Client Name

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403(B) PLANS CHANGING TIMES
Georgia CUPA-HR Chapter Meeting
February 8, 2007
Sharon L. BeardmanSegal Consulting
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? Introduction ? Proposed 403(b)
Regulation ? Pension Protection Act of
2006 ? Fiduciary Responsibility ? Resources for
Plan Sponsors
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Background

• Regulations under section 403(b) of the Internal
  Revenue Code were published in the Federal
  Register on December 24, 1964
• Lets put this in perspective
• Changes in technology
• Changes in the cars we drive
• Baby boomer generation if you were born in 1964

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Changes In The Tax Laws Effecting Retirement
Plans

• Employee Retirement Income Security Act (ERISA)
  in 1974 A comprehensive piece of federal
  legislation designed to regulate the provision of
  private employer retirement and welfare benefits
  amending vesting rules, funding rules for DB
  plans, disclosure and reporting requirements,
  termination requirements, fiduciary
  responsibility and prohibited transaction rules.
• Tax Equity Fiscal Responsibility Act 1982
• Tax Reform Act of 1986
• Small Business Job Protection Act 1996
• Economic Growth and Tax Relief Reconciliation Act
  of 2001
• Proposed 403(b) Regulations November, 2004
• Pension Protection Act of 2006
• Each legislative action created new IRS code
  sections, regulations and DOL guidance under
  ERISA. Employers are required to amend plan
  documents, revise plan materials, and to
  incorporate administrative/operational changes
  to ensure compliance.

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New Laws More Changes In The Market Place

• Legislative changes served as the catalyst for
  the development of new products and services
  offered through insurance companies and financial
  services organizations.
• Within 5 years of ERISA a significant trend
  developed offering contributory defined
  contribution plans under code section 401(k)
  plans and the influx of Mutual Funds as
  investment vehicles in qualified plans.
• Group insurance contracts (GICs) and Mutual
  Funds offered as investment vehicles (403(b)(7)
  custodial accounts) under 403(b) plans in the
  early 1980s
• Administratively, Board Resolutions evolved into
  Plan Documents
• Higher Education 403(b) retirement plans subject
  to nondiscrimination rules began offering defined
  contribution 403(b) plan to all employees
• Mutual fund industry exploded with new styles and
  categories of investment funds
• More competition, more investment funds, more
  technology developing ease and expertise in
  administration of 403(b) plans
• Today, Defined Contribution plans account for
  more assets and more participants than Defined
  Benefit plans

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? Introduction ? Proposed 403(b)
Regulation ? Pension Protection Act of
2006 ? Fiduciary Responsibility ? Resources for
Plan Sponsors
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Regulatory Makeover for Section 403(b)

• Proposed Regulations
• The proposed regulation is to reflect numerous
  legal changes in section 403(b)
• Effectively diminish the extent to which the
  rules governing section 403(b) plans differ from
  the rules governing 401(k) and 457(b) plans for
  state and local governmental entities. Thus,
  these regulations will reflect the increasing
  similarity among these arrangements.
• When finalized these regulations are intended to
  supersede or consolidate Revenue Rulings, and
  Notices and other guidance issued under section
  403(b).

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Comparison 403(b) and 401(k) plans

• Operational Similarities
• Cash or Deferred Arrangements
• Salary Reduction agreements Timing and how
  often a deferral election can be made, changed or
  revoked
• Contribution limits 402(g) and 415 annual
  additions
• Employer contributions/Employee contributions
• Vesting schedule
• Treatment of irrevocable elections and excess
  deferrals under section 402(g) limits

403(b) 403(b) 403(b) 403(b) 401(k)
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403(b) v. 401(k)

• Differences
• Section 403b is limited to certain specific
  employers and employees while Section 401(k) is
  available to all employers, except a State or
  local government or political subdivision, agency
  or instrumentality.
• Section 403(b) contributions can only be made to
  certain funding arrangements 403(b) (1), an
  insurance annuity contract, 403(b)(7), custodial
  account limited to mutual fund shares, or
  403(b)(9), church retirement income account.
• Universal availability rule applies to section
  403(b) elective deferrals while 401(k) elective
  deferrals are subject to an average deferral
  percentage (ADP) rule and a minimum coverage rule
  applies to elective deferrals under 401(k).
• Custodial contract with employer contributions
  may not be paid to a participant prior to
  severance from employment, disability or
  attainment of age 59 ½.

