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403(b)/457(b) Solutions for Compliance, TPAs and other Headaches

403(b)/457(b) Solutions for Compliance, TPAs and other Headaches. History of the 403(b)/457(b) market Review 403(b)/457(b) legislative changes Pros & Cons of 403(b)/457(b) models Next steps. Agenda. 2. History of the 403 (b)/457(b) Market Historical Model

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403(b)/457(b) Solutions for Compliance, TPAs and other Headaches

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  1. 403(b)/457(b) Solutions for Compliance, TPAs and other Headaches

  2. History of the 403(b)/457(b) market Review 403(b)/457(b) legislative changes Pros & Cons of 403(b)/457(b) models Next steps Agenda 2

  3. History of the 403 (b)/457(b) Market Historical Model Supplement to traditional pension plans No ongoing employee communication No employer oversight responsibility No compliance responsibility Multiple provider environments Individual contracts Retail buyers Loads/Surrender charges to compensate financial advisors (sales people) Primarily annuity products (80%) 1974 allowed non-insurance products 3

  4. History of the 403 (b)/457(b) Market (cont.) Problems with Historical 403(b)/457(b) Model Not utilizing group purchasing power Expenses significantly cut into retirement account balances No monitoring of employee actions (loans, distributions, deferrals) Problems and concerns about the pension and Social Security system have caused the government to revisit the 403(b)457(b) plan as an important retirement savings vehicle 4

  5. What were the Drivers behind this new approach to 403(b)? • IRS Regulations announced in the summer of 2007 and effective in 2009 impacted Districts, their Participants and their Providers • These regulations created greater Compliance, Administrationand FiduciaryOversight on the part of Districts • Districts were struggling under the traditional (any willing provider) “open access model” due to many moving parts and lack of collective buying power • There was a desire on the part of Districts for a holistic solution that was a “win-win” for all stakeholders (Districts, Participants, Providers) 5

  6. The Regulations Released July 23, 2007 First legislation relating to 403(b)/457(b) plans in 40 years General effective date January 1, 2009 Intentions of new regulations Increase employer attention/oversight Enhance plan compliance Move toward a 401(k) model Enhance employee retirement outcomes 6

  7. The Regulations The Regulations DO NOT Impose fiduciary duties Subject 403(b)/457(b) plans to ERISA or ERISA fiduciary duties Require districts to select a single retirement plan provider, though that is an option and there are good reasons to do so 7

  8. The Regulations Regulation Highlights 90-24 transfers/information sharing Written plan/plan document requirement Universal availability Distributions & loans Contribution timing Plan terminations 8

  9. The Regulations Important Definitions 90-24 transfer - a transfer of account to an investment provider not part of an employer’s 403(b) plan Plan document - a document that describes the features of an employer sponsored retirement plan Information sharing agreement – a sharing of information between plan sponsor and providers to facilitate plan-level compliance Universal availability - once a plan sponsor permits any employee to elect a salary deferral into the 403(b), the opportunity must be extended to all employees of the organization 9

  10. Questions? 10

  11. Questions for the School District Is your current 403(b)/457(b) “just another payroll slot,” or a true benefit that helps employees plan for their retirement? Is your current 403(b)/457(b) sales-centered or participant centered with a focus on employee education? Is it time to shift the paradigm? 11

  12. What can you do? 12

  13. Multiple vs. Single Vendor Considerations 13

  14. Summary of Comparative Findings • Multi-Vendor • Higher fees are likely because as the number of providers increases, $s invested per provider decreases • Reduces likelihood participants will have a secure retirement • Investment liquidity decreases due to loads and surrender charges • Participant must choose best provider among a potentially “bewildering“ number based on investment options and fees • Too many providers makes monitoring for malfeasance costly • School systems function as a clearinghouse for providers • Single Vendor • Combines assets to reduce fees and charges • Accumulates more real retirement wealth because of lower fees • Assets are portable/No surrender charges • Easier for participants to make choices because of single provider with multiple investment options • Increases equity, i.e. similar participants will achieve similar retirement outcomes • Increases retirement savings by reducing fees 14

