The Pentegra SmartPath™

PENTEGRA RETIREMENT SERVICES

SMARTPATH

™

Plan design best practices to ensure successful retirement outcomes

The Pentegra SmartPath™ successful plan outcomes start with

effective plan design.

THE PENTEGRA SMARTPATH™

As an industry provider, we are keenly interested in the national dialogue around retirement readiness. As evidence of our commitment to helping you and your employees achieve that goal, we recently conducted a survey on retirement readiness in conjunction with Harris Poll, one of the leading polling organizations in the nation. We are pleased to be able to share the results of our survey with you, and to provide our insights on this important issue.

The survey showed that 65% of adults do not believe or are not sure that their 401(k) plan will provide enough money for them to be able to retire when they want/plan to. Nevertheless, 75% of U.S. employees who are currently enrolled in a 401(k) plan think that 401(k) plans are the most important source of a person’s retirement income.

With the 401(k) plan becoming the sole retirement plan for many employees, it is more important than ever to ensure that these programs are designed to help participants meet their retirement income goals. Today, plan success is measured in terms of how well your plan is able to help participants meet their retirement goals for financial security. Real plan effectiveness should be measured in terms of whether participants are on track to succeed. The industry has learned that education alone does not drive participant behavior. Ensuring successful participant outcomes begins with progressive plan design that maximizes positive participant behaviors.

Plan features—automatic features—that better meet the needs of plan participants and plan sponsors can drive successful outcomes for participants and sponsors alike. These features can help participants hit the all-important 10% savings rate that we believe is crucial. Participants benefit as they experience higher levels of retirement success and retirement readiness. Plan sponsors benefit as participants become more engaged with their plan. Improved defined contribution plan outcomes also serve to ease the loss of the traditional defined benefit plan that may have been closed, frozen or cut back.

Automatic features can include automatic enrollment, automatic escalation of salary deferrals, auto rebalancing and utilization of qualified default investment vehicles. These features help plan participants set a reasonable level of salary savings, increase their contributions over time, achieve proper investment diversification, and make better use of a plan’s investment alternatives. Placing participants in an appropriate investment option at a pre-selected contribution rate that increases annually essentially replaces some of the most important features of a defined benefit plan such as automatic coverage and professional investment management. This is why we have developed the Pentegra SmartPath™, a series of progressive plan design metrics crafted in a way to best ensure successful retirement outcomes for you and your participants.

Successful

Plan Design For Outcomes— The Pentegra SmartPath Advantage TM

1. Make it easy to participate.

Why: Strong participation rates start with eligibility features that make it easy for participants to take advantage of your plan—from day one. That means allowing for immediate eligibility. Get employees enrolled in the plan right away and give them an “ownership” stake in their investments. Keep in mind that this does not necessitate offering a matching contribution immediately to new hires, but immediate eligibility makes it easy to start payroll deductions and get employees into the habit of saving through the plan.

As an added bonus, allow new hires to make rollover contributions to the plan and provide an easy way to keep them from spending lump sum distributions from a prior plan. Another consideration—offer “dual” eligibility requirements. As an example, you may wish to set eligibility requirements so that all employees become eligible shortly after their date of hire and require a longer waiting period for employer contributions.

SERVICE REQUIREMENTS FOR EMPLOYEES TO BE ELIGIBLE TO MAKE CONTRIBUTIONS TO THE PLAN PLAN SIZE BY NUMBER OF PARTICIPANTS Eligibility Type

1-49

50-199

200-999

1,000-4,999

5,000+

All Plans

None (Immediately Eligible) 3 months 6 months 1 year Other

38.5% 17.9% 18.8% 23.9% 0.9% 100%

44.8% 19.0% 13.3% 18.1% 4.8% 100%

65.3% 16.9% 5.1% 8.5% 4.2% 100%

72.5% 12.8% 4.0% 4.7% 6.0% 100%

79.7% 12.2% 1.4% 4.7% 2.0% 100%

62.0% 15.4% 7.8% 11.1% 3.6% 99.9%

Source: PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans

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participation

Make it easy for participants to take advantage of your plan— from day

one.

2. Keep your vesting schedule short.

Why: While immediate vesting schedules are ideal, a 2- to 3-year vesting schedule ensures you’re not spending company dollars on “short-timers” while still providing a nice incentive for employees to stay with your company. Vesting schedules of 4 or more years are not as compelling for your employees.

