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Retirement Plans
The Campbell Johnson Group
Randy L. Campbell, Corporate Retirement Director, CRPS ®
Eric A. Johnson, Wealth Management, CFP®
Tyler Beaudoin, Financial Advisor
3102 West End Ave, Suite 200
Nashville, TN 37203
615-269-2426
November 21st 2013
© 2013 Morgan Stanley Smith Barney LLC. Member SIPC.
2011-PS-789
February 2013
Expires January 2014
Day-to-Day Business Challenges
 Competition
 Consumer spending
 Employee turnover
 Inventory control
 Rising costs
 Supplier problems
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Why a Retirement Plan?
 Longer life expectancy
 Social Security
 Inflation
 Valuable employee benefit
 Tax advantages
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Retirement Plans
 Profit Sharing Plan
 Money Purchase Pension Plan
 401(k) Plan
 Safe Harbor 401(k) Plan
 SEP
 SIMPLE IRA
 SIMPLE 401(k)
 Defined Benefit Plan
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Choosing a Retirement Plan for Your Business
Employer Contributions
Requirements
Type
Permitted
Type1
Discretionary
% of compensation
No
N/A
Mandatory
% of compensation
No
N/A
Discretionary
% of compensation
or match
Yes
Pre-tax or Roth
Mandatory
Non-elective
or match
Yes
Pre-tax or Roth
Discretionary
% of compensation
No
N/A
SIMPLE IRA
Mandatory
Non-elective
or match
Yes
Pre-tax
SIMPLE 401(k)
Mandatory
Non-elective
or match
Yes
Pre-tax or Roth
Defined Benefit
Mandatory
Actuarially
Determined
No2
N/A
Profit Sharing
Money Purchase
401(k)
Safe Harbor 401(k)
SEP
1
2
Employee Contributions
Certain plans may allow for other types of voluntary after-tax contributions.
New rules under PPA allow salary deferrals under certain circumstances.
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Qualified Defined Contribution Plans
 Do not promise a specific amount of benefits at retirement
 Benefits are based on accumulated contributions plus earnings
(or minus losses)
 Employer contributes to accounts maintained under the plan, sometimes
at a set rate, but often at a discretionary rate declared annually by the
employer
 Employees may have a pre-tax salary deferral option and/or an after-tax
contribution option
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Qualified Defined Contribution Plan Features
Let’s review some basic features of qualified defined contribution
retirement plans:
 Eligibility
 Vesting
 Distributions
 Loans
 Filing requirements
 Plan fiduciaries
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What Is a 401(k) Plan?
 A salary reduction plan that permits employees to save for retirement on a
pre-tax basis
 Employee contributions can include
– Pre-tax employee contributions
– Roth 401(k) contributions
– Catch-up contributions for employees age 50 and older
 Employer contributions can include
– Matching contributions
– Profit sharing contributions
 Maximum contributions
– Pre-tax and Roth contributions cannot exceed $17,500 in 2013, or $23,000
for employees age 50 or older
– Total contributions (including matching, profit sharing, and employee)
 Lesser of $51,000 (or $56,500 if age 50 or older) or 100% of compensation
in 2013
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401(k) Plan
Employer Advantages:
 Means of attracting and retaining valuable employees
 Tax-deductible contributions
 Flexible plan design features
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401(k) Plan
Employer Disadvantages:
 Filing requirements
 ACP and ADP testing requirements
– Consider automatic enrollment feature or Safe Harbor 401(k)
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401(k) Plan
Employee Advantages:
 Pre-tax savings
 Tax-deferred growth
 Easy payroll deductions
 Flexibility and control
 Contribution limits
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401(k) Plan
Employee Disadvantages:
 Distribution requirements
 Limited investment options
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401(k) Plan Candidates
Any Business that Wants to:
 Replace a costly traditional pension plan
 Offer a “big company” retirement program
 Attract and retain valuable employees
 Take advantage of tax-saving opportunities
 Receive a tax deduction for contributions
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What Is a Safe Harbor 401(k) Plan?