403(b) 403(b) 403(b) 403(b) 401(k)
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Proposed 403(b) Regulations

• IRS announced in August 2006 effective date of
  403(b) regulations delayed until at least January
  1, 2008
• IRS expected to finalize regulations sometime in
  2007
• IRS indicated the following new items in the
  proposed regulations would remain in the final
  regulations in some form
• Written plan document requirement
• Must satisfy applicable laws in form/operation
  and contain all material terms
• Not required to be a single document
• ERISA implications and impact on non ERISA
  supplemental plans and governmental plans
• 29 CFR 2510.3-2(f) defines circumstances of an
  employers 403(b) program to be excluded from
  coverage under Title I

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Proposed 403(b) Regulations continued

• Timing requirement for depositing elective
  deferrals
• Within 15 days after the month in which the
  employee would have otherwise received the cash
  payment
• Generally adopt Revenue Ruling 90-24 on transfers
• Between providers of the same plan
• Between plan of former and current employers
• To governmental defined benefit plan to purchase
  service credit
• The Proposed Regulations permit 403(b) plan
  termination and permit accumulated benefits to be
  distributed
• Amend plan to eliminate future contributions and
  ongoing administrative duties such as annual
  filings
• No employer contributions to an alternative
  403(b) plan

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Proposed 403(b) Regulations continued

• Proposed Regulations do not adopt the safe harbor
  of IRS Notice 89-23 for purposes of satisfying
  the nondiscrimination requirement for Employer
  contributions and Employee after tax
  contributions
• 403(b) plans must satisfy the nondiscrimination
  requirements applicable to qualified plans under
  Section 401(a) relating to contributions,
  benefits and coverage (Sections 401(a)4, 410(b)),
  includible compensation (Section 401(a)17)and
  average contribution percentage rules (Section
  401(m))
• Statutory categories for exclusion under the
  universal availability rule for elective or
  Supplemental Plan
• Employees eligible to participate in a section
  457(b) plan which permits elective deferrals or
  employees eligible for a CODA, 401(k) plan
• Employees who are non resident aliens
• Student workers
• Employees who normally work fewer than 20 hours
  per week

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Proposed 403(b) Regulations continued

• Notice 89-23 transition rules for satisfying the
  403(b)(12)(A)(i) nondiscrimination requirements
  not included in proposed regulations
• No longer excludable employee categories
• 1. Employees who have made a one time election
  under Section 414 to participate in a
  governmental plan,
• 2. Visiting professors,
• 3. Employees of collective bargaining groups, and
• 4. Employees who are affiliated with a religious
  order who have taken a vow of poverty where
  religious order takes care of employee

The IRS has requested comments on whether these
types of exclusions should continue to be
permitted.
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? Introduction ? Proposed 403(b)
Regulation ? Pension Protection Act of
2006 ? Fiduciary Responsibility ? Resources for
Plan Sponsors
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Pension Protection Act of 2006Major Provisions
For Higher Education Practices

• EGTRRA Provisions Made Permanent
• Higher deferral limits
• 2007 cost of living increases
• 15,500 elective deferral limit
• 5,000 age 50 catch up limit
• 45,000 annual additions limit under 415(c)
• Guidance on application of limits for
  employees eligible for 15 year serviceand age 50
  catch up provisions
• Roth 403(b) plans
• Governmental plans not required to amend plan
  documents to comply with Act until 2011

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Qualified Automatic Contribution Arrangement

• Eligible automatic contribution arrangements
  governed by Code 414(w) for plan years beginning
  after December 31, 2007
• Allows permissive withdrawal within 90 days of
  first automatic contribution without penalty if
  employee opts out
• Arrangement must meet notice requirements upon
  eligibility and every year thereafter
• Notice to affirmatively elect out of plan,
• Opportunity to select a different contribution
  rate,
• Provide information on investment options and
• Provide default investment selection the absence
  of employee instruction
• Applies to 401(a), 403(b) and 457 plans
• ERISA preemption of State laws prohibiting
  automatic contribution arrangements not
  applicable to governmental plans effective
  immediately

