meeting the QDIA requirements.

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QDIAs cont.

· Six mandatory conditions in order for plan sponsor to qualify for 404(c)(5) fiduciary relief:– Qualified Default Investment Alternative

· Assets have to be in a QDIA– Participant Investment Election Opportunity

· Participant must have been given opportunity to direct investment allocation and failed to do so.

– Notice Requirements· Plan sponsor must provide timely advance notice of QDIA and annual

notices to participants– QDIA materials must be provided as part of general participant

information/investment disclosures– Transfers into and out of QDIA must be allowed without penalty– Broad range of investment options

· Plan must offer participants the opportunity to invest in “broad range of investment alternatives” as described in 404(c).

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QDIAs cont.

· So, what types of investments qualify as QDIAs???– Managed account

· An investment management service provided by a plan fiduciary that allocates contributions among existing plan options and takes into account participant age, target retirement date, or life expectancy.

– Life cycle or target date fund· A diversified investment fund, product, or model portfolio designed to

provide varying degrees of long-term appreciation and capital preservation.

· Must become more conservative over time based upon participant’s age, target retirement date, or life expectancy. – Does not take into account risk tolerance.

– Balanced Fund· Fund product or portfolio with a target level of risk appropriate for the

plan’s participants as a whole.

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Target Date Funds (“TDFs”)

· Investment structured around a specific date

· Compare to funds with same target dates

· Consider fund manager’s objectives

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Target Date Funds cont.

· Due to such widespread usage, the DOL and EBSA are becoming increasingly diligent regarding education for plan participants regarding the funds and how they actually work.

· New requirement to have a graphical illustration of how fund’s asset allocation will change over time is required to be in the notice

· Raises questions regarding their suitability to be the QDIA

· Based on a 2014 Fidelity survey:– 83% of defined contribution plans use a TDF as the default investment

option (QDIA).– 39% of participants are 100% invested in a TDF– 58% of Millennial participants are 100% invested in a TDF

Fidelity analysis of 21,000 corporate defined contribution plans and 13.1 million plan participants as of 12/31/2014

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Target Date Funds cont.

· Is it a fund or a ‘fund of funds’?· Does the TDF glide path use a “to” or “through” approach to asset allocation?

– “To” approach reduces the fund’s equity (stocks) exposure over time and achieves its most conservative point at the target date.

– “Through” approach continues to reduce equity exposure through the target date so it does not reach its most conservative point until years later (after the target date).

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Target Date Funds cont.

· Does the target date fund glide path use a “to” or “through” approach?– “To” approach reduces the fund’s equity (stocks) exposure over time to its

most conservative point at the target date.– “Through” approach reduces equity exposure through the target date so it

does not reach its most conservative point until years later (after the target date).

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Fiduciary File

· Summary Plan Description· Updated Investment Policy Statement· Investment committee meeting agendas/minutes· 408(b)(2) and 404(a)(5) fee disclosures/employee notifications· Benchmark report· Fidelity bond· Most recent 5500

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Fiduciary File cont.

· Summary Plan Description/plan document– Ensure accuracy and up to date

· Employee eligibility requirements· Vesting schedule· Loan policy· Ensure timely filing of 5500 based on fiscal year of plan stated in SPD.

· Investment Policy Statement– Do you have one?– Specific vs. General

· General purpose of plan· General objectives of plan sponsor

– Finance committee, investment committee, CFO, fiduciary· Investment Options · Participant education and communication· Monitoring investment selections

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Fiduciary File cont.

· Investment committee meeting agendas/minutes– Date– Time– Place– Who needs to be there/attended– What will be discussed/was discussed– Action items– Next meeting time/TBD

· Fee disclosures - main point of emphasis for DOL/EBSA– 408(b)(2) and 404(a)(5)

· Who the service provider(s) is· Description of services being provided· Declaration of fiduciary status of provider· Fee (hard dollar) or expense (% of plan assets) charged by provider

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Fiduciary File cont.

Sample 408(b)(2) Category of Service Annual Estimated Estimated

EstimateAvg. per % of assets

participantPayments to Investment Providers $22,106 $237 0.80% Payments to Recordkeeper $10,355 $134 0.37% Payments to Others $8,550 $111 0.31% Total Estimate $41,011 $532 1.48% Estimated total $34,511 $448 1.24% after credit to plan expense account

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Fiduciary File cont.

· Difference between 408(b)(2) and 404(a)(5)– 408(b)(2) fee disclosure is the disclosure given from the plan provider

(Principal, Hancock, Voya, Great West) to the plan sponsor (the employer/company)

– 404(a)(5) fee disclosure is the disclosure given from the plan sponsor (the employer/company) to the plan participant (you).· Contains majority of the same fee disclosure information but will contain

additional information relevant to the plan participant.

