Administering Your Firm's Retirement Plan Best Practices

Transcription

1 May 19-22, 2014, Toronto ON Canada Administering 's Retirement Plan Best Practices Presented by Ginger Brennan and Rebecca Chandler HR10 5/19/2014 3:00 PM - 4:00 PM The handouts and presentations attached are copyright and trademark protected and provided for individual use only.

2 2014 Administering 's Retirement Plan Best Practices Ginger Brennan registered representative of ING Financial Advisers, LLC National Director of Sales Becki Chandler Client Relationship Manager CN

3 Please read the Program Disclosure Document carefully before investing. The Program Disclosure Document contains important information about the Program and units of the collective investment funds that serve as investment options under the Program. For inquiries contact: Securities offered through ING Financial Advisers, LLC (Member SIPC). The ABA Retirement Funds, ING Financial Advisers, LLC, The Northern Trust Company and Northern Trust Investments, Inc., and TD Ameritrade, Inc., are all separate, unaffiliated companies and not responsible for one another s products and services. 2

4 Introduction Benefits Responsibilities Pre-tax income directed to a long-term savings vehicle on a tax-deferred basis Attract and retain talented employees Do a good thing for your employees Workplace Retirement Plan Selection of plan type & features Selection of providers Fiduciary role Employer tax deduction Administration and Maintenance 3

5 Tax-deferred, long-term savings Benefits Meet Jane and John. Jane has a 401(k) with no employer match. John uses a regular taxable brokerage account for his retirement savings. Both are in the 25% tax bracket. This year, Jane and John can each afford to save $10,000 in take-home pay. For simplicity s sake, poor Jane and John never make another contribution, but their money compounds at 5% per year for 30 years Jane can put $13,333 in her 401(k), because she doesn t have to pay the 25% income tax on that money before contributing it. Meanwhile, John pays his tax and puts $10,000 into his brokerage account. Compound growth at 5% per year for 30 years Match? $57,626 25% tax rate $43,219 Compound growth at 5%, taxed, per year for 30 years If invested in stock, assuming 15% tax on capital gains $30,175 $38,236 $13,333 $10, This example was designed for educational purposes only and is not intended for specific legal, accounting, investment, income tax or other professional advice. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, or any non-investment related content, made reference to directly or indirectly in the presented material(s) will be profitable, be suitable for your portfolio or individual situation, or prove successful. 4

6 Attract and retain talented employees Benefits When asked to rank the importance of 11 factors relating to job opportunities, survey respondents placed salary, benefits (including health insurance and 401(k) programs) and opportunities for professional growth and advancement at the top of the list. 1 Companies that emphasize better benefits and use them to attract and retain high caliber staff add 7.3 percent in additional profit to their bottom line. 2 1 Generation Y. What millennial workers want:: How to attract and retain Gen Y Employees; Robert Half International and Yahoo! Hotjobs.com, The Human Capital Edge: 21 People Management Practices Your Company Must Implement (or Avoid) to Maximize Shareholder Value; by Bruce N. Pfau Phd, Ira T. Kay Phd, Watson Wyatt Worldwide,

7 Doing good for your employees Benefits Pensions have been cut In the legal community In 1985, 90% of companies offered traditional pensions plans. By 2012, that number fell to just 11% 1 9 out of 10 lawyers are in firms with fewer than ten attorneys 2 In 1998, only 10% of companies offered only a DC plan. This number is now 70% 1 Only 17.3% of Companies with fewer than ten employees sponsor a retirement plan 3 1 Retirement Plan Types of Fortune 100 Companies in 2012, Towers Watson, Insider October The Lawyer Statistical Report, American Bar Foundation, 2012 edition 3 Employee Benefit Research Institute estimates from the 2011 March Current Population Survey 6

8 Employer tax deduction Benefits Employer contributions are deductible on the employer s federal income tax return to the extent that the contributions do not exceed the limitations described in section 404 of the Internal Revenue Code. Refer to Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), for more information about deduction limitations. You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or qualified plan. The credit equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. 7

9 Plan Features Plan Strategies Plan Types Selection of plan type & features What type of plan is right for your firm? Defined Benefit Cash Balance Plan Money Purchase Profit Sharing / 401(k) SEP IRA SIMPLE What plan strategy meets your objectives? What plan features will make your plan unique? Safe Harbor Social Sec. Integration Cross-tested Maximize contributions while reducing limitations associated with testing Eligibility & Vesting Investment Options & Trading Restrictions This example was designed for educational purposes only and is not intended for specific legal, accounting, investment, income tax or other professional advice. Please note that other plan types, strategies, and features may exist. Formula awards higherpaid employees with a larger percentage of their compensation TIP Match & Match Structure Distribution & Rollover Options TIP Different employee groups defined and separate contributions to each group are made If your strategy is to maximize tax deferred contributions, look into adding a Cash Balance plan to your 401(k) Automatic Features & QDIA Self-Directed Brokerage Service Does your plan include an advice offering? 8

