Retirement Plans Today – An update for the plan sponsor

11Roadways to Retirement

Retirement Plans Today –An update for the plan

sponsorPresented by:John Smith, Vice President

First National Bank315-555-6000

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Roadways to RetirementRoadways to Retirement

A quote“The President has proposed the creation of Employer Retirement Savings Accounts (ERSAs) to simplify employer-sponsored retirement plans. ERSAs would consolidate 401(k)s, SIMPLE 401(k)s, 403(b)s and 457 defined-contribution accounts. They would be merged into a single plan that can be easily established by any employer.

The simplified ERSA addresses the number one concern we hear from small business about 401(k)s and other retirement savings plans—that they are too complicated! And through simplification, ERSAs would lower administrative costs of the plans.”

- Elaine Chao, U.S. Secretary of Labor, at ASPPA Conference Washington , D.C.April 26, 2005

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…What actually

happened

Pension Protection Act of 2006

401(k), 403(b), 457 plans remain very different

New complexities in the regulations

New safe harbors

New notice requirements

New communication, disclosure rules

New provisions pertaining to advice

New rules for automatic enrollment and default investment vehicles

New rules for beneficiaries, IRA rollovers

Bottom line? While there are some positive developments in the new regs, retirement plans have only become more complicated. And we don’t see that changing anytime soon.

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Today’s Agenda

A view of the retirement landscape

Highlights from the PPA

Trends and issues we see with plan sponsors

Ways we can help

A view of the retirement landscape

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Over 62 million Americans now enrolled in 401(k) Plans

Average combined 401(k) balance = $61,000 (per Fidelity Investments)

Average annual income: $27,640 per capita, $44,389 household

That’s 2.2 times annual income for individuals, 1.4 times per household

Considering that most people will need 12 – 15 times annual income to retire one day, that’s a scary thought

Key statistics

at a glance

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Average company contribution = 4.5% of payroll (combining all types of employer contribution)

Avg. Deferral = 5.4% NHCEs and 6.7% HCEs

Avg. Participation Rate = 83% (plans with a match), 70.4% (plans without a match)

Avg. Match = 50% on the first 6%. (This is the most common; 33% pay more).

Avg. # of funds = 18 in 2005, 13 in 2000; only 16% offered 10 or more in 1995

Advice offered = 55.6% (most common in smaller plans)

Key statistics

at a glance

Source: 48th Annual Survey of Profit Sharing/401(k) Council (www.PSCA.org)

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Automatic enrollment = offered by 10.5% of all plans (2004 survey)

– Likely to increase dramatically

42.1% of plans are self-trusted; 36.3% use Bank trustees; 21.6% use non-bank trustees (small plans are more often self-trusted, while larger plans usually employ a corporate fiduciary: 80.1%)

92.3% of plans offer Internet access

Key statistics

at a glance


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A dramatic increase in Automatic Enrollment

Plan size/Participants 1-49 50-199 200-999 1,000-4,999 5,000+ All Plans

% of Plans 2004 0.9% 3.4% 9.8% 18.2% 30.6% 10.5%

% of Plans 2005 3.5% 8.1% 19.1% 23.9% 34.3% 16.9%

Default Deferral Percentage with Auto Enrollment

Default Deferral % of Pay 1% 2% 3% 4% 5% >5%

Percent of Plans 3.2% 15.4% 60.3% 10.9% 3.2% 7.1%

PSCA Survey: Reported in Defined Contribution Insights Sept / Oct. 2006 issue

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Lifestyle orTargetBalanced

Stable Value

Money Market

The Default Fund option for auto-deferrals

37% LifestyleOr TargetedMaturity Fund

17% Balanced Fund

30.3% Stable Value Fund

9.7%MoneyMarket

PSCA Survey: Reported in Defined Contribution Insights, Sept/Oct 2006 Issue

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56% passed test without adjustments or advance limitations on deferrals

9.5% passed by prospectively limiting HCEs to a lower contribution percentage (announced at beginning of year)

8.0% passed by limiting HCEs to a lower percentage of pay as stated in the plan’s design

19.7% passed by paying refunds to impacted HCEs

3.2% passed by re-characterizing HCE excess amounts to a non-qualified plan

13.1% passed through bottom-up QNECs or other approaches

ADP testing

remains a battle


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Average 401(k) balance: $22,586

On average, 2,100 calls to PSRs per month (approximately 2.6% of participants opt out in any given month, or 31% in any given year)

Distributions now average 6-7% of plan assets each year (including all types)!