VESTING SCHEDULES BY PLAN SIZE AND CONTRIBUTION TYPE PLAN SIZE BY NUMBER OF PARTICIPANTS Vesting Schedule Matching Contributions

1-49

50-199

200-999

Immediate Full Vesting 2-Year Cliff Vesting 3-Year Cliff Vesting 3-Year Graduated Vesting 4-Year Graduated Vesting 5-Year Graduated Vesting 6-Year Graduated Vesting Other

45.2% 1.2% 4.8% 3.6% 2.4% 11.9% 31.0% 0.0%

39.2% 2.5% 2.5% 1.3% 1.3% 15.2% 35.4% 2.5%

31.1% 4.9% 11.7% 6.8% 2.9% 25.2% 14.6% 2.9%

1,000-4,999

5,000+

All Plans

39.7% 4.4% 11.0% 5.1% 5.1% 20.6% 10.3% 3.7%

46.4% 7.2% 16.7% 2.9% 0.7% 18.1% 4.3% 3.6%

40.6% 4.4% 10.4% 4.1% 2.6% 18.7% 16.5% 2.8%

Source: PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans

3. Use online enrollment.

Why: Online enrollment offers plan sponsors and participants alike a more efficient interface operationally plus administrative ease. It can also be used as a mechanism that will make participants more likely to use online financial planning and guidance tools to map out a strategy from day one. Today, 47% of employers have a 401(k) plan autoenrollment feature that is coordinated with online enrollment1. The bottom line—it is a critical tool to help participants help themselves.

1 PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans

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enrollment 4. Implement auto-enrollment.

Why: In conjunction with online enrollment, implement automatic enrollment. Automatic enrollment basically provides that eligible participants will be automatically enrolled in their company’s 401(k) plan unless they take action to opt out or choose an alternate contribution percentage. The primary advantage of auto-enrollment has been to get at least 90% of workers into a retirement savings plan. That is an impressive participation rate no matter how you look at it.

Research shows that automated solutions such as automatic enrollment positively impact participant behavior and savings rates. According to the 56th Annual Profit Sharing Council of America (PSCA) Annual Survey of Profit Sharing and 401(k) plans, 47.2% of plan sponsors offer auto-enrollment. Automation has become standard in many Defined Contribution (DC) Plans. “Studies show that if people default in, they stay in.” 2 2

Dallas Salisbury, Employee Benefits Research Institute (EBRI)

PERCENTAGE OF PLANS WITH AUTOMATIC ENROLLMENT BY PLAN SIZE PLAN SIZE BY NUMBER OF PARTICIPANTS

1-49

For All New Hires 9.3% For All Non-Participants 4.2% Percentage of All Plans 13.6% That Have Automatic Enrollment

50-199

200-999

1,000-4,999

5,000+

All Plans

34.3% 2.8% 37.0%

44.1% 5.9% 50.0%

59.3% 5.3% 64.7%

56.1% 5.4% 61.5%

42.4% 4.8% 47.2%

Source: PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans

Studies show that if people default in, they

stay in.

5. Better yet, use a 6% deferral rate rather than 3%.

Why: Typical automatic enrollment sets participants’ initial contributions at a minimum of 3% of their pay, increasing their contributions by 1% a year (up to 6%). While the 3% deferral rate is good, a 6% deferral rate is an even better starting point and what we recommend as a best practice. Using 6% of pay for automatic enrollment goes a long way toward increasing savings rates overall—in particular if your matching contribution is tied to a higher deferral rate.

Doing so also enables senior executives and highly paid employees to save more by improving 401(k) non-discrimination test performance. While some may question whether automatic enrollment is worth the cost of additional employer matching contributions, the rise in cost will often be modest—most higher paid employees sign up for a 401(k) plan on their own. It would make sense then that the population of employees that are automatically enrolled tend to have lower salaries. While every company needs to come to terms with this individually, more and more employers have determined that the benefits outweigh the incremental additional cost. Automatic enrollment can make employees feel more secure and in turn improve morale and a company’s ability to attract and retain talent. Studies continue to show that “automatic enrollment can also dramatically increase participation by women, minorities, younger workers and moderate-income employees—four groups that are most likely to under-save. Automatic enrollment can increase participation in these groups from 1 out of 5 to 4 out of 5 and above.”3

