The pentegra smartpath™

SMARTPATH™ PENTEGRA RETIREMENT SERVICES

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.

Plan Design For Successful Outcomes— The Pentegra SmartPathTM Advantage

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.

2 Pentegra Retirement Services

SERVICE REQUIREMENTS FOR EMPLOYEES TO BE ELIGIBLETO 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) 38.5% 44.8% 65.3% 72.5% 79.7% 62.0%3 months 17.9% 19.0% 16.9% 12.8% 12.2% 15.4%6 months 18.8% 13.3% 5.1% 4.0% 1.4% 7.8%1 year 23.9% 18.1% 8.5% 4.7% 4.7% 11.1%Other 0.9% 4.8% 4.2% 6.0% 2.0% 3.6% 100% 100% 100% 100% 100% 99.9%

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

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.

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 auto-

enrollment feature that is coordinated with online enrollment1. The bottom line—it is a critical tool to help participants

help themselves.

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


VESTING SCHEDULES BY PLAN SIZE AND CONTRIBUTION TYPE


Vesting Schedule Matching Contributions 1-49 50-199 200-999 1,000-4,999 5,000+ All Plans

Immediate Full Vesting 45.2% 39.2% 31.1% 39.7% 46.4% 40.6%2-Year Cliff Vesting 1.2% 2.5% 4.9% 4.4% 7.2% 4.4%3-Year Cliff Vesting 4.8% 2.5% 11.7% 11.0% 16.7% 10.4%3-Year Graduated Vesting 3.6% 1.3% 6.8% 5.1% 2.9% 4.1%4-Year Graduated Vesting 2.4% 1.3% 2.9% 5.1% 0.7% 2.6%5-Year Graduated Vesting 11.9% 15.2% 25.2% 20.6% 18.1% 18.7%6-Year Graduated Vesting 31.0% 35.4% 14.6% 10.3% 4.3% 16.5%Other 0.0% 2.5% 2.9% 3.7% 3.6% 2.8%


Studies show that if people default in,

they stay in.

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)

enrollment

PERCENTAGE OF PLANS WITH AUTOMATIC ENROLLMENT BY PLAN SIZE


1-49 50-199 200-999 1,000-4,999 5,000+ All Plans

For All New Hires 9.3% 34.3% 44.1% 59.3% 56.1% 42.4%For All Non-Participants 4.2% 2.8% 5.9% 5.3% 5.4% 4.8%Percentage of All Plans 13.6% 37.0% 50.0% 64.7% 61.5% 47.2%That Have Automatic Enrollment



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

One of the best practices in plan design that can

help ensure successful outcomes.

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


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


1-49 50-199 200-999 1,000-4,999 5,000+ All Plans

Automatic Escalation * 32.5% 37.9% 34.4% 44.4% 39.8%Voluntary Escalation * 15.0% 13.8% 19.8% 22.2% 18.1%No Escalation * 52.5% 48.3% 45.8% 33.3% 42.1% 100.0% 100.0% 100.0% 99.9% 100.0%

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

auto-escalation


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 contribution—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.

Source: 2013 PLANSPONSOR Defined Contribution Survey 4 2013 PLANSPONSOR Defined Contribution Survey5 PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans

More than 100% of first 6% of salary

100% of first 6% of salary

51%-99% of first 6% of salary

50% of first 6% of salary

Less than 50% of first 6% of salary

Other

APPROXIMATE MAXIMUM MATCH/CONTRIBUTION

PLAN SIZE BY ASSETS


7.6% 8.0% 6.9% 7.8% 6.7% 6.8% 9.3% 4.4% 10.0% 10.6%

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

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

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

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

0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% 0.4% 0.0% 0.9%

Consider using employer matching contributions

as a way to incent participation.

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 HCE’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


Type of Safe Harbor 1-49 50-199 200-999 1,000-4,999 5,000+ All PlansTraditional 94.1% 94.1% 76.9% 75.0% 81.8% 84.2%Automatic Enrollment 5.9% 5.9% 23.1% 25.0% 18.2% 15.8% 100.0% 94.1% 76.9% 100.0% 100.0% 100.0%

matching contributions

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


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 Type 1-49 50-199 200-999 1,000-4,999 5,000+ All Plans401(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%


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

401(k) with a Roth IRA.