From our book of

business…

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Loans are available in 86% of 401(k) plans as a whole (79% for plans with < 200 employees)

For plans with a loan feature, approximately 24% of participants have a loan outstanding

Average loan amount is $6,368

For plans with loans, loans account for 2% of plan assets

The big challenge: how to keep loans from taking on a life of their own, and how to keep plan assets invested for retirement

Loans

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Distributions 45.5%

Help with loans 18.9%

Account Balance Inquiries 5.1%

Hardship 4.9%

Address Changes 4.1%

Help with PIN 4.0%

Investment questions 3.3%

Statements 2.1%

Website questions 1.8%

Verify Fax 1.1%

Sponsor calling 0.7%

Census questions 0.6%

VRU help 0.2%

Other 7.8%

100.0%

When participants ask for help (opt-out calls to our call

center)

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Last five years in

the market

The DJIA (Dow Jones Industrial Average)

The DJIA (Dow Jones Industrial Average)

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Last five years in

the market:

changing dynamics

Annualized Returns for as of 9/30/2006for various Morningstar categories

1 year 3 years 5 years 10 years

Large Cap Blend

9.15 11.62 6.59 7.62

Mid Cap Blend

8.16 14.77 12.35 10.70

Small Cap Blend

7.62 15.63 13.63 10.62

Foreign Large Growth

17.65 19.57 12.37 5.94

Highlights from the Pension

Protection Act

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Pension Protection

Act of 2006

Background

– Passed by House July 28, 2006

– Passed by Senate Aug. 3, 2006

– Signed into law August 17, 2006

Affects all qualified retirement plans, IRAs, 403(b) plans, 457 plans

Effective dates vary by provision

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Defined Contributi

on Provisions

EGTRRA permanence – 2010 sunset eliminated

Contribution and deferral limits

Catch-up contributions

Expanded portability

Automatic rollovers

– State laws preempted !

Qualified Roth contribution program

Saver’s credit

Faster vesting for matching contributions

Restrictions regarding reducing future benefits

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A new safe-

harbor for automatic enrollmen

t!Minimum

Maximum

Yr. 1

Yr. 2

Yr.3

Yr. 4+

3%

4%

5%

6%

10%

10%

10%

10%

(Effective plan years after 12/31/2007)Automatic deferrals

Automatic deferral increase

– Initial deferrals: 3% minimum

– Increased annually to 10% maximum

Matching or non-elective contributions

Notice to employees

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Need not apply to current employees with election in effect or those who affirmatively elected not to participate

Auto election must cease to apply if the employee makes an affirmative election or election out of the deferral.

Defaulting the default option concern: Not knowing who made an affirmative election to the old default fund can be covered by disclosure and providing time to make another affirmative election.

New safe harbor, cont’d

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The employer

contribution side of the new Safe Harbor

Matching or nonelective contribution

– Matching contribution

• 100% of deferrals up to 1%, plus

• 50% of deferrals between 1% and 6%

or

– Nonelective contribution

• at least 3% of compensation

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Defined Contributi

on Provisions

(cont.)

Notice to employees

– Right to opt out of automatic enrollment

– How automatic enrollment contributions will be invested

– Timing – reasonable opportunity to make an election

Other

– Employees will have the right to opt out and request return of automatic deferrals within the first 90 days of being automatically enrolled.

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Defined Contributi

on Provisions

(cont.)

Investment advice options enhanced

– “Fiduciary adviser” defined

– Solving the advice issue with two alternatives (computer models or level compensation)

– Annual audit of advice program

– Notice requirements

Default investment guidance required of DOL

– within 6 months of enactment

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Defined Contributi

on Provisions

(cont.)

Periodic benefit statements

– (Generally effective plan years after 12/31/2006)

• Quarterly for self-directed accounts

• Annually for other accounts

Simplifies Form 5500 filing

– (Effective plan years after 12/31/2006)

• Form 5500-EZ threshold raised to $250,000

• Simplified Form 5500 for plans with 25 or fewer participants

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Defined Contributi

on Provisions

(cont.)