  15. Multi vs. Single Vendor Conclusion? “While there are a number of economic reasons for the disparity in fees based on administrative structure, we conclude that… …controlled access provides a better model for maximizing the likelihood that teachers achieve their retirement goals.” What does that mean? Lower Fees Higher Retirement Balances equals 15

  16. Single Vendor Model It is a “Best in Class” model that… • First & foremost… we believe it can improve retirement outcomes for Participants! • Lowers fees and makes them transparent • Provides diversified investment options through a single trading platform • Can offer both actively managed & low cost passively managed (index fund) investment options • Seeks “Best in Class” investments with quarterly monitoring & oversight which is missing now • Focuses on education and retirement outcomes, not on sales and marketing • Uses salaried, non-commissioned, licensed Financial Advisors who are measured for their support to Participants and not tied to sales of investments • Ensures tax compliancy for the District and ultimately for the Participants • Is faster and more flexible (example is addition of Roth 403(b)/457(b) • Eliminates District issues with compliance, record keeping • Puts all providers (including prior ones) under one umbrella • Saves Districts time and money which helps allocate valuable resources to other pressing needs 16

  17. Single Vendor Summary • The Participant Experience • Education / Planning tools from One Source • Transactions are simplified and administratively efficient • Increases to participation • Purchasing Power of the Institution • Economies of Scale/Pricing Leverage • Ease of Administration • Audit/Necessary Filings • One-Stop shop model for Investments • Investment Policy Statement / Goverance items • Clarity & Simplicity • Transparent Fee Structure 17

  18. Single Vendor Benefits • Simplification of Compliance under IRS/DOL Regulations • An improved process for plan administration • Economies of scale through pricing negotiation • Improved fee transparency to participants and plan • Improved vendor relationship – sole provider with greater accountability 18

  19. Models of Operation: Pros/Cons of Single vs. Multiple Vendors Single Vendors Pros Pricing/cost Breakpoints are hit quicker Pure education vs. sales Easy to understand (employees) Easy to communicate (district) Administrative burden to district lower than having multiple providers (no need for a TPA or additional provider services and fees) Cons Depending on product chosen, lack of choice (not relevant for open architecture products and/or products with self-directed brokerage feature) 19

  20. Models of Operation:Pros/Cons of Single/Multiple Vendors (cont’d) Multiple Vendors Pros Employees have the option to choose from more than one product (most relevant if products include proprietary mutual funds or a limited investment platform) Cons Pricing/cost Breakpoints not offered and/or not hit as quickly “Communication” is really sales, not education due to competing products (i.e. old 403(b) model) Difficult for employees to understand (which one do I pick?) Difficult for the district to communicate (more employee questions, etc) Greater administrative burden (need for TPA, more provider services, therefore, higher expenses) 20

  21. Time to shift from current provider-centered model to participant-centered model 21

  22. Vendor oftentimes shares revenue collected by your 403(b) plan with TPA’s & Advisors to offset their fees and receives revenue from Investment Managers to offset their recordkeeping services. Mutual Fund Investment Managers (i.e. Fidelity, Vanguard, etc.) Concept of Operations Revenue Sharing Revenue Sharing Vendor/Recordkeeper/Provider • Investment Platform (open architecture vs. proprietary) • Recordkeeping • Participant Web-Site • Education Services Third Party Administrator • Plan Documents • Compliance • Administration • 5500 Report • Loan Tracking PLAN SPONSOR 403(b) Revenue Sharing Advisor/Consultant • XYZ Financial Solutions • RFP Services • Fiduciary Oversight • Investment Monitoring • Education Services • Etc. 22

  23. Marketing Challenges and District Scenarios • Challenges • Provide enough investment choices to earn buy-in by participants • Reduce opposition by current providers • Three Scenarios-District • Eliminate 403(b) entirely and move all participants to Coop • Maintain current 403(b), grandfather in current participants and providers, but all new contributions into Coop • Maintain current 403(b), grandfather in current participants and allow future contributions into existing providers, but shift all new participants into Coop 23

  24. Questions? 24

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