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The Power of Plan DesignAnd Selecting & MonitoringService-Providers<br />Presented By<br />Adam C. Pozek,<br />ERPA, QPA, QPFC<br />Partner<br />DWC ERISA<br />Consultants, LLC<br />

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Agenda<br />The Power of Plan Design<br />Setting the stage<br />Defined contribution plans<br />401(k)<br />Profit Sharing<br />Defined benefit plans<br />Selecting & Monitoring Service Providers<br />

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Setting The Stage<br />

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Applicable Limits<br />

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Nondiscrimination testing to ensure Highly Compensated Employee (“HCE”) benefits not disproportionate to Non-HCE (“NHCE”) benefits<br />Must meet one of two tests to be HCE<br />5% owner test<br />Compensation test<br />Employees not meeting one of these tests are NHCE<br />HCEs & Nondiscrimination<br />

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Plan is top heavy when more than 60% of plan assets belong to key employees<br />Key employees are generally the owners and officers<br />Minimum required contribution to non-key employees equal to the lesser of…<br />3% of compensation, or<br />The highest percentage allocated to any key employee<br />Key Employees & Top Heavy Plans<br />

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Defined Contribution Plans:401(k)<br />

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Plan design that provides for automatic passage of ADP test<br />Minimum employer contribution required<br />Participant notice required 30 – 90 days prior to start of each plan year<br />Two “traditional” options<br />Two automatic enrollment options<br />Safe Harbor 401(k) Plans<br />

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Matching contribution<br />100% of the first 3% of deferrals, plus<br />50% of the next 2% of deferrals<br />Base contribution<br />3% of compensation<br />Immediate vesting required<br />Safe Harbor 401(k) Plans<br />

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Last day rule/hours requirement not permitted<br />Split eligibility is permitted<br />Immediate for deferrals<br />1 year of service for employer contributions<br />Deemed pass of ACP if additional matching contributions…<br />Are not based on deferrals exceeding 6% of pay<br />Do not exceed 4% of pay<br />Safe Harbor Contributions<br />

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Existing 401(k) plans<br />Must be added at the start of a plan year<br />Amendment must be signed prior to the start of the plan year<br />Startups and non-401(k) plans<br />Initial year must include safe harbor for at least 3 months<br />Implementation no later than October 1st for a calendar year plan<br />Amendment must be signed prior to implementation<br />Implementation<br />

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Defined Contribution Plans:Nonelective Contributions<br />

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Design-based safe harbor allocation methods<br />Per capita method<br />Pro rata method<br />Permitted disparity method (a/k/a Social Security integration)<br />General-tested allocation methods<br />Age-weighted method<br />New comparability method (a/k/a cross-testing)<br />Allocation Methods<br />

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Uniform dollar amount allocated to each eligible participant<br />NHCEs (almost) always receive larger percentage of pay than HCEs<br />Per Capita Method<br />

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Per Capita Method<br />

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Uniform percentage of pay allocated to each eligible participant<br />Compensation capped at IRS limit<br />May be expressed as…<br />A set percentage, e.g. 5% of pay to all plan participants<br />Participant comp x 5% = Allocation<br />A total dollar amount, e.g. $100,000<br />Participant comp/Total comp x $100,000 = Allocation<br />Pro Rata Method<br />

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Pro Rata Method<br />

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Considers that SS benefits are paid only on compensation below the social security wage base<br />Allows additional contributions on pay exceeding a set level<br />Usually the wage base<br />May be a percentage of the wage base<br />May be a fixed dollar amount<br />Must be specified in plan document<br />Permitted Disparity Method<br />

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Base contribution percentage applies to all comp<br />Excess contribution percentage applies to comp>wage base<br />Usually capped at<br />5.7%, or<br />Base percentage<br />Permitted Disparity Method<br />Excess<br />Base<br />

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Permitted Disparity Method<br />

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Using The Time Value of Money<br />$2,875/year<br />$10,000/year<br />Age 30<br />Age 55<br />

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Divide participants into groups and allocate pro-rata within each group<br />Valid business classifications<br />Each participant in his/her own group<br />Groups must be defined in the plan document<br />Be careful with definitions<br />Minimum NHCE “gateway” contribution equal to the lesser of…<br />5% of compensation<br />1/3 the highest percentage allocated to any HCE<br />New Comparability Method<br />

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New Comparability Method<br />

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Comparison of Methods<br />

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Safe Harbor & New Comparability<br />

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Defined Benefit Plans<br />

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Defines benefit at Normal Retirement Age<br />Benefit based on…<br />Compensation,<br />Service, and/or<br />Participation<br />Benefit expressed as monthly or annual annuity<br />Participant earns a portion of the benefit each year<br />Employer bears the investment risk<br />Defined Benefit Plans<br />

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Funding Defined Benefit Plans<br />Future Investment Earnings<br />Current Assets<br />Future Additions<br />Future Contributions<br />

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Maximum Contributions<br />

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Architectural Firm<br />2 owners  Age 55+<br />7 principals  Early 40s<br />16 other employees<br />Principals to buy out owners over 10 years<br />Current plan is safe harbor 401(k) with new comparability<br />Case Study #1<br />

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Case Study #1<br />

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Salvage yard<br />3 owners earning $450,000+ each<br />4 spouses and children<br />32 other employees<br />Current plan is safe harbor 401(k) with new comparability<br />Case Study #2<br />