Provides for retirement plan rollovers directly to Roth IRAs (Effective after 12/31/2007)

– QRPs, government 457(b), 403(b) plans

– Roth IRA conversion rules apply

– Taxable portion taxed in year rolled over

Nonspouse beneficiaries may roll plan assets to IRAs (Effective for distributions after 12/31/2006)

– QRPs, government 457(b), 403(a), 403(b) plans

– IRA maintained as “inherited” IRA

– Cannot roll to nonspouse’s own IRA

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Defined Contributi

on Provisions

(cont.)

Greater portability of after-tax assets between employer-sponsored plans(Effective after 12/31/2007)

– Plan must separately account for after-tax assets

– Opens door for direct rollovers of Roth 401(k), 403(b) accounts

Hardship distribution definition includes nonspouse, nondependent beneficiary hardships (Effective on date of enactment)

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Defined Contributi

on Provisions

(cont.)

Extends distribution notice period – 402(f) noticeto 180 days (Effective plan years after 12/31/2006)

Allows penalty-free distributions for guardsmen and reservists (Effective after 9/11/2001)

Called to active duty after Sept. 11, 2001 and beforeDec. 31, 2007

Called for 180 or more days, or for indefinite period

Distributions from IRAs, or of deferrals made to 401(k) plans, 403(b) plans, and certain pre-ERISA trusts

2-year repayments to IRAs

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Defined Contributi

on Provisions

(cont.)

Accelerates vesting in DC plans, top-heavy vesting schedules apply to all DC plans

– 6 year graded or 3 year cliff

IRS has authority to modify sanctions under EPCRS (correction program)

Prohibits forcing participants to purchase company stock with Employee contributions

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Defined Contributi

on Provisions

(cont.)

Missing participant relief – PBGC

Employer security diversification enhanced

Penalty and bonding limits changed

Mandates qualified domestic relations order (QDRO) regulations (timing)

Plan amendments – 2009

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IRA Provisions

EGTRRA provisions made permanent

Increased IRA, SEP, and SIMPLE contribution limits

Catch-up contributions

Expanded rollovers

Saver’s credit

Small employer plan start-up credit

Trends and issues we see with

plan sponsors

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The “juggling act” for today’s Plan Sponsor

Shifting needsOf

Baby Boomers

Shifting needsOf

Baby Boomers

Keepingplan document

up-to-date

Keepingplan document

up-to-date

Fund selection,review processFund selection,review process

Participant education /

advice

Participant education /

advice

Satisfying404(c)

Satisfying404(c)

Fiduciaryresponsibility

Fiduciaryresponsibility

Corporate goalsand objectives

Corporate goalsand objectives

Maximizingbenefits to

key EEs

Maximizingbenefits to

key EEs

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“Can you get me ‘out of the middle’ on loans, distributions and other activities?”

“I don’t want to be the one telling participants how to invest.”

“Who are the fiduciaries to our plan?”

“What is 404(c) again?”

Still a lack of understanding over fees

Best intentions versus actual execution: ongoing investment review, due diligence

Concerns we hear

in discussion

s with prospects

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“Do we really need a Trustee? Can’t we

just buy an insurance policy?”

Regulations have become quite complicated

IRS, DOL audit programs are more aggressive, and automation / computerization has facilitated this trend

Cost of “doing it wrong” is higher than ever before

Many retirement programs have multiple firms involved, which can place ultimate accountability back with the plan sponsor

Until they invent an insurance policy that will jump out of a file cabinet and do these things, it is far from enough

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Real-life circumstan

ces

Question of whether an investment-knowledgeable committee can be assembled internally

– Sporadic / inconsistent fund review process

– Committee essentially “picks the hot funds”

Much time was spent to create an IPS, but it was never followed up

A few vocal / influential participants create a menu that is cluttered with options, confusing everyone else

Individual employees unwittingly ended up serving as trustee – creating personal liability

Significant balances reside in money market fund due to inertia (as opposed to a deliberate choice)

Lack of understanding that ensuring reasonableness of fees is just as important as monitoring fund performance in ‘fiduciary duty’