 A salary reduction plan that permits employees to save for retirement on a
pre-tax basis
 Employer matching or non-elective contributions required for Safe Harbor
 Allows for
– Employee contributions
– Catch-up contributions for employees age 50 and older
– Employer discretionary contributions
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Safe Harbor Employer Contribution Requirements
 A dollar-for-dollar match on salary deferrals up to 3% of compensation and
50 cents on the dollar for salary deferrals between 3% - 5% of employee
compensation for all eligible non-highly compensated employees
or
 Non-elective contributions of 3% of compensation for all non highly
compensated employees, regardless of whether or not they make
elective deferrals
 Employer matching and non-elective contributions used to satisfy safe
harbor are always 100% vested
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Roth 401(k) Contribution Feature
 Available to all participants regardless of income
 Must be maintained in separate plan accounts
 Subject to 401(k) ADP discrimination testing
 Contributions are taxed when deferred from salary
 Earnings are tax-exempt if distributed at least five years after
beginning Roth contributions and a qualifying event has occurred
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Defined Benefit Plan
 Promises a benefit at retirement, determined by plan formula
 Annual contributions determined by a variety of factors, including
– Compensation
– Investment performance
– Years until retirement
– Life expectancy
 Allowable compensation used to calculate benefits is $255,000 in 2013
 Maximum Benefit: Lifetime annual income at retirement of $205,000 (for
2013) or highest three year average compensation, whichever is less
 Vesting schedule differs from defined contribution plans
– 5 year cliff vesting
– 3-to-7 year graded vesting
 Certain plans may incorporate a salary deferral option
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Defined Benefit Plan
Advantages:
Disadvantages:
 High contribution limits
 Usually fully funded by employer
 Favors older, more highly-paid
 Requires sufficient cash flow each
employees
 Amounts forfeited by terminated
employees may be automatically
applied to reduce future contribution
requirements
year to meet minimum funding
requirements
 Plan’s actual investment
experience may affect the level of
future contributions
 High level of administrative
complexity
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Definition of Fiduciary
fi·du·ci·ar·y
A person to whom property or power is entrusted for the benefit of
another.
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Plan Fiduciaries
 Generally, those individuals or entities who manage an employee benefit
plan and its assets
 Plan fiduciaries may be
– Plan sponsor
– Trustees
– Investment advisors
– Other individuals exercising discretion in the investment and/or
administration of the plan
 Status is based on the functions performed by the individual
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Fiduciary
1.
ERISA definition of Fiduciary Standards
2.
Who is a Fiduciary
3.
Managing Fiduciary Responsibility
4.
Ongoing Fiduciary Responsibilities
5.
Limiting Fiduciary Liability
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ERISA Fiduciary Standards
A qualified retirement plan fiduciary should:
Act for the exclusive purpose of providing benefits to participants and their
beneficiaries;
Pay only reasonable plan expenses;
Act with requisite care, skill, prudence, and diligence;
Diversify the investments of the plan; and
Act in accordance with the documents and instruments governing the plan.
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Who is a Fiduciary?
ERISA generally defines a fiduciary to include anyone who exercises
discretion, control or authority over plan assets or the management of
the plan, or in the administration of the plan.
Fiduciaries may include:
The business owner / plan sponsor;
The plan administrator;
The Board of Trustees of the plan sponsor; and / or
A specially designated Investment Committee.
All plan fiduciaries must understand that they may be held personally liable
for a breach of their responsibilities.
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Managing Fiduciary Responsibility
How does a fiduciary manage their responsibilities?
Become familiar with ERISA requirements and Department of Labor (“DOL”)
guidelines on plan operation and investment management;
Establish, adhere to, and document a structured, prudent set of procedures.
PROCEDURES
PLAN OPERATIONS
FIDUCIARY
INVESTMENTS
PLAN COMPLIANCE
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The Role of a Fiduciary
If a plan’s fiduciary does not have the expertise to carry out any of its
functions, it is the fiduciary’s responsibility to hire plan service providers
who do have that expertise.