DEFAULT DEFERRAL RATE AS A PERCENTAGE OF SALARY PLAN SIZE BY ASSETS

Overall <$1MM

$1MM- $5MM

$5MM- $10MM- $25MM- $50MM- $200MM- $10MM $25MM $50MM $200MM $500MM

$500MM- >$1B $1B

1% 5.3% 8.8% 11.4% 4.8% 4.5% 4.0% 4.0% 3.4% 5.7% 2.7% 2% 11.0% 11.3% 9.9% 17.1% 12.1% 12.9% 9.8% 10.1% 6.6% 7.0% 3% 47.0% 38.8% 44.9% 46.7% 48.9% 51.0% 48.0% 46.9% 50.0% 41.1% 4% 10.7% 8.8% 9.6% 8.1% 12.1% 10.8% 11.9% 11.2% 9.4% 11.4% 5% 8.0% 8.8% 6.3% 5.7% 4.8% 7.6% 8.2% 12.3% 13.2% 11.4% 6% 9.6% 10.0% 7.4% 6.2% 9.3% 5.6% 10.1% 11.7% 11.3% 18.4% Other 8.4% 13.8% 10.7% 11.4% 8.2% 8.0% 8.0% 4.5% 3.8% 8.1% Source: 2013 PLANSPONSOR Defined Contribution Survey 3 David C. John, “The Business Case for 401(k) Automatic Enrollment, Retirement Made Simpler”

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auto-escalation

6. Add an auto-escalation feature.

Why: Encouraging participants to save more by using an auto-escalation feature is another integral best practice.

Auto-escalation of at least 1% per year, but preferably 2%, is ideal. We recommend that participants start with a deferral of 6% of salary and plan to increase this deferral by another 1% each subsequent year, with a cap of 10% if your plan has a Qualified Automatic Contribution Arrangement (QACA), but no cap if there is no QACA. By adding an auto-escalation feature in addition to auto-enrollment at a 6% of pay level, within several years many employees will hit the all-important 10% of pay savings rate that we believe is crucial.

DOES YOUR PLAN OFFER “AUTO ESCALATION” (I.E., AUTOMATIC DEFERRAL INCREASES)?

PLAN SIZE BY ASSETS

Overall <$1MM $1MM- $5MM- $10MM- $25MM- $50MM- $200MM- $500MM- >$1B

$5MM $10MM $25MM $50MM $200MM $500MM $1B

Yes 26.9% 10.6% 12.7% 19.1% 25.9% 35.2% 38.3% 44.3% 51.2% 54.2% No 62.3% 51.1% 68.9% 72.8% 68.4% 60.1% 59.1% 54.2% 48.2% 42.9% Unsure 10.8% 38.3% 18.4% 8.1% 5.7% 4.8% 2.6% 1.4% 0.6% 2.9% Source: 2013 PLANSPONSOR Defined Contribution Survey

PERCENTAGE OF AUTOMATIC ENROLLMENT PLANS THAT AUTOMATICALLY INCREASE DEFAULT DEFERRAL RATES OVER TIME PLAN SIZE BY NUMBER OF PARTICIPANTS 1-49

50-199

200-999

1,000-4,999

Automatic Escalation * Voluntary Escalation * No Escalation *

32.5% 37.9% 34.4% 15.0% 13.8% 19.8% 52.5% 48.3% 45.8% 100.0% 100.0% 100.0%

5,000+

All Plans

44.4% 39.8% 22.2% 18.1% 33.3% 42.1% 99.9% 100.0%

* Sample size too small to calculate Source: PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans

One of the best practices in plan design that can help ensure successful

outcomes.

7. Get creative with your matching contribution.

Why: One of the most attractive features of a 401(k) plan is an employer matching contribution. The majority of 401(k) plans offer a matching contributionâ&#x20AC;&#x201D;81.6% of 401(k) plans provide a match on participant contributions, and 55% provide a non-matching company contribution.4 Of plans with company matches, the most common matching formula is 50% per $1.00 of salary, most commonly up to the first 6% of pay, with 47.8% of plans using this type of matching formula.5 Consider using employer matching contributions as a way to incent participation, and structure your matching formula to do so.

Employees often contribute an amount that maximizes their matching contributions. Increasing the match cap will often result in higher deferral rates and ultimately, better retirement readiness. This can also help ensure that IRS non-discrimination tests will be satisfied so that your Highly Compensated Employees are able to defer the maximums permissible under the law.

Increasing the level of contributions that a participant must make to 6% of eligible pay in order to receive a match encourages participants to save at a level that is much more likely to result in meeting their long-term goal of attaining an adequate level of retirement readiness. While the typical match of 50% on 6% is equal to 3% of pay, for nearly the same benefit dollars, you can use a 25% up to 12% of pay formula, or a 30% up to 10% of pay formula. Roll out the new formula in conjunction with a retirement education program to help employees see the value in making the most of the new match.

Keep in mind that while it is best to keep your employer match consistent, you can adjust your company matching contributions if necessary due to economic or business conditions. You can always restore the matching contributions to previous levels when conditions change.

