Download Alerus Retirement Report

April 2004
Alerus Retirement Report
Make Sure You Know The Rules
When Re-employing Our Returning Veterans
In This Issue...
Make Sure You Know
The Rules When
Re-employing Our
Returning Veterans
Provider Compensation
800.433.1685
www.alerusfinancial.com
Alerus Investment
Update
As members of our armed services return from
active duty and are re-employed, it’s important
that you, their employer, know what actions you
must take with regard to their defined
contribution plans, including 401(k) plans.
Their rights and your obligations are defined
under the Uniformed Services Employment and
Re-employment Rights Act of 1994 (USERRA).
Alerus Retirement Solutions is ready to guide
you through the plan rules and benefit rights of
your employees who are returning veterans.
Retirement Plan Participation is Protected
During Active Service
When your employees who are members of the
National Guard or Reserve are called to serve
our country, their eligibility in your retirement
plan is suspended if they do not receive a
paycheck from your business during their active
military service. They become inactive
participants in your plan.
• The time that your employees are on active
duty is credited to determine eligibility and
vested interest in their account balances.
• Re-employed veterans who were previously
eligible under your 401(k) plan are
immediately eligible to make salary deferral
contributions.
• Employees who had not met the eligibility
requirement prior to leaving for active duty
might be eligible to make salary deferral
contributions because military service time
counts for eligibility purposes.
Profit Sharing and Pension Contributions
If you make profit sharing or pension
contributions while your employees are on
military leave, you have a responsibility to
make up those contributions for the returning
veterans.
• Their contribution is based on the
compensation the employee would have
earned had they not been on military leave.
If it is not possible to reasonably ascertain
that amount, you should base contributions
on the employee’s average compensation for
the 12 months prior to
their being called to
military service.
• Veterans you re-employ
are not eligible for a
share of any allocation of Jim Drealan, J.D.,
Compliance Manager
forfeitures.
Salary Deferral Contributions
Re-employed veterans have the right to
contribute make-up salary deferrals to your
401(k) plan for the time they were in military
service.
• Make-up salary deferrals are limited to the
amount they could have contributed if they
had not been in military service. In most
cases, this is the annual maximum deferral
limit ($12,000 in 2003), unless the plan has
a deferral percentage limit.
• Re-employed veterans have a grace period to
contribute make-up salary deferrals equal to
three times the period of military service, not
to exceed five years. For example, if the
period of military service is July 1, 2003, to
July 1, 2004, they have until July 1, 2007, to
contribute make-up deferrals.
• Make-up deferrals must be deducted from
compensation; re-employed veterans cannot
simply write a personal check.
• Employees who elect to make up salary
deferrals need to advise you that they intend
to do so. You should then advise Alerus
Retirement Solutions of the contributions so
they are not considered for compliance
testing purposes.
Employer Matching Contributions
If your re-employed veterans elect to contribute
make-up deferrals, you must contribute the
appropriate matching amount. The match rate is
the same as it would have been had your
employee actually made the contributions
during the military service period. For example:
• Your employee is on military leave from Jan.
1, 2004, to Jan. 1, 2005. The 401(k) plan
continued on page 2
continued from page 1
wrap fee:
explicitly stated
asset fee
basis points:
describes hundredths
of a percent, i.e. 100
basis points equal 1
percent
front end load:
sales charge at time
of purchase
back end load:
sales charge at time
of sale
provides for a match of 50% on salary
deferrals during that period. If the employee
contributes a make-up salary deferral
payment of $6,000 in 2006, you must
contribute a make-up match of $3,000.
In addition, if your returning veteran elects to
begin making regular salary deferral
contributions upon re-employment, you are
required to match them at the rate specified by
your plan.
Additional Considerations
• Earnings - While your re-employed veterans
might have earned returns on salary deferral
contributions and corresponding employer
matches had they not been in active military
service, you are not required to make up
those earnings. However, earnings will begin
to accrue after they deposit contributions
into the plan.
• Loan Payment Deferrals - If the loan policy
of your plan permits, loan payments can be
suspended for up to one year while your
employee is on military leave. The standard
Alerus loan policy allows for suspension of
loan payments.
• Beneficiaries - If you have employees
entering military service, you should remind
them to review their beneficiary designations
and update them if necessary.
We’re Here to Help
If you, your employees who are leaving for
active military service, or those who are
returning have any questions regarding
retirement plan rights and obligations, please
contact Alerus Retirement Solutions.
How are Retirement Plan Providers Compensated?
As a partner in a law firm for 18 years prior to
joining Alerus, I handled the business aspect of
the practice including our 401(k) plan. On
occasion, I was solicited by retirement plan
providers to handle our 401(k), but never quite
understood how these providers profited. Since
I didn’t understand how the industry charged
fees, it was difficult to comparison shop.
Many businesses find themselves facing this
same question. It is important to know how
retirement plan providers charge for two
reasons:
1. To ensure you are comparing “apples with
apples” when interviewing potential
providers.
