GENERAL SESSION 2: Benefit Survival in Hard Times

1. GENERAL SESSION 2: Benefit Survival in Hard Times presented by Fred Reish Reish & Reicher Speaker Mark Davis CAPTRUST Financial Advisors Speaker Kristen Zarenko U.S. Department of Labor Speaker Carol Zimmerman Internal Revenue Service Speaker Pat Byrnes Actuarial Consultants, Inc. Moderator

2. Benefit Survival in Hard Times The 2007 to 2009 recession, sometimes labeled the worst since the Great Depression, and the vicious bear market of 2008, have harmed almost everyone, including 401(k) participants and defined benefit plan sponsors. This program discusses some of the consequences of those events. 2

3. Benefit Survival in Hard Times • Target date funds and QDIAs • Defined benefit and cash balance plans • Matching contributions for 401(k) plans • Partial terminations • Lifetime income 3

4. Target Date Funds and QDIAs 4

5. Target Date Funds and QDIAs Target date funds suffered unexpectedly large losses in 2008 . . . on average, 2010 funds lost approximately 23% and one 2010 fund lost over 40%. In addition to exposing the volatility of “appropriate” investments, the losses revealed significant design differences between similarly labeled investments. 5

6. Target Date Funds and QDIAs The losses caught the attention of Senator Herb Kohl of Wisconsin, who chairs the Special Committee on Aging. His Committee held two sets of target date hearings in 2009. The Senator also asked the DOL and SEC to hold hearings on target date funds. 6

7. Target Date Funds and QDIAs In addition, the DOL and SEC held a joint hearing on June 18th on the subject of target date funds. It is contemplated that the agencies will issue reports or findings based on those hearings—and possibly follow up with guidance. 7

8. Target Date Funds • NAIRPA • – “Truth in Labeling” • Not just “to” versus “through” • – “aggressive”, “moderate” and “conservative” • – full disclosure of methodology and “glide path” • – ERISA fiduciary status for QDIA managers • ERISA currently says mutual fund managers are not fiduciaries for plans 8

9. Target Date Funds • No need for just one • – Multiple suites can be in same plan • – One is QDIA • – Position as “asset management solutions” 9

10. Target Date Funds—DOL Involvement • Employers are increasingly including target date fund offering in their participant-directed plans. • Target date or similar investments were included as one of the permissible categories of qualified default investment alternatives in the Department’s 2007 final rule. • In early 2009, Department and the Securities Exchange Commission receive similar letters of inquiry from Senator Herb Kohl. 10

11. DOL-SEC Joint Hearing on TDFs • A joint DOL-SEC public hearing concerning target date funds was held on June 18, 2009. • What were the DOL and SEC interested in learning? Who testified? • What did we learn? 11

12. QDIA Regulation • Why were target date and similar investments included as one of the permissible categories of qualified default investment alternatives? • What are an employer’s obligations when they select a target date or similar investment for their plan? • Will the Department reconsider the categories of permissible investments, in light of the market downtown of 2008? 12

13. DOL—Next Steps • Do plan sponsors need help understanding the unique issues associated with selecting and monitoring target date or similar investments for their plans? • Do participants and investors adequately understand the benefits and risks associated with investment in a target date or similar investment? • What should be disclosed to participants and investors about target date and similar investments? 13

14. Target Date Funds and QDIAs  Panel Discussion 14

15. Defined Benefit Pension Plans

16. Defined Benefit Pension Plans The recent losses in stocks, bonds and other investments have left most defined benefit plans underfunded. That creates, among other issues, the difficult proposition of requiring that sponsors, in the midst of an economic downturn, fund their regular annual contribution plus an additional contribution for a share of the underfunded amount. 16

17. Funding Issues • How does underfunding affect minimum funding requirements? • How does volatility compare with that under pre-PPA rules? • How do benefit restrictions affect plan funding? • What options do plan sponsors have to control changes in minimum funding requirements?

