Pension Protection Act of 2006 One Year Later

Pension Protection Act of 2006 One Year Later Business & Planning Opportunities National Benefit Services, Inc., 2007 Presented by Jerry Kalish, President National Benefit Services, Inc. and Lanny D. Levin, CLU, ChFC, President LANNY D. LEVIN AGENCY, INC. 1

Agenda Capabilities of LANNY D. LEVIN AGENCY Jerry Kalish Opportunities using Qualified Plans after the Pension Protection Act of 2006 Lanny Levin New Rules for EOLI-ignore at your clients risk Lanny Levin Two Life Insurance Sales Ideas 2

About National Benefit Services Founded in 1978 Focus on use of qualified retirement plans for: Business owners who want to put more money in their pockets Employers who want to attract, retain, and motivate their employees Work with financial professionals who want to grow their retirement plan business and look like heroes to their clients 3

How NBSI Adds Value to You High standard of support from local TPA Firm principal has over 30 years of experience Available for sales calls Review existing plans Benchmark takeover plan targets Professional case design including advanced tax planning and illustrations In-house seminars Alert to cross-selling opportunities for you Assist with year end tax planning before end of year In-house ERISA counsel Expertise in fields less familiar to you 4

Focus of This Presentation How the Pension Protection Act of 2006 provides significant opportunities for financial professionals to grow their businesses and look like heroes to the clients National Benefit Services, Inc., 2007 5

But first, a Word from our Compliance Department This presentation is provided for general discussion purposes only and should not be considered tax or legal advice. Employers should always check with a qualified tax adviser to determine the application of the tax laws and rules to a specific situation. 6

Why the Pension Protection Act of 2006 is significant Largest single rewrite of retirement plan laws since ERISA in 1974 Result of years of negotiation, lobbying efforts, and political posturing Winners and losers 7

Years of Negotiation, Lobbying Efforts, and Political Posturing Enron 2002 Pension Reform 6 months in conference 2006: a particularly contentious election year 8

Before we get started: a brief review of the tax advantages of qualified retirement plans Contributions by the employer on a tax deductible basis Contributions by the employee on a tax deductible basis Participant can borrow against his account Funds accumulate on a tax deferred basis Tax can be minimized or deferred when benefits are distributed Participant s account protected against creditors Participant has non-forfeitable right to retirement benefits Life insurance can be bought on a tax deductible basis A tax credit may be available for the establishment and administration of a new plan 9

And they just keep getting better January 2006: Roth provision can be added to 401(k) plan August 2006: New Pension Protection Act of 2006 adds significant tax benefits available to business owners and other Highly Compensated Employees Automatic enrollment effective in 2008 will add approximately 10 million new 401(k) participants Estimated $1.8 trillion in new money over the next 20 years. 10

Defined Benefit Plan: Winners and Losers Winners Allows larger deductions Clarifies status of cash balance plans Delta and Northwest Airlines Surviving spouse rules In-service distributions Losers Tightens DB funding rules (requires faster funding) Sets up less flexibility in calculating funding obligation 11

Defined Benefit Plans Still Rockin and Rollin for Small Business Owners Traditional DB plans 412(i) DB plans [now 412 (e)(3)] 12

How the new DB deduction rules can benefit business owners Old Law New Law DB only DB and DC Limited by restrictive funding rules 25% of covered comp excluding 401(k) Funding rules liberalized (larger deductions available) 2006: Additional 6% available for PS 2008: Each plan subject to individual limits if covered by PBGC 13

Example of the new deduction rules Pre-PPA DB deduction DB only: $100,000 limited by funding rules Combined plans: 25% limit 2006 deduction DB only: $400,000 because of new funding requirements Combined plans: extra 6% PS or $13,200 at max comp of $220,000 for owner/hce 14

Advantages of 412(i) plans over traditional DB plans Creates larger initial deductions than a traditional plan since the funding assumptions are required to be much more conservative, and is not subject to the full funding limitation tests of a defined benefit plan; Does not require an enrolled actuary Is required to use policy contract guarantees as funding assumptions, thus shielding assumptions from IRS attack as unreasonable Can be designed to eliminate the potential of excess plan assets that, in a traditional plan, would be subject to taxes and penalties of 80% or more upon termination of the plan; Produces an understandable accrued benefit since it is simply the cash value of the contracts funding the participant's account; Provides retirement benefits that are guaranteed by the insurance company and not just the financial strength of the particular employer providing the plan. 15

Best 412(i) prospects Highly profitable & stable business Owner over 45 years old Few or no employees Employees young and low-income Very high, stable income Desire to maximize deductions Ability to continue contributions min. 5 years Appreciates value of survivor benefit 16

Five quick questions to ask the business owner 1. How old are you? 2. How many employees do you have? 3. How much would you like to contribute and deduct each year? 4. Do you or your spouse own any other businesses? 5. Do you have any leased employees? 17

