February 2014 Meeting

Retirement Plans:  Considerations for Creating, Maintaining, Getting and Staying in Compliance

Richard Cawthorne, President of the Alpha Pension Group, an independent pension consulting firm that manages retirement plans for various organizations, gave a presentation on retirement plan administration best practices and prudent management of retirement plan offerings. Richard is a Registered Investment Advisor and a Certified Retirement Plan Specialist.

Many of us have 403b, 401a, or 401 k plans but are challenged when it comes to administering them. Others have shied away from setting up even employee only funded plans because of liability concerns. Richard described the various types of plans and some of requirements for each of them.

Basically, there are four types of plans: 1) 401(a) Employer funded programs; 2) Non ERISA 403(b) employee only programs; 3) ERISA 403(b) Employer and employee funded programs; and 4) 401(k) Employer and employee funded programs. 401(a) plans are the most basic plans – the employer puts a certain amount of money in some sort of investment account for the employee. These plans can be employer funded only or can be funded by both the employer and the employee. In 403(b) plans, the employee puts funds into the account and the employer can contribute some matching amount if that is its policy. A 403(B) plan not covered by ERISA regulations involves employee only voluntary contributions. If the employer contributes, then it is an ERISA plan. For the employee only 403(b) plan, the employer typically has no interaction involving the employee accounts – contributions and investment choices are truly up to the employee only. In setting up the plan, there must be at least two or more investment options. 403 (b) plans are typically set up by non-profits while the 401(k) plan was designed for for-profit companies. 401(k) plans have been more heavily regulated than 403(b) plans over the past 30 years, but now a lot of those same regulations are being applied to 403(b) plans. Still, the 403(b) plan remains the most advantageous plan for a nonprofit.

Richard then explained how fees are charged on retirement plans. There are at least 3 types of fees. First, there are the plan sponsor fees, which are the fees charged to your organization for administering the program (hard dollar fees). Next, there are the fees charged to the individual participants in your plan (soft dollar fees). And finally, there are the fees that are charged by the investment companies that the participant has chosen for his/her funds – these fees are paid by the participants. There are various requirements for the disclosure of the fees charged,
depending on the type of retirement plan that your organization offers. There are two investment options that can be included as part of your plan: mutual funds and group annuities, which are insurance based investment products. There are more fee disclosure requirements for mutual funds than for the insurance based group annuities.

A fiduciary for a retirement plan is a person who exercises any discretionary authority or control over the management of the plan or its assets. The fiduciary for the plan has a specific obligation to ensure that fees and expenses for a retirement plan are reasonable in light of the level and quality of the service provided. The fiduciary is usually someone within your company – it is not the service providers such actuaries, attorneys, accountants, brokers, and record keepers, unless they exercise discretion or are responsible for the management of the plan or its assets. The duties of the plan fiduciary are: a duty of exclusive purpose, a duty of prudence, a duty to diversify, and finally, a duty to follow plan documents. A broker can help you administer your plan and assist with investment options. By contrast, a consultant, which is what Richard and his company are, will offer investment strategies, do employee educations, and can act as a 3(21) fiduciary. The IRS wants to make sure that the company is educating the employees about their plan. Either a broker or a plan consultant can do this; however, a plan consultant does help to mitigate your liability in the eyes of the IRS. It does not make sense to have both a broker and a plan consultant. Retirement plan best practices include the following: having an investment policy statement; having minutes for any meetings that takes place regarding the plan; having quarterly investment monitoring reports; having plan performance reviews; and finally making sure that all fees are disclosed and are reasonable.

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