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Case Study #2<br />

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Case Study #2<br />

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Case Study #2<br />

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Selecting & MonitoringService-Providers<br />

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“…the failure to exercise due care in selecting and monitoring a fund’s service providers constitutes a breach of…fiduciary duty.”<br />Mahoney v. JJ Weiser & Co, Inc., 564 F.Supp.2d 248, 255 (SDNY 2008)<br />“At the very least, trustees have an obligation to (i) determine the needs of a fund’s participants, (ii) review the services provided and fees charged by a number of different providers and (iii) select the provider whose service level, quality and fees best matches the funds needs and financial situation.”<br />Liss v. Smith, 991 F.Supp. 278, 300 (SDNY 1998)<br />The Duty<br />

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Plan assets cannot inure to the benefit of employer.<br />ERISA §403(c)<br />Fiduciaries are prohibited from engaging in certain transactions with parties-in-interest.<br />ERISA §406(a)<br />Fiduciaries are prohibited from dealing with plan assets for their own interests or acting on behalf of an interest adverse to the plan.<br />ERISA §406(b)<br />Fiduciaries must…defray the reasonable expenses of administering the plan.<br />ERISA §404(a)<br />General Concepts<br />

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The Case<br />Multiemployer welfare fund owned a hotel that was not very profitable.<br />Trustees hired Dr. Schwartz (friend of one trustee and personal physician of another) to conduct feasibility study on most profitable use of hotel.<br />Dr. Schwartz collected a $250,000 fee in advance.<br />The Decision<br />The doctor had no experience, qualifications, etc.<br />Trustees did not solicit competitive bids to determine reasonableness of fees.<br />Trustees breached fiduciary responsibility by hiring Dr. Schwartz.<br />Source: Donovan vs. Mazzola, 716 F.2d 1226 (9th Cir. 1983)<br />Example<br />

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President of company secures more favorable banking terms by selecting the bank to service the 401(k) plan<br />Financial institution offers plan fiduciary more favorable mortgage on personal residence in exchange for using institution to custody plan assets<br />Company shareholders hire plan investment advisor in order to receive free personal financial planning services for themselves<br />Other Examples<br />

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Providers needed to operate the plan<br />Third party administrator<br />Recordkeeper<br />Custodian<br />Broker<br />Investment advisor<br />Actuary<br />Auditor<br />Attorney<br />Plan document provider<br />Potential Service-Providers<br />

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Credentials<br />Years in business<br />Licenses<br />Expertise<br />Education/certification of employees<br />References<br />Financial stability<br />E&O insurance<br />Past transgressions<br />Factors To Consider<br />

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“…it is the view of the Department that a plan fiduciary’s failure to take quality of services into account in the selection process would constitute a breach of the fiduciary’s duties under ERISA when…the selection involves the disposition of plan assets.”<br />Source:DOL Advisory Opinion to Diana OrantesCeresi, SEIU, February 19, 1998<br />Cost vs. Value<br />

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Understand who is getting paid and how much<br />The devil is in the details<br />Forthcoming regulations require ongoing fee disclosure to avoid prohibited transactions<br />ERISA §408(b)(2)<br />The Price Tag Still Matters<br />

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Source: George v. Kraft Foods Global, Inc. (S.D. Ill. Jan 27, 2010)<br />ERISA measures the process, not necessarily the result<br />Claim of fiduciary breach<br />Allegations included failing to monitor providers and paying excessive fees<br />Court granted motion to dismiss<br />Undisputed facts showed committee followed a reasoned process to select and monitor service-providers<br />The Prudent Process<br />

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Page | 46<br />Questions<br />

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The content of this presentation is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances.<br />To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.<br />Caveats & Disclaimers<br />

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Appendix<br />

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About DWC ERISA Consultants, LLC<br />Established in 1999<br />National, full-service ERISA consulting firm<br />Locations in multiple states<br />Nearly 750 clients nationwide<br />No E&O claims since company inception<br />

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Expertise & Leadership<br />Our consultants…<br />Average more than 10 years of experience<br />Are registered with the IRS as return preparers, subject to strict ethical standards<br />Hold active industry leadership roles<br />IRS Advisory Committee on Tax Exempt & Government Entities<br />ASPPA Board of Directors and Executive Committee<br />ASPPA Government Affairs Committee<br />Editorial Board of The Journal of Pension Benefits<br />

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Professional Development<br />Mandatory professional credentialing program<br />In-house training on technical developments and process improvements<br />Required CPE and participation in industry conferences and events<br />

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Service Standards<br />Respond to phone calls and e-mails within 1 business day<br />Complete nondiscrimination testing within 15 business days of receipt of complete and accurate information<br />Prepare plan documents within 10 business days of receipt of complete and accurate information<br />

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Relationship-Based Service & Cost-Effective Pricing<br />DWC’s service model is straight-forward. We assign a consultant and a partner to each plan. DWC adheres to a strict peer-review policy, so all work is reviewed prior to delivery to our clients. Our structure provides high-touch, accurate service to our clients while maintaining cost-effective pricing.<br />At DWC we dig deeper to understand each client’s unique financial and operational needs. With decades of experience, critical thinking and exceptional service, DWC combines strategic solutions with flawless execution. <br />