APPROXIMATE MAXIMUM MATCH/CONTRIBUTION PLAN SIZE BY ASSETS

Overall <$1MM $1MM- $5MM- $10MM- $25MM- $50MM- $200MM- $500MM- >$1B

$5MM $10MM $25MM $50MM $200MM $500MM $1B

More than 100% of first

6% of salary

7.6%

6.9%

7.8%

6.7%

6.8%

9.3%

4.4%

10.0% 10.6%

100% of first 6% of salary

12.2% 12.9% 9.5% 12.7% 10.8% 12.0% 10.7% 15.9% 17.5% 19.1%

51%-99% of first 6% of salary

30.6% 33.9% 30.7% 24.8% 27.2% 27.3% 30.0% 36.7% 34.2% 43.2%

50% of first 6% of salary

27.2% 21.4% 27.9% 29.4% 27.1% 30.9% 30.8% 23.9% 23.3% 18.6%

Less than 50% of first 6% of salary

22.4% 23.7% 25.1% 25.3% 28.2% 23.0% 19.0% 18.7% 15.0% 8.5%

Other

0.1%

Source: 2013 PLANSPONSOR Defined Contribution Survey 4 2013 PLANSPONSOR Defined Contribution Survey 5 PSCAâ&#x20AC;&#x2122;s 56th Annual Survey of Profit Sharing and 401(k) Plans

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8.0%

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0.0%

0.0%

0.0%

0.0%

0.0%

0.2%

0.4%

0.0%

0.9%

matching contributions 8. Alternatively, adopt a Safe Harbor Matching formula.

Why: Safe Harbor formulas provide alternative, simplified methods of meeting the non-discrimination requirements by offering certain minimum employer contribution formulas for 401(k) plans. Adopting a safe harbor 401(k) plan design allows an employer to avoid discrimination testing of employee elective deferrals and/or employer matching contributions (ADP/ACP testing). Based on your employee demographics and how your employees are using your plan, the Safe Harbor approach may be a good option if you want to avoid discrimination testing, allowing HCEâ&#x20AC;&#x2122;s to maximize their contributions and ensure that the plan provides all employees with a base of retirement savings.

TYPE OF SAFE HARBOR PLAN DESIGN USED IN PLANS WITH A SAFE HARBOR MATCH PLAN SIZE BY NUMBER OF PARTICIPANTS Type of Safe Harbor 1-49 50-199 200-999 1,000-4,999 Traditional 94.1% 94.1% 76.9% 75.0% Automatic Enrollment 5.9% 5.9% 23.1% 25.0% 100.0% 94.1% 76.9% 100.0%

5,000+ All Plans 81.8% 84.2% 18.2% 15.8% 100.0% 100.0%

Source: PSCA 56th Annual Survey of Profit Sharing and 401(k) Plans

Consider using employer matching contributions as a way to incent

participation.

9. Add a Roth 401(k) feature (with an In-Plan Roth conversion feature).

Why: A Roth 401(k) option combines the features of a traditional 401(k) with a Roth IRA, providing employees with a source of tax-free retirement income. The key differences between a traditional 401(k) contribution and a Roth 401(k) contribution center on the tax status of both contributions and withdrawals, along with the rules governing rollovers.

Unlike a traditional 401(k) contribution, Roth 401(k) contributions are made on an after-tax basis. Traditional 401(k) contributions reduce a participant’s income for federal and (usually) state tax purposes at the time contributions are made and grow on a tax-deferred basis until the participant takes a distribution, which is treated as ordinary income.

Roth 401(k) contributions and investment earnings, on the other hand, are tax-free upon withdrawal as long as the employee has maintained the Roth 401(k) account for at least five years and has attained age 59 ½.

The Roth 401(k) with an in-plan Roth conversion feature may offer advantages to those who are currently in a low tax bracket but who expect to be in a higher tax bracket later on. Another benefit—the Roth 401(k)’s tax-free withdrawals can help highly paid workers better manage their tax situation in retirement. For most people, the main reason to contribute to a Roth 401(k) is to let the money grow tax-free. No one knows what the tax rates will be in the future, so it may be beneficial to hedge the taxable salary deferrals and earnings in a traditional 401(k) with earnings in a Roth 401(k) that can be withdrawn tax-free. That said, why wouldn’t you offer a Roth feature under your plan?

PERCENTAGE OF PLANS PERMITTING ROTH 401(k) DEFERRALS PLAN SIZE BY NUMBER OF PARTICIPANTS Plan Type 1-49 50-199 200-999 1,000-4,999 5,000+ All Plans 401(k) 56.4% 52.6% 52.5% 46.8% 46.3% 49.8% Combination 73.5% 55.3% 43.1% 58.7% 60.9% 59.0% (401(k) and other DC plan)

All Plans

67.5% 53.4% 45.7% 52.6% 51.3% 53.8%

Source: PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans

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Roth 401(k) feature

A Roth 401(k) feature combines the features of a traditional 401(k) with a

Roth IRA.

