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Defined Contribution Plans

Defined Contribution Plans. Basic training for sales people who are new to selling retirement plans. Why do employers offer retirement plans?. Attract and retain employees Additional form of compensation Help employees plan for their financial future

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Defined Contribution Plans

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  1. Defined Contribution Plans Basic training for sales people who are new to selling retirement plans

  2. Why do employers offer retirement plans? • Attract and retain employees • Additional form of compensation • Help employees plan for their financial future • Provide employees means of saving on tax-favored basis (a huge advantage in building wealth for retirement) • Build employee loyalty and commitment • Means of incenting employees and rewarding loyalty (vesting schedule, company stock)

  3. What are some of the options available to employers? • 401(k) plans • 403(b) plans • Profit sharing plans (401(a)) • Cross tested plans • ESOPs, kSOPs • Defined benefit plans • Cash balance plans • SIMPLE plans, SEPs

  4. What differentiates the various programs? • Whether the employer wishes to promise a stated benefit at retirement age, or simply contribute to employee accounts and let market experience determine the ultimate benefit • Whether employee contributions will be permitted • Whether employer contributions will be required or discretionary • The amount an employee can contribute each year • The amount that can be deducted in a given year • Whether a “vesting schedule” can be used • Whether the benefits will be portable • Other factors

  5. What have been some general trends in the retirement plan landscape? • Shift from DB to DC • Move to participant direction • Shift to daily valuation • Internet access for participants, plan sponsors • Demand for new types of investments • Moving from fixed ER contributions to matching formulas • Tying ER contribution to profits • Move to safe harbor designs

  6. Why are 401(k)s the most popular program today? • Allow significant deferral of employee compensation ($16,500 plus $5,500 catch up) • Interest, dividends and capital gains not taxed until money is withdrawn • Balances are portable • New access technologies empower participants • Tax-deferred status gives 401(k) the greatest leverage for investing towards retirement

  7. Just how popular are 401(k) plans? • 39 million 401(k) participants in U.S. • $1.7 trillion in 401(k) assets (one fifth of all mutual fund assets) • 45% of new mutual fund assets come from 401(k) plans • Average 401(k) balance now $43,000 • Availability of 401(k) has become significant factor in job decision for employees

  8. What are the tax consequences? • Pre-tax deferrals considered employer contributions • Funds contributed by employee before federal (and state) taxes are applied, reducing taxable income for current year • All contributions placed in trust; become plan assets protected by ERISA • Earnings, dividends and capital gains accumulate on tax-deferred basis • At retirement, funds withdrawn are taxable to employee as ordinary income • Often in lower tax bracket at retirement

  9. What are the components of a 401(k)? • Plan document: establishes plan and spells out rules (contributions, vesting, loans, etc.) • Plan Administrator: handles day-to-day administration of plan as articulated in plan document • Participants: employees with balances in a 401(k) • Fiduciary: a person with discretionary authority or control over plan assets, or a plan administrator; must act in best interest of plan participants

  10. What is the role of the plan sponsor in a 401(k)? • Determine plan design in creating plan document • Oversee policy, procedural and administrative rules of plan operation (e.g., adjudicating hardship withdrawals, determining loan policies, etc.) • Perform plan administration, or contract with outside firm (most common) • Keep plan in compliance (recordkeeper generally performs compliance tests) • Effect payroll changes and communicate payroll data to recordkeeper • Make contributions to trust in timely manner • Communicate plan to participants

  11. What is the role of the plan trustee? • Safeguard plan assets and hold in trust • Process contributions, distributions, transfers and other investment transactions • Perform tax reporting on distributions • Monitor service provider(s) to ensure plan compliance • Depending on arrangement, oversee plan investment selection process • Educate / counsel participants on plan investment choices

  12. What is the role of the plan recordkeeper? • Administer plan per terms of plan document • Provide daily or periodic valuation of accounts • Allocate earnings, losses, dividends, capital gains to participant accounts • Issue plan and participant statements • Perform compliance testing and required reporting • Depending on arrangement, assist with plan consulting and plan document support

  13. What’s the difference between ‘balance forward’ and daily valuations? • Balance forward: Participant accounts valued periodically (e.g., quarterly, semi-annually) • Uses accrual accounting • Daily valuation: Participant accounts are valued on a daily basis • Uses cash (or share) accounting; ignores accruals • Every transaction is translated into its effect on the participant’s share holdings • Since fund NAVs are known daily, value is easy to calculate • Daily valuation usually involves voice response unit (VRU)

  14. What are the key advantages of daily valuation? • More frequent inquiry and trading • Faster statements (usually 15 business days) • Faster payout of distributions, loans • Automation and efficiencies -- eliminates much of the paper flow, answers routine questions, helps HR be more efficient • Addresses coordination problems of multi-state or dispersed employee populations • Sense of empowerment to participants • Fairness issues

  15. Daily valued 401(k) plans: A superior benefit program • Employees have the most efficient way to save (401(k)) • Many options for employer contributions (discretionary, matching, or none at all) • Employees are empowered; perceive the most value in their plan • Technology streamlines many tedious tasks • Retirement plan becomes an attraction and retention tool

  16. Banks partnered with Federated Investors • State-of-the-art program includes daily valuation and voice response technology • Entire product managed and delivered by First Citizens • Local, personalized service • Strong commitment to employee education • One of nation’s ten largest fund families • Partnership with specialty recordkeeper who administers 120,000 participants • Full slate of investment options • Cost-effective pricing

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