Th e Fi v e P i l l a rs o f a
s the American workforce ages, many employees are
looking toward retirement with great concern. In fact, studies1
show that from 2010 to 2020, the age group 65 to 74 will be
the fastest growing segment of the population with the age
group 55 to 64 as the largest segment of the population.
As a result of recent events and an age wave sweeping the
United States, Congress has become more interested in the
retirement savings of U.S. workers.
In this environment, it is more important than ever to make
sure that your company has a solid retirement plan.
As a decision maker, you know how important
a solid retirement plan is to you and to employees.
There are five principles or “pillars” essential to a solid retirement plan.
Benefits of a Retirement Plan
◆ Helps attract new employees and retain valuable employees
◆ Helps bridge the gap between Social Security and retirement income needs, which
are estimated to be between 70 to 80 percent of current income2
◆ Contributions to employee’s accounts are tax deductible from business income
The Plan Fiduciary
Solid Plan Design and Compliance
2Palmer, Bruce, “Retirement Income Replacement Ratios: An Update,”
The Plan Fiduciary
Understanding the role of the plan fiduciary is a critical component of a retirement plan.
What is a Fiduciary?
A fiduciary is anyone who exercises any discretionary authority or control over the management of a retirement plan or its assets. You are a fiduciary if you perform any of the following:
◆ Have discretionary authority or control over the retirement plan’s management
◆ Have decision-making authority in the selection and retention of plan fiduciaries ◆ Select plan investment vehicles
◆ Give investment advice to the plan for compensation ◆ Acquire or dispose of plan assets
◆ Make discretionary decisions under the plan (for example, authorize or disallow
When establishing a retirement plan, you acquire the responsibilities of a fiduciary. A plan must have at least one Named Fiduciary — person who is primarily responsible for the overall operations and administration of your company’s retirement plan. Usually the Plan Sponsor, Plan Administrator, Trustee, Plan Committee, or administrative Committee serves as the Named Fiduciary.3
The Plan Sponsor’s fiduciary’s responsibilities include the following: 1.Selecting an Investment provider and investment options
A. Keep a due diligence file for fiduciary decisions B. Appoint other plan fiduciaries, as needed C. Evaluate plan needs
D. Create an Investment Policy Statement E. Compare and select an investment provider
F. Finalize plan features, including investment options and services
2.Communicating to employees
3.Monitoring investment options and plan operations4
3Source: Transamerica Retirement Services 4Source: Manulife Financial
Design and Compliance
Your company has individual needs, so your retirement plan must be responsive to those needs. Key issues, such as cash flow and your organizational structure and size factor into the type of plan design you select. There are 401(k) plans, profit sharing plans, 403(b) plans, 457 plans, defined benefit and non-qualified plans. It is likely that you already have or will need a combination of plans.
Bottom line: the design and provisions of your retirement plan affect how you
and the company’s most valuable employees are compensated.
Business Demographics Safe Harbor 401k Plan Name Age DOH Salary Deferral Matching Option Total
Owner 1 60 1/1/1980 $200,000 $16,000* $8,000 $24,000* Owner 2 39 1/1/1980 $200,000 $13,000* $8,000 $21,000* Worker 1 60 1/1/1985 $45,000 $2,500 $1,800 $4,300
Worker 2 50 1/1/1985 $30,000 $2,500 $1,200 $3,700
Worker 3 40 1/1/1990 $25,000 $1,700 $1,000 $2,700
Worker 4 40 1/1/1990 $25,000 $2,000 $1,000 $3,000
Worker 5 30 1/1/1990 $20,000 0 0 0
Worker 6 30 1/1/1990 $20,000 $500 $500 $1,000
Worker 7 21 1/1/2001 $15,000 0 0 0
Worker 8 21 1/1/2001 $15,000 0 0 0
Total $38,200* $21,500 $59,700* Owners Allocation of Employers Contribution $16,000 (74%)
*2004 numbers. The 2003 contribution limits are $14,000 for 50 and older, $12,000 for all others.
Safe Harbor 401k (a case study on how plan design effects the highly compensated)
◆ Effective in 2002, Safe Harbor plans with matching contributions will not have to
consider the top-heavy rules and highly paid employees can defer up to the limit. Requirements:
◆ The Safe Harbor 401(k) option permits employers to choose between a matching
option and a non-elective option.
◆ Matching option: requires the employer to match dollar for dollar on the first
3% of employee deferrals and 50 cents on the dollar for the next 2% of pay (4% match on 5% deferral.)
◆ Non-elective option: requires the employer to contribute 3% of compensation for
all eligible employees regardless of whether employees make person contributions.
◆ All contributions must be 100% immediately vested.