Thinking 404(c) is automatic, or initiated by the provider

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Make the technology do more

– Plan sponsor site becomes a workstation; online delivery of all reports

– Changing deferral rates (larger plans)

– Take “speedbumps” out of loan, distribution process

– Eliminate many paper forms

– Place SPD, fact sheets online

– Electronic enrollment

– Enabling plan sponsor site for transactions

Do more for the plan sponsor

– Eligibility determination

– Approving hardships

– One-on-one calls with participants to review plan and funds

– Online guidance and education

HR trends

How we can help

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As Trustee, we ensure that the overall program meets the client’s needs. We assist with many fiduciary and plan-related responsibilities, including fund selection / review and ERISA 404(c). We meet with participants on a regular basis to help them understand the plan and make sound investment decisions. We are the “eyes and ears” of our program on the ground, giving clients the onsite attention they need while BPA handles the operational, administrative and back-office functions.

BPA-Harbridge provides daily valuation administration to each plan. This includes plan document services, plan design work, ongoing compliance testing, and processing of contributions, distributions and other activity. Most day-to-day operational matters are handled by BPA, in coordination with HR and the Trustee. The result is an extremely efficient program with no duplication of effort.

A wide array of mutual funds are offered in our program -- including equity, international, fixed income and stable value options from over 100 different fund families. BPA deals directly with fund families to buy and sell mutual funds per the instructions of participants on the voice response and internet systems.

Oursolution

First National BankFirst National Bank BPA-HarbridgeBPA-Harbridge

Mutual FundsMutual Funds

Plan Sponsors

Plan Sponsors

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Simplifying life for Human

Resources(administration

versus recordkeeping)

We track all employees on our system (not just those with a balance), and receive full census with each transmission

We perform a variety of edit checks then notify employer of amount to be funded

We determine eligibility by source, for all money types within plan

Online enrollment, deferral rate changes

Vesting updates with each contribution cycle

Streamlined process for loans, distributions

Greatly reduced workload on HR for year-end compliance testing, Form 5500 process

Ability to run ADP, ACP tests on demand

Interacting with HR through “Action Items” in plan sponsor website

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The latest features

and technology

Bilingual voice response unit, participant website, and sponsor website (English and Spanish)

Personalized rate of return (statements and web)

Automatic rebalancing

Automated loan and distribution processes

Online fact sheets and prospectuses

Quarterly statement archive (e-delivery)

All participant forms, SPD, confirms, and newsletter posted online

Self-directed brokerage account option

Robust plan sponsor workstation

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True open architectur

e on investment

s

Over 135 fund families currently traded across our platform (1,200+ funds in total)

No proprietary funds

Able to select the strongest possible mix of investments for the plan

Full range of A, Advisor and R shares, plus institutional shares

A critical distinction versus “asset gatherer” retirement programs

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A high level of

plan design and

ERISA expertise

Supporting every type of qualified retirement plan (DC and DB), as well as non-qualified plans

– Unbiased advice, since we handle all plan types

– A “total retirement solution” under one roof

Plan consulting offered as part of each engagement (initial and ongoing)

Peace of mind, simplified approach to compliance and communication

Clients expect us – as retirement professionals – to advise them on compliance and technical matters. We take that role seriously.

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Answering the call

on participan

t education

As Trustee, we conduct regular, onsite education meetings (semi-annually, quarterly, etc)

Quarterly statements and newsletters

Education and guidance via participant website

Enrollment booklets, workbooks, slide rules and other printed pieces (some from mutual fund families)

Customizable education pieces for various needs

Collaborating with HR to deliver the message, using a variety of media

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Other roles we play as Trustee

Bringing a much-needed fiduciary process to client retirement plans

– Constructing high-quality, diversified fund menus

– Creating and living out an Investment Policy Statement

– Assistance with ERISA 404(c)

Helping participants understand their plan, become energized to invest and select an appropriate mix of investments

Plan design assistance and consultation

Serving as relationship manager and the local point of contact

Brings the “best of all worlds” to a plan sponsor

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Thank you for your

participation today!

For more information, please call John Smith at First National Bank, 315-555-6000. Email is [email protected]

We welcome the opportunity to provide a proposal for your plan

Open for Q&A / discussion

Thank you for your participation!

Documents

Retirement Plans Today – An update for the plan sponsor