10 Selection of providers Recordkeeper Third Party Administrator Trust Company Investment Advisor Consultants Advisory Firm ERISA Attorney Payroll Company Maintains the participant records; trades the shares when contributions are deposited and when participants reallocate their portfolios; provides the web site and call center for the participants and plan sponsors; and generates and mails the participant statements. Drafts the plan document; performs the compliance testing; and prepares the annual IRS Forms These tasks are sometimes part of a bundled service provided by a recordkeeper. A Bank or Trust Company acts as Custodian; initially accepts the contributions, processes loanand distribution checks; and prepares tax reporting. Provides advice and guidance on investment selection and allocation to the trustees; may also serve as directed or discretionary trustee; and on rare occasions can take on investment fiduciary role. Consultant can be used in the request for proposal ( RFP ) process and retained to evaluate the plan s merits from time to time. Provides advice and guidance on investment options to employees participating in the plan; may take on professional asset management role for a fee; may take on fiduciary responsibility for participant in-plan investments. Can advise on plan types, plan features, and plan documents. May also help resolve plan qualification issues or disputes. While payroll companies offer services unrelated to retirement plans, the link between payroll and participant contributions to qualified plans does require consideration when picking a payroll vendor. This example was designed for educational purposes only and is not intended for specific legal, accounting, investment, income tax or other professional advice. Please note that other types of providers may exist. 9

11 Fiduciary role TYPICAL PLAN TRUSTEE DIRECTED TRUSTEE DISCRETIONARY TRUSTEE Fiduciary Liability to No Outside Fiduciary Section 3(21) Fiduciary Section 3(38) Fiduciary ABA Retirement Funds Program FIDUCIARY ACTS AND DECISIONS RESPONSIBLE FIDUCIARY Adoption and continued use of the Program Selection and periodic monitoring of trustee, investment manager, and recordkeeper Selection and monitoring of investment advice service provider to participants Develop and maintain Plan/Program Investment Policy 1 Selection, termination, and monitoring of all fund managers, and investment options consistent with the Plan/Program Investment Policy 1 Investment Manager Monitoring of all investment advisor purchase/sale activity for compliance with prospectus and investment guidelines / Investment Manager Investment Manager Determining applicability and compliance of fund investment line-up for certain ERISA requirements 1 Subject to acceptance by ABA Retirement Funds / Investment Manager TIP Investment Manager Ask yourself: How much fiduciary responsibility do I really want? 10

12 Administration and Maintenance Eligibility and Data Changes 1 Employer determines eligibility 2 Employee elects to participate in plan Follow plan document eligibility rules TIP Make sure you have enough enrollment kits on hand 3 Employee completes enrollment process 4 Employer verifies enrollment (optional) Some law firms appreciate the opportunity to verify enrollments in the plan Make sure you are meeting your TIP participant communication responsibilities 5 Recordkeeper processes enrollment and beneficiary 6 Recordkeeper establishes account access and password 7 Recordkeeper sends enrollment notice(s) 11

13 Administration and Maintenance Contributions Some plan types allow participants to make their own contributions to their accounts, while other plan types only allow the employer the firm to contribute. To make it easier to understand and track the contribution limits imposed by the IRS, it may be helpful to think of the limits in terms of layers. For example: TIP For the plan types that allow employer contributions, the formula the plan uses to allocate employer contributions to its participants is described in its plan documents. Layer 1 the limit imposed on the employer. For profit sharing plans, the total employer contributions cannot exceed 25% of aggregate eligible compensation of all eligible employees (401(k) elective salary deferral contributions are not included in employer contributions for this limit). Layer 2 the limit imposed on the participant (known as the "annual additions limit"). For all contributions to all employer plans in which the individual participates, contributions cannot exceed the lesser of 100% of the participant's eligible compensation and a prescribed indexed dollar amount. For 2014, prescribed indexed dollar amount is $52,000. TIP Layer 3 the dollar limit for elective contributions (including pre-tax elective contributions and Roth 401(k) contributions). This dollar limit is indexed each year. The limit is $17,500 for The catch-up contribution limit for 2014 for a participant who attains age 50 before yearend is $5,500. Timely Deposit Rules Remember, participant contributions must be forwarded to your recordkeeper as soon as they can be segregated from the employer's assets. 12

14 Administration and Maintenance Investment Election Changes and Transfers Typically, your participants have several options to make investment election changes and transfers Things to keep in mind: TIP Does your provider offer service level guarantees? 1 Make sure your participants are familiar with any trading or transfer restrictions within your plan s fund lineup 2 If your plan includes a self-directed brokerage window, investment election changes and restrictions may be different from those of funds in the plan 3 Beware of cut off times for processing of investment election changes as this is often a source of complaint by participants 4 Find out if your current provider offers automatic investment reallocation to keep participant accounts on track 13