In addition to providing you and employees with all the benefits you deserve, your plan must remain in compliance with complex ERISA laws and IRS regulations. Here are a few of the compliance issues you may want to consider:
◆ Do you have a written plan document and an IRS determination letter?
◆ Are you familiar with the terms of the plan and is the plan being administered
in accordance with its terms?
◆ Is the plan top heavy and is the ERISA Form 5500 prepared annually? ◆ Does your plan require a CPA audit?
◆ Do you have a fidelity bond?
◆ Has the plan evaluated plan service providers against competitors for
Selecting and Monitoring the
A retirement plan must provide a smart and balanced selection of investment options with a proven track record of strong performance compared to benchmarks. Selecting the investments for your retirement plan is one of the most important things you will do. It is also one of the most difficult. Balancing risk with reward is a tricky task fraught with two general kinds of risk — downside and upside. The former is the risk that you and employees will take on too much volatility relative to goals and level of risk aversion. The latter is the risk that the investments you select will leave you and employees short of long-term goals.
To help you walk this fine line, your NFP Securities Representative will help you create your Investment Policy Statement. This statement sets the guidelines your plan will use to select and monitor investments. In addition, with access to some of the industry’s most cutting-edge analytical tools combined with years of experience, your NFP Representative makes an excellent partners.
When creating the plan’s Investment Policy Statement, your NFP Representative considers the following:
◆ Performance relative to investment style category. ◆ Risk relative to investment style category.
◆ Minimum track record of investment manager. ◆ Holdings consistent with investment style. ◆ Expense ratios/fees.
◆ Stability of the organization.
8% Large Growth15%
Large Value 12% Large Blend 10% Mid Blend 10% Small Blend 8% Foreign Equity 10% Gov’t Mortgage Bond
8% High Yield
Multi Sector Bonds 10%
Growth & Income
Asset Allocation 91.5% Securities Selection 4.6% Market Timing 1.8% Other 2.1%
Determinants of Portfolio Performance
Source: Brinson, Singer, & Beebower 1991 Historic market performance is not indicative of future results.
5 Brinson, Gary P., L. Randolph Hood, and Gilbert L Beebower. 1986. “Determinants of Portfolio Performance.” Financial Analysts Journal (July/Augus).
6 Ibbotson, Roger G. and Kaplan, Paul D. 2000. “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?.” Financial Analysts Journal (January/February).
You should strongly consider providers that offer a wide selection of funds, from different categories, which will provide for a proper asset allocation. Some retirement plan vehicles also offer useful model portfolios and bundled asset allocation funds.
In the late 1980s and early 1990’s, Gary Brinson, L Randolph Hood, and Gilbert Beebower conducted two studies that signifi-cantly affected the way financial advisors, port-folio managers, and financial academicians look at portfolio theory and methodology. These studies, published in 1986 and 1991, examined the performance of 91 large U.S. pension plans between 1974 and 1983 and found that, on average, more than 90 percent of the variability in portfolio performance was determined by asset allocation.5 Of the
remain-ing determinants, the group found that security selection determined approximately 5 percent of performance, while market timing accounted for just under 2 percent. A follow-up study by Roger Ibbotson and Paul Kaplan (published in 2000) that examined returns of 94 stock/bond hybrid funds supported this conclusion.6
Consistent participant education is the cornerstone of a successful retirement plan. A comprehensive education program should provide a wide range of materials delivered through a variety of platforms — in person, online and on paper. Because each employee has unique needs, you should have range of support from the enrollment to the distribution phase.
Enrollment meetings and enrollment kits play a major role in the participation of your plan. Many vendors have gone to great lengths to ensure the enrollment process is easy and productive.
During the accumulation phase, employees need to understand the tax advantages of qualified plans and the impact compounding can have on their nest egg. They also need help managing risk and balancing investments according to their risk tolerance.
How does investment-planning change from the accumulation phase to the pre-retiree phase? How much income is required for you and your employees and what is the cost of generating that income? These are important questions that need attention during the distribution phase.
Service, Technology and
A plan that is not administered or serviced correctly can burden your staff unnecessarily. Your retirement plan should minimize the burdens on your organization rather than bogging you down with day-to-day administrative issues. Exceptional customer service minimizes time spent administering a plan.
Service and technology issues to consider:
◆ How much time do you spend managing your plan?
◆ Does your plan have central administration or is a Third Party
◆ Do you have a dedicated, responsive client contact at your current provider? ◆ If participants have a problem or a question, will they call you or your
plan provider first?
◆ How efficient is the payroll and loan processing? ◆ What Tools do the participants have access to?
Securities and advisory services offered through NFP Securities, Inc.
1250 Capital of Texas Highway South Building 2, Suite 125
Austin, TX 78746 512-697-6000 Member NASD/SIPC