CFDD 2011
Advisor Conference
Techniques To Help Advisors Consult
To The Fastest Growing DC Plan Market
Marcia S. Wagner, Managing Director,
The Wagner Law Group
Brodie Wood, VP, NFP National Practice Leader,
Diversified
For Financial Advisor Use Only
ERISA Framework for
403(b) Investment Issues
Marcia S. Wagner, Managing Director,
The Wagner Law Group
For Financial Advisor Use Only
ERISA Framework for 403(b)
Investment Issues
 Identifying 403(b) plans subject to ERISA
 Evaluating Key ERISA fiduciary

consequences
Moving assets despite 403(b) contract
obstacles
For Financial Advisor Use Only
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Identifying 403(b) Plans
Subject to ERISA
 1975 DOL limited-employer-involvement



regs
2007 IRS 403(b) regs
DOL Field Advice Bulletin 2007-02
DOL Field Advice Bulletin 2010-01
For Financial Advisor Use Only
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1975 DOL Limited-EmployerInvolvement Regs
 Employee participation is voluntary
 All rights are enforceable solely by the employee
 Employer’s involvement is limited to:
holding the 403(b) contracts
•
permitting vendors to publicize the plan;
•
remitting salary reductions
•
summarizing information about the plan
Employer can reasonably limit number of vendors
Employer cannot receive compensation from
vendors
•
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2007 IRS 403(b) Regs
 Before 2007 regs
employer could avoid administrative oversight
•
employees could self-certify eligibility for
distributions or loans
 2007 regs require plan document to allocate
administrative responsibilities
 Employee self-certification is prohibited
 Employer, 403(b) vendor, or TPAs must determine
eligibility for distributions
•
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DOL Field Advice Bulletin
2007-02
 Preamble to 2007 IRS 403(b) Regs
 Permitted administration
conducting administrative reviews
•
complying with the max contribution limit
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certifying facts to 403(b) vendor (e.g.,
employment termination).
Impermissible administration
•
processing distributions
•
determining hardship for hardship
distributions
•
determining eligibility for loans
•
authorizing plan-to-plan transfers
•

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Field Advice Bulletin 2010-01
 Employer impermissible administration:
Having discretionary authority over participants’
investment transfers from one vendor to another
•
Hiring TPA to make discretionary determinations
403(b) vendor permitted administration:
•
make discretionary determinations under loan or similar
403(b) plan features
•
hire a TPA to make the discretionary determinations
Employer permitted administration:
•
choose only 403(b) vendors that will make discretionary
determinations
•
terminate 403(b) vendors that do not comply with the
IRS 403(b) regulations.
•
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Field Advice Bulletin 2010-01
Investment Management
 General rule: Reasonable choice of investments
 One 403(b) vendor only if:
o
o
participants can transfer or exchange their
investments with other 403(b) vendors or
employer can demonstrate:
403(b) vendor makes available broad
range of investments
administrative costs of salary reductions
for multiple 403(b) vendors would cause
the employer to drop the plan


For Financial Advisor Use Only
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Non-ERISA v. ERISA 403(b)
Plans Summary
 Non-ERISA 403(b) plans are impracticable, even if




theoretically possible
Non-ERISA status is lost with employer discretion for
loans, non-safe-harbor hardship distributions, or similar
features
Some 403(b) vendors will not exercise discretion
Eliminating some features (e.g., loans) is unpopular
Employer is forced to exercise discretion and, thus,
create ERISA plan
For Financial Advisor Use Only
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Evaluating Key ERISA
Consequences
 Form 5500 audit requirements
 Investment management oversight
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Form 5500 Audit Requirement
 Before 2009, simplified Form 5500 (e.g., no audit)
 Audit requirement now applies to large plans (i.e., 100
or more participants)
•
Audit exemption still available for small plans if
certain conditions are satisfied (e.g., 95% of the plan
assets are held by a mutual fund or insurer)
•
Audit exemption for 403(b) contracts frozen before
2009
 Audit costs are driving plan consolidation.
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Investment Management
Oversight
 Historically, employers exercise little control over


