Maintaining participant records on a daily basis requires sophisticated systems that are able to execute trades, process transactions and update accounts on a timely basis.  The PenServ system processes data on a transaction-day basis and displays information to the participant web site.  The site is designed to provide detailed transactions, pending items and the ability to track web instructions entered by the participant.

PenServ offers a complete menu of Daily Services:

• Secure systems to protect participant information
• Daily account transactions
• Automated daily payroll processing
• Daily update of plan values
• Notification of scheduled payrolls due
• English and Spanish Internet and Voice System
• Current Rate of Return and fund information
• Fund prospectuses
• On-line Enrollment
• Paperless loan processing
• Automated distributions
• On-line standard or customized reports for Plan Sponsor and Participants
• Asset allocation modeling capability
• Customizable Plan Sponsor Web Site
• Quarterly Plan Sponsor Reports
• Quarterly Participant Statements mailed or posted to web
• Special Audit Reporting package
• Semi-annual discrimination testing reports
• Annual management and valuation report
• Signature-ready IRS Form 5500
• Summary annual report
• Employer contribution calculations
• Toll-Free Participant Service Center
• Dedicated Relationship Team

Selecting investments for a Company’s 401(k) plan is a major aspect for the decision makers responsible for designing the Plan.  The considerations regarding the investment model can be complex simply because of the many choices available in the marketplace today.  Participant or trustee direction, segregation or pooling of assets, and the comparative cost of these options are generally choices evaluated by plan sponsors.  This is where the advice of a competent investment professional is necessary.  Investment firms provide assistance with plan activities such as:

• Selection of a good investment mix for the participants
• Education materials for plan participants
• Enrollment meetings to explain the process of managing plan balances
• Assistance with plan distributions
• Rollovers from prior retirement plans
• Retirement planning for the executive staff

In selecting investment and fund management companies for a Plan, an employer has many choices:

MUTUAL FUNDS.  This is a popular choice among retirement plans since it offers the ability to invest in a number of stocks, bonds and other securities.  The assets are combined into one portfolio and managed by an investment company.   The fund then issues units or shares, giving each investor an interest in the portfolio.  The investor’s units represent a share of the ownership in the portfolio holdings.
In selecting mutual funds for a plan, the options should offer a diverse range of risk factors that include:

• A money market fund for conservative investors focused on preserving their existing investment
• A bond fund or other low risk fund as an additional conservative option
• A bond or equity fund that provides a medium-risk option
• An equity fund that provides a higher risk, but a potentially higher rate of return

SELF-DIRECTED BROKERAGE ACCOUNTS.   This option provides your employees access to an expanded list of stocks and bonds not offered as an option in the Plan.  Generally, additional fees are applied under this option because of the additional tracking of assets through an outside firm.  Self-directed brokerage accounts are used primarily by participants with large balances who prefer a broader selection of investment options.

ANNUITY CONTRACTS.   An insurance company can provide a variable annuity that includes several options such as a money market fund, a fixed-income option and a group of equity funds.  Under this type of contract, contributions are allocated among the different funds offered as part of the annuity. Fees in an annuity may be higher than in with a mutual fund arrangement and the services of a separate TPA may add to the cost.

Most employers find their financial professional through referrals from an existing relationship, experience with another employer or through word-of-mouth information from friends or professional organizations. Although this is a comfortable method for many individuals, a structured selection process is generally more acceptable.  It is recommended that each company establish a list of considerations for the selection process and begin with a list of firms that meet the criteria.

Investment professionals are compensated through various methods:

Financial Advisors.  An advisor is generally compensated on a fee basis rather than by brokerage commissions. Selecting a fee-only advisor eliminates any conflict of interest with respect to the selection of investment options and the movement of monies from one fund to another.  The financial advisor may select funds that pay no commissions and the advisory fee may exceed the cost of the commissions.  Although fees should be a consideration, the cost should be compared to the relative benefit and the decision based on the value to be added to the Plan. 

Brokers. Your broker may be compensated by the investments placed in the plan, which may be comparable to the fee of a financial advisor.  A competent broker will generally disclose all commissions paid for the services provided and by using funds designed for a retirement plan, there is no incentive for the broker to move money from fund to fund.  As with the financial advisor, the broker should be considered for the value the firm can bring to the plan and not solely on cost.

Banks.  Many banks have brokerage units or investment management subsidiaries that often provide managed funds for plan participants.  Again, if the bank offers its own selection of mutual funds, the plan sponsor should request written details of the internal costs and the historical rate of return on the funds.  Also, be certain to ask how much of the account is required to be invested in proprietary funds.

Insurance Companies.  Variable annuities offered by insurance companies offer products that typically have a higher cost; however, these options can serve a purpose.  If the plan is a start-up, options may be limited and the insurance company may be willing to assist with the plan.  Also, if the plan is very large, the company may have a product to accommodate a negotiated fee.  Again, many insurance companies offer excellent web sites and enrollment materials to assist in the establishment of the plan.

ERISA § 3(21) and IRC § 4975(D)(3) defines a fiduciary as an individual who:

• Exercises discretionary authority or control over the management of the plan or the plan’s assets;
• Offers investment advice for a fee, whether the compensation is direct or indirect, or who has the ability to control the assets of a plan; or
• Has any discretionary control with respect to the administration of the plan.

An individuals or organization executing instructions provided by a fiduciary are not considered a fiduciary as long as there is no discretionary action on the part of that individual or organization.  For example, a recordkeeper completing the ministerial activities associated with completing instructions of a participant in a plan that provides for participant direction of investments is generally not a fiduciary under the plan.  An investment advisor who controls and directs the investments of the plan for a fee, however, will be considered a fiduciary.