18. Benefit Issues What should employers be aware of in connection with benefit restrictions? • Timing issues • Administrative issues • Notice requirements • Collective bargaining implications • Plan drafting implications

19. Benefit Issues What effect does the economic crisis have on participants’ benefits? • Earlier-than expected termination • Reduced pay / hours • Reduced cash balance benefits • Reduction in future benefit accruals by employer

20. Workforce Issues How does economic crisis affect employers’ ability to use defined benefit plans to deal with workforce issues? • Financial concerns of individuals • Effect of benefit restrictions on enhanced early retirement benefits

21. Defined Benefit Pension Plans  Panel Discussion 21

22. Matching Contributions

23. Matching Contributions To cope with the recession, many plan sponsors—perhaps 20% of the S&P 500 companies—have stopped or reduced their 401(k) matching contributions. As a practical matter, the stopping and re-starting of matching contributions may now be a part of our national fabric. Legally, though, plan sponsors must be careful to do it properly. 23

24. Legal Issues for Matching Contributions • Regular matching contributions • Safe harbor matching contributions • Plan document and SPD issues 24

25. Matching Contributions  Panel Discussion 25

26. Partial Terminations

27. Partial Terminations A common feature of this recession is that employers cut back quickly and substantially on their work forces. While there has been little discussion of the impact of those layoffs, some are concerned that a significant number of partial terminations may have occurred. 27

28. Partial Termination: Consequences and Considerations Consequences: • Vesting • Potential disqualification for failure to vest Considerations: • 20% turnover • Economic cycle 28

29. Partial Terminations How do you know if a partial termination has occurred? • How definitive is the 20% threshold? • Which participants count when determining the turnover percentage? • How is a plan freeze treated? • What else should an employer consider?

30. Partial Terminations Consequences • Vesting—which plans and participants are affected? • What if the employer misses the plan termination? • How is nondiscrimination testing affected? • What else should employer consider?

31. Partial Terminations  Panel Discussion 31

32. Lifetime Income

33. Lifetime Income The substantial investment losses in 401(k) plans, together with relatively low deferral rates, are raising concerns about the adequacy of retirement benefits. Closely related is a concern about the decumulation—or distribution—phase. How can the money last for a lifetime? 33

34. Lifetime Income Disclosure Under the proposal, defined contribution plans subject to ERISA would be required to include “annuity equivalents” on benefit statements provided to employees. An annuity equivalent would be the monthly annuity payment that would be made if the employee’s total account balance were used to buy a life annuity that commenced payments at the plan’s normal retirement age (generally 65). Description of S. 2832 from Office of Senator Bingaman. 34

35. Lifetime Income The DOL and Treasury Departments have expressed a common interest in that issue and have developed a request for information—or RFI—to be posed to the private sector. 35

36. DOL and Lifetime Income The concerns and questions of the DOL and Treasury are expressed in the RFI. 36

37. Lifetime Income & Annuity Issues • What is the plan fiduciary perspective on lifetime income and annuity issues? • What kind of guidance does the DOL give to plan fiduciaries? • DOL 2010 Regulatory Agenda: Request for Information re: Lifetime Income Options for Retirement Plans

38. Lifetime Income  Panel Discussion 38

39. Fred Reish REISH & REICHER Managing Director 11755 Wilshire Boulevard, 10th Floor Los Angeles, CA 90025-1539 (310) 478-5656 FredReish@Reish.com www.reish.com Mark A.Davis CAPTRUST FINANCIAL ADVISORS Vice President, Financial Advisor CAPTRUST Financial Advisors 2629 Townsgate Road, Suite 250 Westlake Village, CA 91436 (818)-483-1590 Mark.Davis@CAPTRUSTAdvisors.com www.captrustadvisors.com Kristen Zarenko U.S. DEPARTMENTOF LABOR Employee Benefits Security Administration 200 Constitution Avenue, NW, Room N5669 Washington, DC 20210-0001 (202) 693-8510 zarenko.kristen@dol.gov www.dol.gov/ebsa Carol Zimmerman INTERNAL REVENUE SERVICE 1000 Liberty Avenue Pittsburgh, PA 15222-4004 (412) 395-5236 carolyn.e.zimmerman@irs.gov www.irs.gov Pat Byrnes ACTUARIAL CONSULTANTS, INC. President 2377 Crenshaw Boulevard, #350 Torrance, CA 90501 (310) 212-2600 pat.byrnes@acibenefits.com www.acibenefits.com