Defined Contribution Plans: Winners and Losers Winners Removes EGTRRA sunset provisions Clarifies automatic enrollment/default funds Allows investment advice to participants Expands distribution rules Allows larger deductions Requires diversification of employer stock Losers 18

No Way to Stop More Law Changes Technical Corrections Add-ons to other legislation such as Iraq funding bill Continued legislative tinkering 19

Our Profit Sharing/401(k) Plan Administration Checklist for 2007 Default investment arrangements Updated expense policy Expanded availability of hardship distributions Faster vesting of employer non-elective contributions (match or profit sharing) Vesting statements Updated QDRO procedure Availability of rollover by non-spouse beneficiary Availability of fiduciary liability insurance 2008: Automatic Enrollment 20

More Class Action Lawsuits The alleged abuses On-going investigations by plaintiff s law firms 21

Regulatory Focus IRS: 26 Priority Guidance Plan Retirement Benefit Items DOL: 25 PPA regulations in 2007/2008 22

The arms race is over after 25 years First 401(k) in 1982, then: Daily valuation Loans Self-directed brokerage Web access Investment education tools Multi-share classes Co-fiduciary Advice tools 23

Where the focus will be Business owner who wants to maximize contributions and benefits What plan sponsor and employee actually want 24

Designing the Perfect Retirement Plan for the Business Owner Meets legal requirements Is affordable Allows flexibility for making contributions Maximizes benefits for the owner Provides for family members working in the company Has a full service support system 25

I ll take Retirement Plans, Alex 26

Ready, set, advise: Rollover IRAs on their way 7.4 million rollovers, 28% increase $245 billion rolled over, 38% increase Source: 2004 data Spectrem Group 27

Retirees moving to Tibet: Who will be their tour guide? From the land of accumulation to the land of distribution The link to the travelogue, http://www.wealth2k.com/tibet.html by David Macchia, Wealth2K.com 28

The Coming Annuitization of 401(k) Plans Already part of some 401(k) plans Solving the annuity puzzle : the disconnect between the economic realities and the psychological reaction 29

Barriers to annuitization (we think) Desire to leave a legacy Complexity of annuities Lack of financial literacy Aversion to perceived loss Desire to maintain control 30

Advisors Disconnected from Affluent Clients 88.6% say their biggest concern is losing their wealth, 84.6 % of advisors do not feel that even 20% of clients have this concern 49.2% say they are concerned about estate taxes, only 8.2% of advisors think this is important to clients Source: Cultivating the Middle Class Millionaire, 2005, CEG Worldwide, 2005 31

Few CEOs Knowledgeable about Pension Protection Act Only 4% of those surveyed are very knowledgeable 23% somewhat knowledgeable 61% acknowledged that they are not at all knowledgeable about PPA regulations Source: PricewaterhouseCoopers Trendsetter Barometer, survey of CEOs of fast-growth, private companies 32

What plan sponsors want Keep it simple Plans that Focus on participant needs Are user friendly Provide personal service AllianceBernstein Research 2006 33

What employees want Just do it for me Plans that require Little work to join Little work to invest Minimize tough decisions Source: AllianceBernstein Research 2006 34

Core questions plan sponsors ask 1. 2. 3. 4. 5. 6. Are we getting the best value for our plan? Are we meeting all of our fiduciary obligations? Do we have the right investment lineup? Do we provide a communication program that works? Are we receiving the type of service we need? Is the plan effectively meeting our goals? Source: AllianceBernstein Research 2006 35

1. Are we getting the best value for our plan? Only 32% were confident or very confident that they understood all of the fees they pay for their plans. Nearly 25% said they did pay explicit fees for plan services, and 45% weren t sure 36

2. Are we meeting all of our fiduciary obligations? Most DC sponsors don t consider themselves fiduciaries. However, sponsors are worried about fiduciary responsibilities. 38

2. Are we meeting all of our fiduciary obligations? Most DC sponsors don t consider themselves fiduciaries. However, sponsors are worried about fiduciary responsibilities. Procedural prudence provided Independent RIA responsible for selection and monitoring of funds Investment policy statement Independent RIA s 401(k) Toolbox for investment advice Regular, documented meetings with employer and employees 39

3. Do we have the right investment lineup? Most sponsors don t think they understand asset allocation? Over 2/3 said that a diverse plan should have at least 16 funds In follow-up discussions, most were concerned that their plans had too many options. 40

3. Do we have the right investment lineup? 58% said that their plan did not have a default option. Stable value funds were the most popular default option. Funds selected and monitored by independent RIA who receives no revenue sharing from funds and assumes fiduciary responsibility PPA and DOL regulations require that default fund can only be managed account, asset allocation fund, or target-maturity fund - effective date is 2007 41

4. Do we provide a communications program that works? Most employees see themselves as accidental investors. They have a low level of confidence about retirement. 42