10. Limit plan leakage.

Why: Early distributions from retirement plans for uses other than as retirement income are more commonly known as plan “leakage”. Most plans allow participants to access their account using withdrawal and loan provisions—approximately 90% of plans offer loan and hardship withdrawal provisions.6 Using a plan’s withdrawal feature creates leakage. Loans can also create leakage. It is best to limit the number of total loans outstanding at any given time—ideally to one or two at most. Doing so limits 401(k) asset outflows due to the perpetual use of plan assets to meet day-to-day spending needs.

NUMBER OF LOANS ALLOWED IN PLANS PERMITTING LOANS PLAN SIZE BY NUMBER OF PARTICIPANTS Number of Loans One Loan Two Loans Three Loans Four Loans Five Loans Six or More Loans

1-49 61.4% 30.1% 3.6% 0.0% 1.2% 3.6% 99.9%

50-199 55.8% 37.7% 3.9% 0.0% 2.6% 0.0% 100.0%

Source: PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans 6 PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans

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200-999 49.0% 38.0% 9.0% 1.0% 1.0% 2.0% 100.0%

1,000-4,999 52.5% 39.0% 8.5% 0.0% 0.0% 0.0% 100.0%

5,000+ 41.2% 49.6% 7.6% 0.8% 0.0% 0.8% 100.0%

All Plans 50.9% 39.9% 6.9% 0.4% 0.8% 1.2% 100.1%

access

It is best to limit the number of total loans outstanding at any

given time.

11. When it comes to plan investments, less is more.

Why: When it comes to plan investments, more is not always better. In fact, less is more. The majority of 401(k) plans contain far more equity options than are required to create a diversified equity portfolio. The result? Choice overload, which can leave participants overwhelmed to the point where they simply default to the most conservative investment options or even worse, avoid joining the plan. In doing so, they may sacrifice the opportunity for wealth accumulation most retirement investors should seek.

A Columbia University study on “choice overload” found that while consumers find a wide range of products initially appealing, they can find it difficult to finally decide on an option. This could not be more true than with retirement planning. The study found that the probability of an average employee joining a retirement savings plan decreases as the number of investment options increases. For every additional 10 investment choices, the researchers found that predicted participation rates decline on average by 2%7.

Today, with multiple asset classes and numerous active and passive fund options, a participant can be faced with dozens of choices. The average defined contribution plan has a total of 19 investment options8. 95.5% of plans offer the same fund options for both participant and company contributions9. However, the typical participant does not spend their day reading up on investments and the ins and outs of how to diversify. Instead, most people in today’s environment are looking to determine how to make their retirement investment relatively simple.

When it comes to retirement plan investing, clarity of investment choices and ease of use should be more of a priority than how many funds are available. Participants often associate more fund choices with more research, more decisions and more work for them. Streamline your fund lineup to help participants make simpler and more educated asset allocation decisions.

7 “Choice Overload and Simplicity Seeking” Sheena S. Iyengar, Emir Kamenica, Columbia University Study, February, 2007 8 PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans 9 PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans

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investments AVERAGE NUMBER OF INVESTMENT FUND OPTIONS PLAN SIZE BY NUMBER OF PARTICIPANTS

Funds Available for Company Contributions

1-49 23

50-199 21

200-999 18

1,000-4,999 19

5,000+ 15

All PlansNumber of 19

Number of Funds Available for Participant Contributions

23

21

18

19

16

19

Source: PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans

DO YOU CURRENTLY OFFER ANY OF THE FOLLOWING TYPES OF INVESTMENT OPTIONS IN YOUR PLAN? PLAN SIZE BY ASSETS

Overall

Target-date funds

Target-risk funds (i.e.,

<$1MM $1MM- $5MM- $10MM- $25MM- $50MM- $200MM- $500MM- >$1B $5MM $10MM $25MM $50MM $200MM $500MM $1B

71.9% 46.5% 62.4% 72.1% 74.6% 74.9% 77.9% 79.4% 86.1% 84.3%

“growth”,“conservative,” etc.)