· Other required disclosures/notices to plan participants (usually require 30, 45 or 60 day notice):– Original QDIA selection or QDIA change– Change in investment choices– Change to plan structure

· 401(k) to SH 401(k)· SH 401(k) to PS 401(k)

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Fiduciary File cont.

· Plan Benchmark Report– Compares your plan to those in your industry group nationally

· Plan provisions (loans, vesting, match, match amount)· Fees· Investment options (amount and type)· Participation rate· Auto-enroll/escalation vs. not· Avg. account balance· Employee eligibility· Roth option· Safe harbor/profit share provision· Investment committee (do you have one, who is on it, how often do they

meet)· Catch up provisions· Employee education

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Fiduciary File cont.

· Fidelity Bond– Must protect the plan against loss by reason of acts of fraud or dishonesty

on the part of persons required to be bonded, whether the person acts directly or through connivance with others.

– Who is ‘insured’ or covered?· The plan is the named insured. The persons covered by the bond are

those who handle funds of the plan.– Owners of companies, plan trustees, employees making contributions

or distributions on employees’ behalf, etc.

· How much does the bond need to be?– For a privately held company - 10% of plan assets, or up to $500,000,

whichever amount is less– For a publicly held company – 10% of plan assets, or $1M, whichever

amount is less

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Fiduciary File cont.

· Most recent 5500– If 12/31 end to the plan year, 5500 needs to be filed by 7/31 of following

year.

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Plan tidbits…

· Bundled vs. unbundled plan· Terminated employees· Roth vs. traditional 401(k)· 2016 contribution limits

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Auto-Enrollment/Auto Escalation

· Auto-enrollment/escalation features began being used in mid 1990s and were not widely used until the passage of the Pension Protection Act in 2006.

· Since passage of the PPA, according to the 55th annual survey of Plan Sponsor Council of America, approximately 46% of all defined contribution plans include an automatic enrollment arrangement.

· Three types of auto-enrollment:– Automatic Contribution Arrangement (ACA)– Eligible Automatic Contribution Arrangement (EACA)– Qualified Automatic Contribution Arrangement (QACA)

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Auto-Enrollment/Auto Escalation cont.

· Automatic Contribution Arrangement (ACA)– Most basic (and most commonly used)

· States that employees will be automatically enrolled in the plan, unless they elect otherwise

· Must specify percentage of employee’s salary deferral (3 – 5%). Max is generally 10%

· Must explain that employees have right to ‘opt-out’ or elect a different percentage to be withheld

· Other options involve more complicated contribution rules, compliance/testing requirements, employer match

· Advantages: increased plan participation, education, and ‘buy-in’, higher contribution allowances for HCEs based on IRS testing

· Disadvantages: required employee notices, additional administrative tasks, unintended results

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Auto-Enrollment/Auto Escalation cont.

– According to the Building Futures data of 3/31/2014, implementation of an auto-enrollment plan increased participation rates from 67% to 90%!

– 90% of participants do not change the default plan elections.– The study shows opt out rates do not increase from an auto deferral rate of

3% to an auto deferral rate of 6%.

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Why does all this matter?!?

· According to an AARP June 2012 study, 78% of workers age 50+ cite the need for money and/or health insurance as their primary need for working.– Increasing health care costs due to age rating of health plan premiums (up

to 3x higher for older workers).– Longer duration (From 53 to 66 days) and higher costs (from $2,227 to

$3,485) of disability claims– 25% of the US labor force will be 55+ in 2020, an increase 12% in 2000.– The % of workers who are 60+ and contributing to DC plans has doubled

over the past 10 years!!

· 71% of employees satisfied with their benefits list it as an important reason why they stay with their employer

· Bottom Line: The more robust, inclusive, cost efficient, and effective your retirement plan (and overall benefits package) is will likely lead to a happier, more tenured workforce and reduce overall costs for the employer.

AHIP.org, “Age Rating Restrictions”, America’s Health Insurance Plans, 2013“Workers Compensation and the Aging Workforce” December 2011, National Council on Compensation Insurance, Inc.2013, Stanford Center on LongevityFidelity analysis of 20,000+ DC plans and over 12M participants as of 09/30/2013.

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Retirement Plan Best Practices

QUESTIONS???

Anthony J. MirendaFinancial Advisor

Morgan Stanley Wealth Managementanthony.mirenda@morganstanley.com

720.488.23605251 DTC Parkway Suite 1500

Greenwood Village, Colorado 80111

Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Principal value and return of an investment will fluctuate with changes in market conditions. Investors should carefully consider the investment objectives and risks as well as charges and expenses of a mutual fund before investing. To obtain a prospectus, contact your Financial Advisor or visit the fund company’s website. The prospectus contains this and other important information about the mutual fund. Read the prospectus carefully before investing. Investments and services offered through Morgan Stanley Smith Barney LLC.

Member SIPC. CRC 1267778 8/15.

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Retirement Plans Best Practices

THANK YOU FOR YOUR TIME AND ATTENTION!!!