Advisor
Recordkeeper
FIDUCIARY
Administrator
Consultant
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Selecting a Service Provider
Among other things, a fiduciary should consider the following when selecting a
service provider:
Information about the provider firm itself: financial condition and experience with
retirement plans of similar size and complexity;
Information about the quality of the provider’s services - the qualifications of
professionals who will be handling the plan’s account and the firm’s experience
or performance record; and
A description of business practices and the proposed fee structure (including all
direct and indirect fees).
An employer should document its selection (and monitoring) process.
Proposed DOL regulations discuss additional considerations regarding a plan
sponsor’s selection of a service provider.
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Ongoing Responsibilities
Important areas that will require attention over the life of the plan include:
Investments
Plan Sponsor
Plan
Maintenance
Participation
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Investment Policy Statement
The “Investment Policy Statement” should:
Clearly identify plan investment goals,
Provide specific guidelines for investment decisions,
Establish the broad range of asset classes in the plan,
Establish investment parameters to help measure success,
Create a process to periodically review plan investments against stated goals,
and
Identify process by which plan investment options will be removed or replaced.
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Investment Selection
Prior to selecting the investment options for the plan, the Investment Committee
should outline specific screening guidelines, by category, that each of the
investment options must meet. A process for selecting investments should
include consideration of a variety of statistical and non-statistical factors
including:
 Investment objectives,
 Performance relative to its index and peer group,
 Risk characteristics,
 Investment style,
 Fees (including expense ratios and other potential costs, such as
redemption fees),
 Manager tenure,
 Style consistency, and
 The degree of correlation with other plan investment options.
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Investment Monitoring
A process for monitoring investments should include:
Establishing objective criteria to effectively measure investment performance;
Identifying criteria that may be used in considering whether to replace an
investment vehicle, including
 Fund manager changes and/or changes in fund company ownership
 Performance and risk relative to appropriate benchmarks
 Performance in varying market conditions
 Portfolio changes and/or style consistency
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Investment Direction
Who will direct the investment of assets, the plan fiduciaries or the
participants?
Can a fiduciary obtain relief from liability for losses that result from the
participant’s exercise of control over the assets in his or her account?
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ERISA Section 404(c)
For participants to have control over their own investments AND afford the
fiduciary some protection from liability:
There must be at least three different investment options;
Participants must be given sufficient information to make informed investment
decisions; and
Participants also must be allowed to give investment instructions at least once a
quarter, and perhaps more often.
However, a fiduciary retains the responsibility for selecting the plan’s investment
options and for monitoring their performance.
Please note that the 404(c) rules are long and complicated.
Plan sponsors should consult with legal counsel in order to ensure that the plan
meets all of the 404(c) requirements.
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Participants Who Fail to Select Investments
How do you address the situation when a participant doesn’t make an
investment election?
Default investments
Qualified Default Investment Alternatives (QDIAs)
A plan fiduciary that follows the QDIA rules will not be liable for loss that
occurs as a result of a participant’s investment in a QDIA.
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Qualified Default Investment Alternatives
Investments that qualify as Qualified Default Investment Alternatives (“QDIA”):
A product with a mix of investments that takes into account the individual’s age
or retirement date (e.g. a target date fund);
An allocation among existing plan options based on individual’s age or
retirement date;
A product with a mix of investments based on characteristics of the group of
employees as a whole (e.g. a balanced fund);
A capital preservation product may be used for only the first 120 days of
participation.
QDIAs generally may not invest participant contributions in employer securities.
Stable value funds DO NOT qualify as a QDIA for new contributions.
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Communication with Employees
Employee communication is an integral component of fiduciary responsibility.
Employees need to understand:
How the plan works, and
How their participation could affect their personal situations.
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Communication with Employees
The following documents must be furnished to participants and beneficiaries.
Quarterly benefit statements
Summary Plan Description (SPD)
The summary of material modification (SMM);
An individual benefit statement;
A summary annual report (SAR); and
Any applicable blackout period notice.
Certain other plan-related documents must be available upon request.
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Participant Education
Participants should be provided with information about investment alternatives.
