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AGRIP / CAJPA 2001

AGRIP / CAJPA 2001. AGRIP / CAJPA 2001. Bill Tugaw, President SST Benefits Consulting & Insurance Services, Inc. “Defined Contribution Plans 457, 403(b) and 401(k) & 401(a)”. Overview. Public Sector / Nonprofit Retirement Plans Small Business Jobs Protection Act of 1996

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AGRIP / CAJPA 2001

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  1. AGRIP / CAJPA 2001 SST Benefits Consulting

  2. AGRIP / CAJPA 2001 • Bill Tugaw, President • SST Benefits Consulting & Insurance Services, Inc. • “Defined Contribution Plans 457, 403(b) and 401(k) & 401(a)” SST Benefits Consulting

  3. Overview • Public Sector / Nonprofit Retirement Plans • Small Business Jobs Protection Act of 1996 • Fiduciary Responsibility • ACWA / JPIA Project • Future Changes SST Benefits Consulting

  4. Pubic Sector / Nonprofit Retirement Plans • Defined Benefit Plans • CalPERS • 1937 Act County • Defined Contribution Plans • §457 Deferred Compensation • 403(b) Tax Deferred Annuity • 401(k) Cash or Deferred Arrangement • 401(a) Defined Contribution SST Benefits Consulting

  5. What is §457 Deferred Compensation? • Government Employees • Voluntary Salary Deferral • Up to 25% of pay - $8,500 Annual Maximum • Defined Contribution Retirement Plan • Self-Directed SST Benefits Consulting

  6. What is 403(b) Tax Sheltered Account? • Teachers and Eligible Non-Profits • Voluntary Salary Deferral • Up to 25% of pay - $10,500 Annual Maximum • Defined Contribution • Loans • Potential Early Withdrawal Taxation SST Benefits Consulting

  7. Public Sector 401(k) • Profit vs. Surplus • Tax Reform Act of 1986 • Tax Payor Relief Act of 1997 • Loans • Potential Early Withdrawal Taxation SST Benefits Consulting

  8. What are 401(a) plans? • Proliferation since Taxpayer Relief Act of 1997 exempted public sector from nondiscrimination testing • Mandatory or Voluntary Deferral • Up to 25% of pay - $30,000 Annual Maximum • Vesting SST Benefits Consulting

  9. 401(a) Guidelines (from ICMA RC) • Qualified Retirement Plan • Contributions may be made by employer or employee • Employee contributions may be structured with pre-tax dollars • Earnings accrue tax-deferred • Employee my contribute to both a 401(a) and 457/403(b) plan SST Benefits Consulting

  10. 401(a) Guidelines, continued • Employee contributions must b e made with after-tax dollars unless the employer elects the “pick-up provision”. If the pick-up is elected, the contribution made by the employee must be mandatory and all employees in a plan must contribute the same amount or percentage of base pay. SST Benefits Consulting

  11. 401(a) Guidelines, continued • There is a one time option to be excluded from the plan if a mandatory contribution is required. SST Benefits Consulting

  12. 401(a) Plan Features • Each participant has their own account • Employer contributes a percentage of base salary and may establish a mandatory employee contribution • Employer contribution are made pre-tax • Earnings on the assets grow tax deferred • Taxes are paid upon withdrawal • Employer may establish a vesting schedule SST Benefits Consulting

  13. 401(a) Plan Features, continued • Employer may permit loans and establish loan criteria • Employer may establish more than one 401(a) plan SST Benefits Consulting

  14. 401(a) Plan Features, continued • Everyone within each plan must be treated equally • Employer must contribute the same amount to everyone in a plan • Employees mandatory, pre-tax contribution must be the same amount for everyone in a plan • One-time option to be excluded from the plan upon inception (if mandatory) SST Benefits Consulting

  15. 401(a) Plan Features, continued • Early withdrawals may be subject to a 10% early withdrawal penalty • Penalties not assessed in the event of • Death • Disability • Equal payments over single or joint life • Payments made after age 59 1/2 • Payments made after separation of service after age 55 SST Benefits Consulting

  16. Vesting • Employee’s contributions and associated earnings are always 100% vested • Employer may establish a vesting schedule for employer contributions SST Benefits Consulting

  17. Loans • Minimum loan amount $1,000 • Only one loan per year, maximum of five outstanding loans • Maximum loan amount for all outstanding loans is the lesser of $50,000 or 1/2 of your vested balance • Both the principal and interest payment go directly to the employee’s account SST Benefits Consulting

  18. 401(a) Benefits • May contribute to both a 401 and 457 plan • Participant directed investments • Loans from participant’s account may be allowed • Portable to another 401(a) or IRA • Flexible payout options SST Benefits Consulting

  19. 401(a) Objectives • Provide qualified pension plan atlternative to CalPERS • Benefits younger participants • Attract employees from private sector • Alternative to Social Security SST Benefits Consulting

  20. 401(a) Objectives - continued • Alternative to existing defined benefit plan • Enhanced pension benefit for defined group • Enhanced pension benefit for a broad employee group • Broad salary range makes mandatory EE contribution more difficult for lower wage earners • Annual step increases in EE match can make affordable SST Benefits Consulting