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Qualified Automatic Contribution Arrangement
Safe Harbor Design

• Guidance on qualified automatic contribution
  arrangement includes Safe Harbor design
  effective for plan years beginning after December
  31, 2007
• EE contributes of
  compensation ER match
• Year 1 3 100 of first
  1
• Year 2 4 50 of 2-6
• Year 3 5 same
• Year 4 6 same
• EE contribution not to exceed 10 of
  compensation
• OR
• Employer makes nonelective contribution equal to
  3 of compensation for all eligible employees and
• Employee is 100 vested on matching and elective
  contributions after two years
  of service

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Default Investment Strategies

• Effective for plan years beginning after December
  31, 2006 and investment arrangement must follow
  new Labor Regulations on default investment
• Proposed Labor Regulations indicate appropriate
  default investment option includes
• Lifecycle fund
• Balanced fund
• Professionally managed fund
• Does NOT include stable value or money market
  fund
• Public comment on the absence of money market and
  stable value funds have come from industry
  leaders, investment organizations and public
  policy makers

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Offering Investment Advice

• Eligible investment advice arrangements permitted
  after December 31, 2006 subject to disclosure and
  limit conflicts of interest
• Employer duty to prudently select and
  periodically review financial advisor services
• Advice (provider) is
• Limited to investments under the plan
• Authorized by Plan Fiduciary
• Annual disclosure requirement of affiliation,
  disclosure of fees and compensation and notice of
  material changes in investment or compensation
• 6 year compliance for recordkeeping

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Provisions In Effect Today (Effective January 1,
2007)

• Accelerated vesting for all employer
  contributions applies to both matching and
  nonelective employer contributions
• After 3 years of service 100 or 20 vesting
  over 2-6 years of service
• Benefit statement for individual account plans
  must be available annually effective for plan
  years beginning after December 31, 2006 and must
  include
• Full description of a participants total accrued
  benefits and nonforfeitable benefits under the
  plan
• Provide discussion of the importance of asset
  diversification
• Clearly written to be read and understood by
  average employee
• DOL required to develop one or more model benefit
  statements
• Qualified plans permitted to allow distributions
  to working employees at age 62
• Implications for early and phased retirement
  plans to promote transition into retirement
• Serve to control financial issues and budget
  constraints
• Assist in workforce planning

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Effective January 1, 2008

• Qualified changes in investment options without
  losing 404 (c) relief of fiduciary duty effective
  for plan years beginning after December 31, 2007
• Employees of an individual account plan must have
  ability to exercise control over assets before
  and after investment allocation of qualified
  change in investments,
• Notice and disclosure required to inform
  participants no earlier than 60 days or later
  than 30 days prior to effective date of change
  must include
• Written notice and information comparing existing
  to new investment options
• Information describing how funds will be
  allocated providing similar characteristics in
  risk and returns in the absence of employee
  allocation instructions
• Plans must allow rollover distributions to Roth
  IRAs
• Includible in taxable income at time of rollover,
  without 10 early penalty
• Rollovers subject to Roth IRA limitations based
  on AGI

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Distribution and Rollover Provisions

• Nonspouse beneficiaries permitted to rollover
  distributions into IRAs, effective 1/1/07
• Revise tax notice by deadline no IRS model
  language yet
• Does the 20 automatic tax withholding apply if
  not rolled over?
• After-tax contributions may be rolled over
  between 401(a) and 403(b) plans, effective
  1/1/07
• Separate accounting of after-tax amounts
  required, if permitted

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? Introduction ? Proposed 403(b)
Regulation ? Pension Protection Act of
2006 ? Fiduciary Responsibility ? Resources for
Plan Sponsors
24
Definition of Fiduciary

• ERISA definition 3(9) and 3(21)(A)
• Person is a fiduciary to the extent he/she
• Exercises discretionary authority or control over
  the management of the plan or disposition of plan
  assets
• Renders investment advice to the plan for
  compensation (or has the authority to do so)
• Possesses any discretionary authority over the
  administration of the plan
• The plan sponsor cannot insulate itself from
  fiduciary responsibilities by delegation to
  another party, including selecting and monitoring
  the performance of the trustee or investment
  managers and investments, investment advice
  providers and outsourcing of administrative
  functions.