36.8% 49.7% 47.6% 42.9% 40.8% 30.1% 28.4% 24.5% 22.2% 22.3%

Balanced funds

73.8% 69.0% 77.5% 76.8% 75.4% 69.2% 76.0% 71.7% 69.4% 64.0%

Money Market Fund

67.1% 70.6% 74.6% 68.8% 70.7% 64.2% 64.5% 57.1% 57.4% 55.3%

Employer Stock

7.9%

1.1%

0.5%

2.1%

1.1%

4.0%

10.0%

16.7%

32.4%

41.1%

Stable Value Fund

63.3% 33.7% 49.8% 64.7% 65.6% 66.2% 74.2% 73.8% 76.9% 76.6%

Real Estate / REITS

28.2% 16.6% 23.1% 30.3% 35.0% 27.4% 30.5% 32.2% 30.6% 25.4%

Alternative Investments

5.5%

9.6%

4.4%

4.7%

6.6%

3.7%

5.8%

Socially Responsible

Funds Self Directed

Brokerage Window

10.6%

8.0%

9.3% 10.0%

9.6%

10.4%

11.9%

11.6%

15.7%

13.7%

19.5%

4.8%

7.9%

15.6%

17.1%

29.4%

38.2%

44.4%

42.6%

Mutual Fund Window

14.9% 19.8% 15.1% 13.5% 12.2% 15.4% 13.6% 13.7% 13.0% 22.3%

(hedge funds, private equity, etc.)

9.1%

4.3% 3.7%

Source: 2013 PLANSPONSOR Defined Contribution Survey

When it comes to plan investments, less is

more.

8.6%

12. Make your plan’s Qualified Default Investment Alternative (QDIA) a “one fund” investment solution.

Why: Your plan’s QDIA should be a single fund investment solution that is well diversified among the various asset classes.

A typical 401(k) plan has at least one single source investment solution because they are relatively easy for participants to understand. Single source solutions offer participants a way to keep their investment strategy simple, but sophisticated. Besides being a great choice for a Qualified Default Investment Alternative, these types of funds are particularly suited to participants who want a diversified portfolio in a single fund, are inexperienced investors who prefer to have their asset allocation decisions professionally made and are looking for a sophisticated investment strategy with a single decision. Investors overwhelmed by too many funds from which to choose may make less-than-optimal decisions at best and no decisions at worst. The bottom line—a Qualified Default Investment Alternative is often the better investment choice for many participants. In terms of best practices, consider using a QDIA for new participants and encouraging participants to invest future contributions as well as prior balances in a QDIA. Consider: •

Target date funds These are often a mutual fund or collective trust fund that is designed to provide a simple, yet

sophisticated investment solution through a diversified portfolio where the asset allocation strategy becomes more

conservative as the retirement target date grows closer. A time-horizon based approach, the fund strategy is

sophisticated and well-diversified, giving the participant exposure to the full spectrum of asset classes.

•

Model portfolios Here participants have their deferrals invested by professionals in a guided investment solution based

on a set of specific targets, objectives and desired outcomes. Essentially, it is an investment strategy based on participants’

goals, risk tolerance and timeframe to retirement. These accounts are often attractive to participants who want the

professional oversight and customization that comes with this approach, but do not have the time or expertise to

determine this on their own.

•

Asset allocation funds Employing a risk-based approach, asset allocation funds seek to balance risk versus reward by

adjusting the percentage of each asset in a portfolio according to variables similar to those listed above. Typically such

funds offer a blend of stock, bond and cash investments; such diversification usually makes for a less risky investment

strategy than other funds, as different asset classes rarely all go up or down in value at the same time.

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QDIA DO YOU OFFER A PROFESSIONALLY MANAGED ACCOUNT TO PARTICIPANTS AS AN INVESTMENT OPTION?* PLAN SIZE BY ASSSETS

Overall <$1MM $1MM- $5MM- $10MM- $25MM- $50MM- $200MM- $500MM- >$1B

$5MM $10MM $25MM $50MM $200MM $500MM $1B

Yes No Unsure

35.2% 28.4% 31.6% 37.5% 35.7% 30.8% 34.1% 43.0% 44.0% 44.2% 57.2% 54.0% 56.1% 53.6% 57.4% 63.1% 63.1% 52.3% 55.0% 53.9% 7.6% 17.7% 12.3% 8.9% 6.9% 6.1% 2.8% 4.7% 0.9% 1.9%

Source: 2013 PLANSPONSOR Defined Contribution Survey *NOTE: Managed accounts are services under which professional investment managers make investment and portfolio decisions for participants based on variables like age, goals for retirement, other savings, and risk tolerance. These services usually employ computer models to allocate participant assets across the investment choices available in the plan. Target-date funds should NOT be considered professionally managed accounts.

A QDIA is often the better investment choice for most

participants.

13. Re-enroll periodically Why: Quite simply, there is nothing more effective when it comes to influencing participant behavior than on-site education.

Re-enrollment of existing plan participants helps participants take a fresh look at how they are investing their contributions since many participants are managing what is most likely their first or second largest asset under the “set it and forget it” mantra.

When employing education and communication strategies, think about what type of participant behavior you wish to influence. The most common reasons for providing plan education are to increase participation (78.8%), to increase appreciation for the plan (72.6%) and to increase salary deferrals (74.8%)10. Beyond that, is asset allocation a concern?