15 Administration and Maintenance Accessing Funds There are a few different ways participants typically access funds from their plan accounts Assuming loans are allowed under your plan, a participant may request a loan from the vested portion of his or her account. Typically for the employee who has met the age- or service-based criteria for withdrawal and is still employed. When a participant dies, you are responsible for checking the participant s records to determine the named beneficiary and the type of death benefit, if any, the beneficiary should receive. Only specific financial conditions qualify for hardship withdrawals. TIP Distribution resulting from termination occurs when a participant quits, retires, or is fired. When a participant leaves your firm, an account distribution is not required. In fact, a participant with a vested account balance of more than $5,000 can maintain the account with your firm s plan (subject to required minimum distributions at age 701/2). 14

16 Administration and Maintenance QDROs Qualified Domestic Relations Order (QDRO) is a legal document that acknowledges the right of an alternate payee (e.g., spouse, former spouse, child) to receive all or a portion of the benefits payable to a plan participant 9 BASIC REQUIREMENTS OF QDROS 1. There must be a judgment, decree, or order that is made pursuant to state domestic relations law. 2. The order must relate to providing either child support, alimony, or marital property rights to a spouse, former spouse, child or other dependent of the individual participating in the plan. 3. The order must include the name and last known mailing address of both the person covered by the plan and the spouse, former spouse, or child who is to receive the benefits. 4. The order must include the amount or percentage of the benefits to be paid to each spouse, former spouse, or child, or a manner to determine the amount or percentage. 5. The order must include the number of payments or time period to which it applies. 6. The order must specifically identify each plan to which it applies. 7. The order cannot require the retirement plan to provide any type of benefit or payment option that is not otherwise provided by the plan. 8. The order cannot increase benefits based on actuarial value. 9. The order cannot require the payment of benefits that have previously been assigned by a prior QDRO to a different spouse, former spouse, or child. 15

17 Administration and Maintenance Compliance and Communications As Plan Administrator, you will need to determine the requirements that apply to your plan based on the number of participants in your plan and your plan type Participant communication Plan testing requirements requirements Reporting requirements The Department of Labor ( DOL ) mandates that certain communications to plan participants be conducted, and may include: 1. Enrollment kit for eligible employees 2. Summary plan description 3. Summary of material modifications 4. Summary annual report 5. Participant disclosure Testing is done each year to monitor whether the plan is in compliance with certain IRS and DOL requirements, and includes: 1. Annual additions 2. Top-heavy 3. ADP and ACP nondiscrimination testing (b) Coverage testing Form 5500 is the annual return for your retirement plan that must be filed. It is required to ensure employee benefit plans are operated and managed correctly. 16

18 Administration and Maintenance Plan Termination Although employers establish retirement plans with every intention of having a long-term retirement vehicle, there are occasions when the decision is made to terminate it When Must You Terminate the Plan? Some, but not all, examples of occasions when the plan must be terminated are as follows: Firm has dissolved and is no longer doing business, Sole proprietor has passed away and a successor employer will not be continuing the plan, or Sole proprietor has retired and a successor employer will not be continuing the plan. TIP A partial termination of the plan may be triggered if a significant portion of the firm's employees have severed employment due to firm-initiated employee dismissal such as a layoff. The IRS presumes that a partial termination has occurred if the plan's turnover rate is at least 20% of the active employees. When a partial termination of the plan occurs, affected participants (e.g., those who are no longer participants due to the event) must become 100% vested. There is no requirement that the plan must be terminated or that other participants be vested or receive distributions. 17

19 Administration and Maintenance Forms, Tools, and Resources blications/401kplans.html 18

20 Program Overview ABA Retirement Funds (Program Sponsor; Not-for-Profit Corporation) PROGRAM OVERSIGHT RESPONSIBILITY Board of Directors comprised of 9 attorneys Full-time staff: Executive Director, Associate Executive Director and Staff Nearly 3,700 law firms retirement plans 1 More than $5 billion in assets 1 50 years of service to the legal community Investment Fiduciary, Trustee, and Custodian Leading Global Asset Manager $5.58 Trillion under custody 1 $885 Billion under management 1 Services 74% of Top 100 Corporate Plans 2 Recordkeeping, Client Service and Sales A leading provider of financial products and services in the U.S. One of the largest Defined Contribution Recordkeepers with over 49,000 plans 3 Self-Directed Brokerage Account 4 Offers over 13,000 domestic, international, and global mutual funds Ranked #1 out of 17 online brokers evaluated in the StockBrokers.com Online Broker Review As of December 31, Based on pension assets. Source: Pensions and Investments, February 4, As published by Pensions and Investments Special Report of Top DC Recordkeepers as of March 4, 2013 (based on September, 2012 data). 4. Brokerage services provided by TD Ameritrade, Inc., member FINRA/SIPC/NFA, and TD Ameritrade Clearing, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. Used with permission. 5. Read Full Article: 19

21 2014 Questions?