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Determine Fiduciary Roles

• Participation in the decision to
• Offer the plan
• Select the plan type, provisions or features
  offered
• Choose investment options
• Has the responsibility to
• Choose or evaluate service providers in addition
  to ongoing monitoring
• Bind employer or Plan assets through contracts
• Establish policies and procedures and/or make
  exceptions to these rules
• Approve operation and management of plan
  provisions

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Retirement Policy and Investment Policy Statement

• More plans recognizing the need for an
  established policy to document decision-making
  process
• Guides all decisions about the Plans investment
  options and objectives including selection,
  performance, diversification, and guidance
• Communication of policy
• Formal Statement intended to
• Clarify responsibilities of parties
• Identify types of investments to be offered,
  selection criteria and processes
• Define how funds will be monitored, replaced, or
  removed

Policy Statement should undergo periodic review
and update to evolve with industry requirements.
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Due Diligence

• It is the process and procedure that matters
  most in taking actions and making decisions.
• Fiduciaries must be able to show
• That they investigated and documented each
  decision
• That each process was consistent
• Why decisions were made
• Duty to review and monitor delegation of duties
• Selection process must follow fiduciary
  standards
• Competitive bidding
• Independent and unbiased review and scoring
• Recommendations to governing committee
• Justification for awarding the contract should
  be documented

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Actions

• Periodic review of retirement plan objectives
  and investment strategy
• Document selection and create standards for
  ongoing monitoring of the plan
• Include responsibilities, fees, service
  standards, etc., in contracts and service
  agreements
• Determine the need for outside advisory expertise
  if not available in-house
• Document compliance oversight and investment
  review of all functions

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? Introduction ? Proposed 403(b)
Regulation ? Pension Protection Act of
2006 ? Fiduciary Responsibility ? Resources for
Plan Sponsors
30
Resources for Plan Resources

• Internal Revenue Service website
  (www.irs.gov/retirement)
• Publication 4546 Checklist for 403b plans
• Publication 4547 403(b) Retirement Plan
  Assistance-Have you had your check up this Year?
  
  
  
• Employee Plan News
  
  
  
• Top 10 audit issues
• Department of Labor website (www.dol.gov/ebsa)
• Selecting and monitoring service providers
• Tools for fiduciaries
• Understanding plan fees
• Professional Organizations
• Securities and Exchanges Commission website for
  teacher retirement (www.sec.gov/investor/teachers.
  shtml)
• Retirement savings calculator
• Evaluating retirement plan options

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More Regulations, More Legislation, More
Questions
QUESTIONS?
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Your Retirement Strategy Needs to Drive Your
Approach
Retirement Strategy
1

• Retiree Health
• Defined Benefit
• Defined Contribution

WorkforceAnalysis
8
2
Monitoring
Transition Planning
7
Workforce Management
3
Open Enrollment
Plan
Communication
InvestmentReview
Management
6
4
Participant
Participant Strategy
Retiree Health Review
Strategy
5
Perform Valuations
Funding/Contribution Planning
Individual
Retirement Adequacy
ProgramManagement
Vendor
Health
Management
Management
Strategy Goals/Principles
Annual Management

• Appropriate vehicles
• Workforce strategies/transition
• Educating employees
• Providing tools and resources

• Review Strategy Alternatives
• Work Plan and Calendar
• Execute Work Plan

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Who We Are
The Segal/Sibson combination provides insights to
our clients on a broad spectrum of human resource
and employee benefits issues.

• Established in 1939, Segal is one of the nations
  leading employee benefits, actuarial and human
  resources consulting firms
• Segal consults on the planning, design,
  qualification, implementation, operation and
  communication of retirement, health and other
  benefit programs

• Sibson Consulting is the human capital consulting
  division of The Segal Company
• For over 40 years, Sibsons consulting services
  have encompassed strategic talent management,
  reward and compensation plans, human resources
  assessment, organizational design and change
  management