Do participants need an investment education refresher? Have they done any retirement planning? Have your participants developed a comfort level in accessing your plan’s online tools? Are they using the rebalancing and account realignment tools at year-end? Even more importantly, are they using online financial planning and gap analysis tools? Do participants understand how all of their retirement plans work in tandem, and how they should best use the plans to help them achieve their retirement goals? Are your retirement programs illustrated on a combined benefit statement? Re-educating employees annually offers an effective point to engage employees often about retirement planning.

Periodic re-enrollment and education meetings help participants map out a strategy and stick to that strategy to attain their long-term goals. Participants can’t measure whether they are on track to meet their retirement planning goals without first taking the steps to determine what the goals are. What’s more, a number such as 5% or 6% percent of salary saved and employer matching contributions don’t have a real context for participants without showing them how this translates into real income at retirement. Use your education meeting as a platform for integrating financial planning tools to help your participants do this—in particular, tools that provide guidance and advice.

10 PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans

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re-enrollment HOW CONFIDENT ARE YOU THAT MOST OF YOUR EMPLOYEES WILL ACHIEVE THIER RETIREMENT GOALS? PLAN SIZE BY ASSETS

Overall <$1MM $1MM- $5MM-

$5MM $10MM

$10MM- $25MM- $25MM $50MM

Very confident 3.0% 7.0% 2.4% 1.4% 4.0% 1.6% Confident 9.0% 8.9% 9.4% 8.8% 8.0% 9.5% Somewhat confident 32.5% 25.7% 27.9% 32.6% 32.7% 31.6% Only a little confident 28.6% 22.0% 27.9% 33.1% 28.9% 30.9% Not at all confident 20.4% 24.3% 23.7% 15.0% 21.4% 23.0% Unsure 6.4% 12.1% 8.8% 9.1% 5.0% 3.3%

$50MM- $200MM

$200MM- $500MM- >$1B $500MM $1B

2.4% 4.3% 4.5% 2.5% 7.6% 9.0% 10.9% 11.8% 37.3% 36.8% 35.5% 38.4% 29.5% 25.6% 30.0% 27.1% 19.3% 22.6% 15.5% 11.8% 3.9% 1.7% 3.6% 8.4%

Source: 2013 PLANSPONSOR Defined Contribution Survey

There is nothing more effective when it comes to influencing participant behavior than on-site

education.

14. Outsource 3(16) administrative responsibilities.

Why: Today, there is a great deal of talk about helping employers with fiduciary responsibility, yet the talk often falls short of what most employers actually want and need—someone to simply handle it for them. Outsourcing 3(16) administrative responsibilities offers a simple solution that minimizes risk and reduces plan administrative burdens—including responsibility for monitoring the plan features in this brochure that we encourage you to implement. Since the 3(16) administrator is responsible for managing the day-to-day operation of the plan, outsourcing the fiduciary responsibilities associated with this role transfers these responsibilities from your organization to the named 3(16) Administrative Fiduciary. As an institutional fiduciary, Pentegra can fulfill this role, so that you can rest assured that the automatic features you adopt will be administered properly over the life of your plan.

Outsourcing the 3(16) Plan Administrator role has become an increasingly important function. As any plan sponsor recognizes, retirement plan administration is involved, complex, and laden with compliance burdens. For many employers, the level of self-education and the commitment of time and energy required to effectively fulfill these duties is an unwelcome concern—a concern that too often distracts from the more critical responsibility of running a business. What’s more, these responsibilities involve significant risk, and while most of the executives and employees assigned to these roles rarely know what the roles entail or what is expected, the legal burden falls squarely on those employees as individuals.

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outsource While many assume the greatest source of retirement plan liability is the planâ&#x20AC;&#x2122;s investments, in reality the vast majority of lawsuits and regulatory actions involve failures in administration.

Statistics and Surprises 10,002 Forms 5500 audited 5,973 Voluntary Correction Program (VCP) agreements 3,472 DOL civil investigations closed 75% resulted in payment Average $397,000 255 cases referred for litigation by DOL, 75 convictions, 8,860 ERISA lawsuits

The IRS Top Ten List Of Common VCP Submissions 1.

2.

3.

4.

5.

Failure to amend for tax law changes Incorrect definition of compensation Failure to include eligible employees or exclude ineligibles Loan errors Impermissible in-service withdrawals

6. Required Minimum Distribution errors 7. Employer eligibility failure 8. ADP/ACP failure not timely corrected 9. Failure to provide minimum top-heavy benefit 10. Exceeding maximum contribution limits

Sources: 2011 data from IRS, DOL, and federal court system websites

What most employers want and needâ&#x20AC;&#x201D;someone to simply

handle it for them.