Roth 401(k) feature


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


Number of Loans 1-49 50-199 200-999 1,000-4,999 5,000+ All PlansOne Loan 61.4% 55.8% 49.0% 52.5% 41.2% 50.9%Two Loans 30.1% 37.7% 38.0% 39.0% 49.6% 39.9%Three Loans 3.6% 3.9% 9.0% 8.5% 7.6% 6.9%Four Loans 0.0% 0.0% 1.0% 0.0% 0.8% 0.4%Five Loans 1.2% 2.6% 1.0% 0.0% 0.0% 0.8%Six or More Loans 3.6% 0.0% 2.0% 0.0% 0.8% 1.2% 99.9% 100.0% 100.0% 100.0% 100.0% 100.1%


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

It is best to limit the number of total loans

outstanding at any given time.

access

14 Pentegra Retirement Services14 Pentegra Retirement Services

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, 20078 PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans9 PSCA’s 56th Annual Survey of Profit Sharing and 401(k) Plans

When it comes to plan investments,

less is more.

AVERAGE NUMBER OF INVESTMENT FUND OPTIONS


1-49 50-199 200-999 1,000-4,999 5,000+ All PlansNumber of Funds Available 23 21 18 19 15 19 for Company Contributions

Number of Funds Available 23 21 18 19 16 19for Participant Contributions


Target-date funds

Target-risk funds (i.e., “growth”,“conservative,” etc.)

Balanced funds

Money Market Fund

Employer Stock

Stable Value Fund

Real Estate / REITS

Alternative Investments (hedge funds, private equity, etc.)

Socially ResponsibleFunds

Self DirectedBrokerage Window

Mutual Fund Window

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

PLAN SIZE BY ASSETS


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

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

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

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

7.9% 1.1% 0.5% 2.1% 1.1% 4.0% 10.0% 16.7% 32.4% 41.1%

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

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

5.5% 9.6% 4.4% 4.7% 6.6% 3.7% 5.8% 4.3% 3.7% 8.6%

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% 9.1% 15.6% 17.1% 29.4% 38.2% 44.4% 42.6%

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


investments


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.

A QDIA is often the better investment

choice for most participants.

DO YOU OFFER A PROFESSIONALLY MANAGED ACCOUNT TO PARTICIPANTS AS AN INVESTMENT OPTION?*

PLAN SIZE BY ASSSETS


Yes 35.2% 28.4% 31.6% 37.5% 35.7% 30.8% 34.1% 43.0% 44.0% 44.2%No 57.2% 54.0% 56.1% 53.6% 57.4% 63.1% 63.1% 52.3% 55.0% 53.9%Unsure 7.6% 17.7% 12.3% 8.9% 6.9% 6.1% 2.8% 4.7% 0.9% 1.9%


*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 toler-ance. 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.

QDIA

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


There is nothing more effective when it comes to influencing

participant behavior than on-site education.

HOW CONFIDENT ARE YOU THAT MOST OF YOUR EMPLOYEES WILL ACHIEVE THIER RETIREMENT GOALS?

PLAN SIZE BY ASSETS


Very confident 3.0% 7.0% 2.4% 1.4% 4.0% 1.6% 2.4% 4.3% 4.5% 2.5%Confident 9.0% 8.9% 9.4% 8.8% 8.0% 9.5% 7.6% 9.0% 10.9% 11.8%Somewhat confident 32.5% 25.7% 27.9% 32.6% 32.7% 31.6% 37.3% 36.8% 35.5% 38.4%Only a little confident 28.6% 22.0% 27.9% 33.1% 28.9% 30.9% 29.5% 25.6% 30.0% 27.1%Not at all confident 20.4% 24.3% 23.7% 15.0% 21.4% 23.0% 19.3% 22.6% 15.5% 11.8%Unsure 6.4% 12.1% 8.8% 9.1% 5.0% 3.3% 3.9% 1.7% 3.6% 8.4%


re-enrollment

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.


What most employers want and need—someone to simply

handle it for them.

outsource

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. Failure to amend for tax law changes2. Incorrect definition of compensation3. Failure to include eligible employees or exclude ineligibles4. Loan errors5. Impermissible in-service withdrawals

6. Required Minimum Distribution errors7. Employer eligibility failure8. ADP/ACP failure not timely corrected9. Failure to provide minimum top-heavy benefit10. Exceeding maximum contribution limits

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

While many assume the greatest source of retirement plan liability is the plan’s investments, in reality the vast majority of lawsuits and regulatory actions involve failures in administration.

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.

2. They didn’t know they had a choice.


oversightUnder 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.

The pentegra smartpath™

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