Employees calling for financial planning help 81% would take advantage of a financial planning option if their companies cover a portion of it as part of the employee benefits package 67% would be interested in one-onone financial planning if their employer offers it 87% feel that their employer recognizes and values their efforts on the job Source: 2007 Ameriprise Workplace Financial Planning Benefit Decision Study 43

4. Do we provide a communications program that works? Most employees see themselves as accidental investors. They have a low level of confidence about retirement. Regular enrollment meetings 401(k) Toolbox 44

5. Are we receiving the type of service we need? Most sponsors consider personal services most important. Most desired services highlight need for practical simplicity. 45

5. Are we receiving the type of service we need? Most sponsors consider personal services most important. Most desired services highlight need for practical simplicity. Client has dedicated service manager at both Guardian and NBSI. Regular on-site meetings with client and employees. Responding to what employers and employees need 46

6. Is the plan effectively meeting our goals? 50% of 401(k) plans have participation rates below 80%. Plan participation falls as the number of options rises. 47

6. Is the plan effectively meeting our goals? 50% of 401(k) plans have Automatic enrollment participation rates below 80%. 401(k) Toolbox Plan participation falls as the number of options rises. 48

Putting it all together: the Guardian s ADVANTAGE Program 49

http://www.401ktoolbox.com/ 51

Guardian Advantage & QDIA Compensation Examples $1,000,000 Takeover Plan $100,000 Annual Flow 5% Asset Growth Rate Contract Charges of.55% annual asset charge and no deferred sales charge 52

401k Toolbox QDIA Solicitor s Compensation: 0.20% 401k Toolbox QDIA - Solicitor Compensation Example % of Participants Electing QDIA Assumed Asset Growth Rate 5.00% Deposits 401k Toolbox QDIA Solicitor Comp 0.20% Takeover Assets + Year Deposits 1 2 3 4 5 6 7 8 9 10 85.00% Assets $892,500 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 YE Accumulated Assets $937,125 $1,073,231 $1,216,143 $1,366,200 $1,523,760 $1,689,198 $1,862,908 $2,045,303 $2,236,818 $2,437,909 YE Average Toolbox Assets $914,813 $1,005,178 $1,144,687 $1,291,171 $1,444,980 $1,606,479 $1,776,053 $1,954,106 $2,141,061 $2,337,364 Accumulated 401k Toolbox QDIA Solicitor Comp $1,000,000 $100,000 Total Yearly 401k Toolbox Comp $1,830 $2,010 $2,289 $2,582 $2,890 $3,213 $3,552 $3,908 $4,282 $4,675 $31,232 Cumulative 401k Toolbox Comp $1,830 $3,840 $6,129 $8,712 $11,602 $14,815 $18,367 $22,275 $26,557 $31,232 53

Guardian Advantage Compensation: 1% + 0.25% Trail Assumed Asset Growth Rate Table 25-1% + 0.25% Trail Year 1 2 3 4 5 6 7 8 9 10 Takeover Assets + Deposits $1,100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 5.00% 0.00% YE Accumulated Assets $1,155,000 $1,317,750 $1,488,638 $1,668,069 $1,856,473 $2,054,296 $2,262,011 $2,480,112 $2,709,117 $2,949,573 Mean Assets $1,077,500 $1,205,000 $1,367,750 $1,538,638 $1,718,069 $1,906,473 $2,104,296 $2,312,011 $2,530,112 $2,759,117 Accumulated Comp. Totals Deposit-Based Commission $11,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $11,000 Asset-Based Trail $0 $3,013 $3,419 $3,847 $4,295 $4,766 $5,261 $5,780 $6,325 $6,898 $43,604 Additional Trail $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Total Yearly Comp $11,000 $3,013 $3,419 $3,847 $4,295 $4,766 $5,261 $5,780 $6,325 $6,898 $54,604 Table 25 Cumulative Comp $11,000 $14,013 $17,432 $21,278 $25,574 $30,340 $35,601 $41,381 $47,706 $54,604 54

Creating a sense of urgency for employer to make a decision Not enough compensation for a shareholder-employee of an S corporation Not enough time to maximize 401(k) contributions Timely notice not given to employees 55

Approaching deadlines help October 1 safe harbor notice for new 401(k) adopted in 2007 November 1 SIMPLE termination notice to adopt 401(k) plan in 2008 December 1 safe harbor notice for existing 401(k) plan for 2008 56

Visit us on the blogosphere Retirement Plan Success: resources for investment professionals who want to grow their retirement plan business The Retirement Plan Blog: information and insight for plan sponsors and their advisors National Benefit Services, Inc., 2007 57

And our attorney wants me to remind you again that This presentation is provided for general discussion purposes only and should not be considered tax or legal advice. Employers should always check with a qualified tax adviser to determine the application of the tax laws and rules to their specific situation. For information about our services call: Jerry Kalish National Benefit Services, Inc. 300 West Adams St. Suite 326 Chicago, IL 60606 (312) 419-9080, Ext.3 jerry@nationalbenefit.com www.retirementplansuccess.com 58