ERISA Section 3(16) defines the plan administrator role. The administrator is the fiduciary responsible for overall governance of the plan with the exception of the trustee functions. Together, the trustee and administrator retain nearly all of the legal responsibility for operating a retirement plan subject to ERISA. The key thing to understand about the administrator role is that it is the final frontier—plan sponsors have many viable options for getting help with fiduciary responsibility for plan investments, despite the fact that very few plan sponsors actually ever get in trouble for bad fiduciary investing. On the other hand, many plan sponsors experience headaches, costs, and formal corrections related to plan administration, which is why this is an area that it makes sense to outsource.

Under the most expansive scenario, outsourcing 3(16) Administration is an acceptance by the service provider of all or nearly all of the functions of the administrator as well as the legal title.

Most plan sponsors do not fully understand what this role means, but in a nutshell, it means being responsible for: •

Being named as the named fiduciary, trustee, and administrator in a 90-page legal document, and

various contracts.

•

Spending lots of time and effort governing their plan through education, checklists, and perpetual effort.

•

Doing the work associated with document review, notices, mailings, loans, distributions, QDROs, eligibility

determinations, and other plan tasks.

•

Assuming legal responsibility for the consequences of doing those tasks wrong, or failing to do them at all—the

sorts of failures that any rational business owner recognizes as the inevitable outcome of involving humans in

a process.

•

Having one more job to do when they’re struggling to focus on the one that pays the bills.

Employers don’t want to be the administrator in the vast majority of cases, but they have chosen to be the administrator anyway for two simple reasons:

1.

Most think they have already outsourced—that their third party administrator is the plan

administrator—when in reality they have only obtained clerical help from a non-fiduciary service

provider who leaves a multitude of responsibilities on the client’s plate. It is meaningful help, and a

good TPA is invaluable, but it’s not the same as outsourcing.

They didn’t know they had a choice.

2.

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oversight Under a fully outsourced 3(16) Administrator arrangement, the provider becomes responsible for:

•

Plan Operational Oversight

•

Plan Document Administration

•

New Hire and Termination

•

Service Provider Selection and Oversight

•

Participant Notices, Statements and Disclosures

•

Participant Fee Disclosure

• Hardship Distributions

•

Loans and Loan Repayment

• Contributions • Government Filings • Compliance Testing

•

Distributions and QDROs

•

Claims and Benefit Determinations

•

Annual Plan Review Costs

Outsourcing the 3(16) administrator role transfers these burdens. Outsourced 3(16) administrative services are experiencing a powerful upsurge as providers find more ways to relieve employers, because employers do not simply want help running the plan—they want someone to run it for them.

Outsourcing fiduciary responsibilities minimizes risks and

reduces burdens.

Some final thoughts…

Understanding a company’s culture, demographics and benefits philosophy provides the basis for a dialogue that can be used to design a framework for your plan objectives and for plan redesign. Key considerations—what is your management approach and compensation strategy? Where does your organization fit comparatively to peers? What other types of retirement programs do you offer? Are all of your plans working in tandem? Understanding where a company is positioned—in terms of both strategy and existing programs—helps to incorporate plan features that will engage employees, and ultimately, shape the way they use the plan to build financial security.

As more employees come to rely on their 401(k) plan as their primary source of retirement income, there will be a continued movement toward designing these programs in ways that best maximize successful outcomes for those that use them. In order to achieve best-in-class results in terms of participant retirement readiness, plan sponsors will continue to add more “automatic” plan features. Automatic features help plan participants set a reasonable level of salary savings, increase their contributions over time, achieve proper investment diversification and make better use of the plan’s investment alternatives. The use of automatic features can help participants achieve the all-important 10% savings rate that we believe is crucial to success. In addition, current plan participants can be re-enrolled to make sure that they also get the benefits of the automatic plan features. Progressive redesign of the 401(k) plan is a win-win for participants as well as for their employers.

When all is said and done, a plan’s success is measured by how effectively a participant is able to meet their retirement income replacement goals. Good providers know that successful plan design is a partnership between the sponsor and the retirement plan provider. To learn more about our thoughts on progressive plan design, we invite you to visit our comprehensive website, www.pentegra.com, where you can review our current thinking—including blogs, articles and white papers, and tap into thought leadership as showcased in our Talk to an Expert feature.

Our difference.

Your

advantage.

2 Enterprise Drive, Suite 408, Shelton, CT 06484-4694

800•872•3473 tel 203•925•0674 fax www.pentegra.com © 2014 Pentegra Retirement Services All Rights Reserved