  21. 401(a) Objectives - continued • Provide alternative to costly defined benefit plan enhancements • Encourage organization wide EE participation in retirement savings SST Benefits Consulting

  22. 401(a) - Things to Consider • What is the objective of your group? • Do you have a definable group? • If you want a mandatory, pre-tax employee contribution, can everyone in the group agree on the percentage of base pay? SST Benefits Consulting

  23. Defined Contribution Plans A New Game with New Rules

  24. Small Business Jobs Protection Act of 1996 • Reaction to Orange County • SBJPA created a structure • Trust • Custodian • Annuity • No standard of conduct SST Benefits Consulting

  25. Who is a Fiduciary? • Fiduciary by Title (Trustee) • Fiduciary by Conduct (discretionary control) SST Benefits Consulting

  26. The Employees Retirement Income Security Act of 1974 (ERISA) defines a fiduciary as any person who has any power of control, management, or disposition over the funds or other property of any employee benefit plan. ERISA made fiduciaries personally liable for their actions. Who is a Fiduciary? SST Benefits Consulting

  27. What Fiduciary Protections are Available? • California Government Code Section 995 et seq. • Defense of public employees by the public employer • California Government Code Section 825 et seq. • Indemnification of public employees by the public employer • Potentially no punitive damages SST Benefits Consulting

  28. What Fiduciary Protections are Available? • Fiduciary Liability Insurance • Waiver of Recourse provision for plan fiduciaries • Plan assets cannot be used to pay non-recourse coverage (exclusive benefit of participants & beneficiaries) SST Benefits Consulting

  29. Practical Steps to meet Fiduciary Liability • Plan design complies with federal/state laws and fair to all • current laws • new legislation • Develop an investment policy statement • Structured process to select or remove vendors/investments SST Benefits Consulting

  30. Practical Steps to meet Fiduciary Liability • Establish procedure for monitoring performance • Benchmark indices • Educate and communicate to participants regarding plan restrictions and investment options • Decisions made consistently SST Benefits Consulting

  31. Practical Steps to meet Fiduciary Liability • Due process to resolve disputes • Require periodic audit • independent financial audit • compliance audit of contractors SST Benefits Consulting

  32. Practical Steps to meet Fiduciary Liability • Meet minimum requirements set forth in ERISA 404(c) - “safe harbor” • offer at least three diverse investment options with different risk & return characteristics • participants must have discretion over investment decisions • periodic investment changes must be allowed • communicate information • monitor investment performance SST Benefits Consulting

  33. Training • Trustee • Committee Members • Staff • Management • Union Leadership SST Benefits Consulting

  34. 457 University • Basic 457 Parameters • IRS Parameters • Employer Options • Responsibilities • Hardship Withdrawals • Selection of Providers • Future Changes SST Benefits Consulting

  35. ACWA / JPIA Project

  36. Project Goals • Research §457 Competitiveness • Investment Returns • Expenses and Fees • Administrative Service • Analyze Current §457 Plan Providers • Involve Plan Participants SST Benefits Consulting

  37. Solicit Request For Proposal (RFP) Bids Determine Primary Selection Criteria Historical Investment Returns Investment Expenses and Fees Administrative Bookkeeping Services Project Description SST Benefits Consulting

  38. Project Description • Determine Secondary Selection Criteria • Support Services/Customer Guarantees • Information / Report Services • Transition Services / References SST Benefits Consulting

  39. Competitive Analysis • §457 “Bundled” Providers Solicited • Respondents • Current Size of ACWA/JPIA Plan • Number of Participants / Total Assets SST Benefits Consulting

  40. Advanced RFP Technology • Automated RFP • “Grid” Comparisons • Data Management • Graphic Representation SST Benefits Consulting

  41. Primary Criteria • Investment Standards Weighting • Stable Value (Savings Account) • Growth & Income Funds • Growth Funds SST Benefits Consulting

  42. Primary Criteria - cont. • Investment Time Horizon • 5 Year Performance @ $100 per month • 5 Year Performance @ $10,000 Lump Sum SST Benefits Consulting

  43. Primary Criteria - cont. Expenses and Fees

  44. Net Return to Participant SST Benefits Consulting

  45. Net Return to Participant SST Benefits Consulting

  46. Net Return to Participant SST Benefits Consulting

  47. Current Provider Expense & Fee Reduction • Actual RFP currently in process • No decline in services offered • Increased communication commitment SST Benefits Consulting

  48. Secondary Criteria • Group Meetings • Participant Education • Face-to-Face Counseling • Informational Services • Internet Capabilities • Voice Response • Reporting Capabilities SST Benefits Consulting

  49. Purpose - Finalist Interviews • Negotiate Best Proposal • Transform Weaknesses to Strengths • Enhance Investment Choices • Reduce Expenses and Fees • Eliminate Deferred Sales Charges • Clarify Issues and Concerns • Provide Advance Notice to Respondents SST Benefits Consulting

  50. Committee Options • Determine Available Provider Options • Retain Incumbent Provider(s) • Select New Provider(s) • Retain Incumbent and Add New Provider(s) SST Benefits Consulting

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