403(b) investment menu
• participants have sole control
• some vendors require standard menus
Allowing participants to invest in problem funds
creates ERISA fiduciary risk
Negotiate control or terminate the relationship
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13
Moving Assets Despite
403(b) Contract Obstacles
 The obstacles
 Model solution
For Financial Advisor Use Only
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Moving Assets: The Obstacles
Individual contracts between vendors and
participants
Investment guarantees protected with market
value adjustment or delayed payments
Back-loaded expense charges and termination
fees
For Financial Advisor Use Only
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Moving Assets: Model Solution
 Freeze contributions to existing investment vendors
 Terminate 403(b) plan and participants choose:
• receiving individual contracts to avoid backloaded expense charges or termination fees
• rolling over money tax-free if it is not subject to
deferred payment or other restrictions
• receiving cash subject to income and early
distribution taxes, and vendor’s restrictions
For Financial Advisor Use Only
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Moving Assets: Model Solution
 Establish 401(k) in more competitive
marketplace to replace 403(b) plan
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99 Summer Street, 13th Floor
Boston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250
Website: www.erisa-lawyers.com
marcia@wagnerlawgroup.com
A0061072.PPT
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Growing Your Business
Higher Education & Healthcare Markets
Offer Significant Opportunities for Success
Brodie Wood
Vice President, Not for Profit Sales
For Financial Advisor Use Only
How big is the opportunity?
Total 403(b) Plan Assets By Not-for-Profit Segment [billions]
Source: Spectrem Group – NFP Sector DC Plans 2010
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How big is the opportunity?
Number of 403(b) Plans By Not-for-Profit Segment
Source: Spectrem Group – NFP Sector DC Plans 2010
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Closer look
Key Market –
Healthcare
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Key Market - Healthcare
•
HealthCare Reform = Increase in M&A activity
Both ERISA and Non-ERISA (some church) plans
Large number of plan participants
•
No dominant market player
•
•
Employer provides matching contribution
Physicians are a highly compensated employee group
•
Solid opportunity for ancillary business
•
•
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Closer look
Key Market –
Private Higher Education
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Key Market –
Private Higher Education
•
ERISA plans
•
Rich plans that lack formal structure:
•
Traditionally, no formal fiduciary process
•
Lack Investment Policy Statements
•
No open architecture / Utilize proprietary funds
•
Need for fee and revenue disclosure
•
Lack of ERISA budgets
•
Financial Advisor experience is welcome
•
Dominant market player
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Closer look
Earn their trust and earn
their business!
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Earn their trust and earn their
business!
Plan sponsors are looking for financial advisors to help:
•
Establish formal and comprehensive fiduciary processes
•
Review plan design
•
•
•
Evaluate investment menus and advantages of open
investment architecture
Address new plan audit standards
Determine whether to utilize multiple vs. single vendor
relationships
For Financial Advisor Use Only
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Earn their trust and earn their
business!
Help the plan sponsor establish formal and comprehensive
fiduciary processes
•
•
•
•
Creating or revising Investment Policy Statements
Selecting providers
Evaluating investment menus
Documenting the effort
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Earn their trust and earn their
business!
Help the plan sponsor review plan design
•
Work with your clients/prospects and their legal counsel to
identify plan complexity to help reduce plan-related
expenses
Common unnecessary plan complexity can be found in:
•
Program services
•
Participant education curriculum
•
Utilization of technology
For Financial Advisor Use Only
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Earn their trust and earn their
business!
Help the plan sponsor establish an investment policy
•
Help plan sponsors evaluate their investment menu
•
Start with establishing an Investment Policy Statement
•
Do their fund objectives overlap?
•
Are funds in the plan underutilized? Are they necessary?
•
Utilize investment services that provide pre-set portfolio
choices
•
Open investment architecture
For Financial Advisor Use Only
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Earn their trust and earn their
business!
Help the plan sponsor address new plan audit standards
Annual independent audit requirements now apply to large
ERISA 403(b) Plans
•
Utilize accepted IRS and DOL standards for meeting Form
5500 reporting and independent audit requirements
– Supply clients with an overview of ERISA standards to