A Plan trustee or the named fiduciary who has administrative or management discretion over the Plan is a fiduciary under the IRS and DOL regulations.  Generally, any individual or group of individuals with the ability to select a plan trustee or investment manager or who is able to select the investments available in a participant-directed plan assumes the duties of a fiduciary.

What is Required of a Fiduciary?

A plan fiduciary duty is charged with the duty to apply a level care that the person or organization would apply in handling their own assets. A fiduciary generally holds legal ownership or control of plan asset that actually belong to the participant of the Plan.   It is for this reason that the Department of Labor holds retirement plan fiduciaries to a higher standard and has the ability to apply serious penalties to a fiduciary who knowingly or unknowingly fails to apply a high level of competence and thoroughness in their duties. 
Recently, new regulations under the Pension Protection Act of 2006 applied new rules that impact the duties of a fiduciary of an ERISA plans.  Trustees for qualified plans and ERISA 403(b) plans should consult with the group of professionals employed to assist individuals serving in this capacity to understand the new requirements and take advantage of the protections offered by PPA and the associated regulations.

Large Plan vs. Small Plan

ERISA Section 103(a)(3) requires a written opinion of a qualified independent public accountant to be attached to the Form 5500 for a “large plan” filer. Small plan filers that meet certain conditions would be exempt from the audit requirement for plan years that begin after April 17, 2001.
Large plan status is generally applied if the employer has 100 or more eligible employees on the first day of the plan year; however, the regulations provide an exception for certain small plan filers with an employee count that does not exceed 120. If all requirements are met, this rule would permit such employers to continue as a small plan filer without an accountant’s opinion, until the count exceeds the 120 employee limit.

Who is an Independent Public Accountant

The issue of the accountant’s independence is addressed in Department of Labor publications. While other business may be conducted with the employer, the independent accountant may not:

• Have a ownership or other financial interest in the employer
• Be employed by the employer
• Act as a service provider to the plan

Failure to comply with these rules for the accountant’s opinion could result in substantial penalties.  Although PenServ does not issue an accountant’s opinion, we prepare the necessary reports required by the independent accounting firm. This detailed audit package, that includes a certified Trust Report, minimizes the time required by the employer’s staff to complete the process. PenServ also maintains relationships with several firms qualified to perform ERISA audits and can provide this information to plan sponsors.

1. What is required to establish a qualified retirement plan?

The first requirement is that the plan must be is writing.  This means you must have a plan document that describes the provisions of the plan and how it operates.  The plan can be drafted by an attorney or many firms offer a “prototype” plan that is pre-approved by IRS.  A prototype does not offer the flexibility of an attorney drafted plan; however, it may contain the features you are considering for your plan and the cost should be considerably less.  When considering the adoption of a qualified plan or 403(b) plan, always consult with a professional experienced in the process to assure all rules and regulations are met. 

2. Should I consult my attorney when establishing a plan?

The adoption of a qualified plan or 403(b) plan is a legal action and results in the application of certain legal responsibilities for the company and the owner(s).  In many cases, employers have adopted a “specimen” plan or a “sample” plan without the assistance of an attorney and the plan was not maintained.  As a result, additional costs and penalties have resulted.  It is always recommended that an attorney be consulted when committing the company to an action that results in legal liability. 

3. What type of plan is most suitable for my company?

This question cannot be answered accurately without additional research into the makeup of the organization.  The primary determinant is the goal for the Plan.  This will generally define the program and how it will be designed.  The number of employees, and employee demographics, including age, income level etc., are but a few of the issues that should be considered when establishing a plan.  With this information, a pension professional can prepare a projection of costs and benefits that should be considered in the process.

4. What should I consider when selecting an investment professional for my plan?

One approach is to interview several providers to assist in helping to understand the options available.  Cost should be a consideration of the employer.  Some investment products include costs that are difficult to identify, some create various surrender fees and some have provisions that make it difficult to select another arrangement if the plan sponsor becomes dissatisfied with the program.  When selecting a provider, it is wise to ask for a description of all fees associated with the proposed investments and how the fees are applied.  This information should be maintained in the permanent records of the plan.

5. What should I consider when selecting a recordkeeper for my plan?

Some providers provide a “bundled” product that wraps the investments and recordkeeping into one arrangement.  This results in only one contact for all matters dealing with the plan.  Other providers offer an “unbundled” product where there are two parties involved with the plan.  This may provide more flexibility for the plan.  For example, if the investments are performing well, but the recordkeeping services are not adequate, a new recordkeeper can be selected and the investment products retained. 
The services provided by the recordkeeper should also be considered.  Are all services provided under the fees quoted or are there small fees that can result in unanticipated costs for the plan.  The recordkeeper should monitor the plan for compliance violations, provide non-discrimination testing, prepare the plan’s Form 5500 and advise the employer of the various duties required to ensure the plan remains in compliance with IRS and DOL regulations.

6. What expenses are associated with establishing a plan?

Preparation of the plan document and summary plan description are required to establish the Plan.  The document may be provided by one of the providers selected for the plan and you may decide to have the final document reviewed by your attorney.  These costs can vary, based on the providers selected. 

The plan may require assistance in the enrollment and communication of the plan to participants.  Many plans offer on-line enrollment through a web site or one-on-one meetings with plan participant may be preferred.  Some providers offer this service as part of the set-up process or there may be a fee associated with these services.