The following would be considered investment education:
General financial and investment concepts, such as risk and return,
diversification, dollar cost averaging, compounded return and tax-deferral
benefits;
Historical differences in rates of return among asset classes;
Effects of inflation;
Estimating future retirement income needs;
Determining investment time horizons; and
Assessing risk tolerance.
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Fidelity Bonds & Fiduciary Liability Insurance
ERISA Section 412 generally requires that every person who handles plan
funds or other property be bonded to protect the plan against loss due to
fraud or dishonesty.
The amount of the bond must be at least 10% of the amount of funds handled,
but no less than $1,000.
An ERISA bond is not required to exceed $500,000 ($1,000,000 for plans that
hold employer securities, effective January 1, 2008).
Plan fiduciaries may also wish to purchase fiduciary liability or pension trust
liability insurance.
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Government Reporting
Plan sponsors have the responsibility to file the plan’s annual financial report
(Form 5500).
Penalties may be assessed against a plan administrator for failure to file a
timely complete report.
The most recent report must be made available for participant examination or
provided to participants upon request
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Maintaining Plan Records
Once a set of procedures has been established, a plan sponsor can create
and maintain a set of written records to document these procedures.
A “fiduciary audit file” helps:
Organize plan documents and records
Demonstrate that policies and procedures were established
Document adherence to those policies and procedures
Manage the plan’s administrative and investment issues more effectively
Respond to participant or government inquiries
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Tax laws are complex and subject to change. Morgan Stanley Smith Barney
LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors
and Private Wealth Advisors do not provide tax or legal advice and are not
“fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with
respect to the services or activities described herein except as otherwise
agreed to in writing by Morgan Stanley. This material was not intended or
written to be used for the purpose of avoiding tax penalties that may be
imposed on the taxpayer. Individuals are encouraged to consult their tax and
legal advisors (a) before establishing a retirement plan or account, and (b)
regarding any potential tax, ERISA and related consequences of any
investments made under such plan or account.
02/13
CRC 627712
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Eligibility
Can exclude employees:
 Under age 21
 With less than one year of service
– Defined as 1,000 hours (or less) during a specified 12 month period
– May have a two years of service requirement with immediate vesting
 Covered under a collective bargaining agreement, if a separate
retirement arrangement was a specific subject of negotiation under the
CBA
 Who are non-resident aliens with no U.S. source income
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Vesting
 Vesting determines the percentage of a plan participant’s account the
participant actually “owns” and can take when he or she leaves the employer
 Employee contributions must always be 100% vested
 Most types of employer-funded defined contribution plan contributions are
eligible for either
– Three-year cliff vesting
– Two-to-six year graded vesting (at least 20% each year starting with two
years of service); or
– Any vesting schedule that is faster
 Forfeitures occur when employees separate from service and are not fully
vested. These amounts can be used by the employer to reduce future
contributions, pay plan expenses, or they can simply be reallocated to other
plan participants
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Distributions
 Must have a triggering event:
– Death
– Disability
– Separation from service
– Plan termination
– Meet requirements for in-service withdrawal
 Ordinary income tax and an early distribution penalty may apply (10%)
– Age 55 exception to 10% penalty (not available in IRAs)
 20% withholding unless directly rolled over or transferred into an IRA or
another qualified plan
 RMDs generally required by April 1st of the year following the year in which
the participant attains age 70½
– Qualified plans may allow postponement until April 1st of the year
following the year of retirement
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Loans
 Participant loans may be permitted under the terms of the plan document
 Loans are generally limited to the greater of
– 50% of the participant’s vested balance, up to a maximum loan amount of
$50,000; or
– 100% of the participant’s vested balance up to $10,000
– These loan limits may be reduced based on outstanding loans during the
previous year
 Loan terms (repayment period, interest rate, etc.) are arranged in a separate
loan agreement
 Loan repayment period cannot exceed 5 years (except if the loan is for
certain home purchases)
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Filing Requirements
 Form 5500 required annually by the Department of Labor
 1099-R tax reporting is required to report distributions to participants
 5500 filing usually handled by a Third-Party Administrator; 1099-Rs may be
as well
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