address audit requirements
– Offer guidelines for organizing and submitting audited
financial statements
For Financial Advisor Use Only
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Earn their trust and earn their
business!
Help the plan sponsor determine whether to utilize multiple
vs. single vendor relationships
•Fallout from the new IRS 403(b) regulations
•Affects the plan participants’ experience and raises fiduciary
issues
•Many sponsors believe it’s better to stay with a multi-vendor
approach
•Implement a model that improves the participant experience
with a best-in-class investment line-up and consolidated view of
their retirement plan
•Provide ER with economies-of-scale that lower overall cost
•Create streamlined manageable information flow
For Financial Advisor Use Only
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Closer look
Why Consider Single
Vendor?
For Financial Advisor Use Only
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Why Consider Single Vendor?
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Best-in-class investment line-up
“Expense Budget Account” can be used to pay for planrelated expenses
Improved Participant Experience
May help reduce fiduciary risk
Lower Cost by leveraging economies-of-scale
Plan/Benefit Branding
Reduction in administrative burden for HR
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Closer look
Higher Education
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Significant opportunity
Growing your not-for-profit business
Understand the opportunity
•
•
Need for improved fiduciary process,
open investment architecture, fee
disclosure and revenue transparency,
limited advisor competition —
especially in the higher education
market
Solid opportunity for business
diversification
For Financial Advisor Use Only
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Significant opportunity
Growing your not-for-profit business
Strategy
•
•
Target HR/Benefits, outside ERISA
counsel, any Board level contacts,
references from existing Not-for-Profit
clients
Position decisions in risk management
context, i.e. compliance, fiduciary,
financial, and investment risks
For Financial Advisor Use Only
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Diversified can help!
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•
•
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Prospect lists in your market
Strategic planning sessions for specific opportunities
Joint meetings with prospects
Technical consultative expertise to address not-for-profit
plan design considerations
Access to unique tools to open up opportunities
 Sample RFPs/RFIs
 Key questions to develop demand for your services
For Financial Advisor Use Only
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Diversified can help!
“Avoiding the Breach”
•
White Paper sponsored by
Diversified
•
Provides detailed overview
of ERISA best practices for
403(b) plans
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Partnering with Diversified
• Source for Total Retirement
Services – Defined Contribution,
Defined Benefit and Non-Qualified
Plans
• Experienced professionals average
12 years with Diversified, over 15
years in industry
• Diversified’s Executive Committee
has an average of 25 years of
industry experience, and average
tenure with Diversified of 19 years
• People and commitment to quality
• High-tech, high-touch approach
• Flexible proprietary recordkeeping
system
• 10-year average client relationship
• Average annual client retention
rate of 99%*
• 2 million plan participants*
• $63 billion in retirement assets
under management*
* As of December 31, 2010
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The Diversified Difference®
•
•
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•
•
•
•
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Institutional retirement plans – our only
business
True open architecture approach
Full fee disclosure
Documented fiduciary process
Personalized retirement funding
strategies for participants
Award-winning tools help participants
execute their personalized retirement
funding strategy
Simplified, accurate administration with
unparalleled timeliness
Proactive client relationship expertise
Complete compliance and testing services
Total retirement plan resource
Defined
Benefit
Defined
Contribution
NQDC
Uniquely qualified to provide
consolidated recordkeeping
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All registered investment funds are available by prospectus only. A prospectus may be obtained
by contacting Diversified at 800-770-6797. The prospectus contains additional information about
the funds, including the investment objectives, risks, charges and other expenses. You should
consider all such information carefully before investing. Please read the prospectus carefully
before you make your investment choices.
Investing in mutual funds involves risks. The investment return and principal value of an
investment will fluctuate, so that an investor’s shares may be worth more or less than the
original cost. There is no assurance that any fund will meet its shared objectives.
FA 6677 (8/11)
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