Participant Fees
This fee structure is
typically designed to charge
a flat rate for each
participant account on a
periodic basis, usually
quarterly. For example, a
John Jeffrey, J.D.,
Retirement Plan
$6.25 fee may be charged
Consultant
per participant for each
calendar quarter during
which a balance is maintained. In addition to a
base participant fee, there may be charges for
handling participant transactions such as loans
or distributions.
Administrative Fees
2. To ensure you are in compliance with the
Employee Retirement Income Security Act
(ERISA). ERISA establishes the employer as
a fiduciary of the plan. In this capacity, the
employer has a legal obligation to act
prudently on behalf of plan participants. This
obligation includes understanding the fee
structure that participants face.
Ranging from a several hundred to many
thousands of dollars, depending upon the size
and complexity of the plan, this fee structure is
designed to charge on a per plan basis. The
employer may pay the fees or elect to pass
them on to plan participants. In the latter case,
the fees are often pro-rated among participants
based on account balances.
The following are common ways in which
retirement plan providers will charge:
When reviewing administrative fees, it is
important for the employer to understand which
services are included. Some common questions
are as follows:
• Does the fee include DOL and IRS reporting
requirements, such as Form 5500 and Form
1099R preparation?
• Does the fee cover the initial plan set up or
transfer?
• Are there additional charges for services such
as plan amendments or restatements?
• Does the fee cover annual compliance
testing?
Asset Based Fees
In order to understand the true cost of an asset
based fee, the employer must understand the
total cost of investing within the plan. The total
cost consists of two parts, (1) the explicitly
stated asset fee (often referred to as a “wrap
fee”), and (2) the expense ratios of the funds.
The expense ratio is the internal charge of the
selected fund taken by the fund company on an
annual basis. Failure to consider fund expense
ratios can result in a false picture of plan costs.
Why? Funds may have different share classes.
The different share classes use the same fund
manager and invest in the same type of stocks
and/or bonds. The primary difference between
the class of shares is the annual charge to the
participant’s holdings. The annual charge varies
depending upon how much of that charge is
paid to the retirement plan provider. For
example, a fund company may offer 5 share
classes as follows:
Fund XYZ. Provider “A” offers an asset-based
fee or “wrap” fee of 50 basis points and R-5
share class. Provider “B” offers a wrap fee of
25 basis points with R-1 shares. (Note: “basis
points” or “bps” is industry jargon to describe
hundredths of a percent, therefore, 100 basis
points equals one percent). At first glance,
Provider A appears to be more expensive in this
example, but in reality it will cost the
participants less. The key is the expense ratios
of the share classes.
• Total cost for Provider A: 97 bps (50 bps
wrap + expense ratio of 47 bps).
• Total cost for Provider B: 179 bps (25 bps
wrap + expense ratio of 154 bps).
Result? Provider B is almost twice as expensive
as Provider A.
Loads/Annuity Charges
Sales charges and annuity products may also
affect plan costs. Sales charges, also known as
“loads,” may be charged at the time of purchase
(“front end load”) or at the time of sale (“back
end load”). Both may increase the cost of
investing.
Share
Class
Expense
Ratio
Revenue Paid
to Provider
R-1
1.54%
1.00%
Retirement plan providers may also offer a
“variable annuity,” especially for smaller plans.
A variable annuity appears to invest in mutual
funds, but does so indirectly. Participants invest
in an annuity contract and the insurance
company in turn purchases shares in the funds.
This added layer comes with a cost. In addition
to the expense ratios of the funds, the insurance
company will have an annuity expense which
could be one percent or more of plan assets on
an annual basis. In many cases, an annuity is
the most inefficient way for participants to
invest in the market.
R-2
1.48%
0.75%
Conclusion
R-3
1.10%
0.50%
R-4
0.77%
0.25%
R-5
0.47%
0.00%
ERISA requires every employer to act prudently
with regard to their retirement plan. To meet
this obligation, the employer needs to have a
basic understanding of the plan’s fee structure.
At Alerus Retirement Solutions, we offer our
services at a competitive price and are confident
in our ability to meet your retirement plan
needs. We would welcome the opportunity to
visit with you.
Result? The more revenue paid to the retirement
plan provider, the greater the annual expense to
the participant.
With the above in mind, now compare two bids
on a plan. Both retirement plan providers offer
ACCOUNT ACCESS
Alerus Retirement
Solutions offers two
convenient ways to
access your retirement
account information
and initiate transactions.
Retirement Solutions
Online Access
www.alerusfinancial.com
Retirement Solutions
Telephone Access
800.795.2697
Alerus Investment Update
Employment, Stock Market, and
Interest Rates.
The first quarter economic release
included an unexpected
employment announcement that
sparked an increase in the stock
market and interest rates.
Typically, as the economy recovers
from a recession, unemployment
falls. This hasn’t been the case this
Shari Hensrudtime around. It has taken
Ellingson, Ph.D.,
unemployment over a year to
Chief Investment
reflect the improvement in the
Officer
economy. The reason cited for the
delay is an increase in
productivity; we have learned to produce more with less.
The good news for employment and the stock market
could mean bad news for interest rates. Bond prices
continued the recent downward trend and interest rates
have been maintaining record low levels for some time
now. Given the recent employment and economic news,
all eyes will be on the Federal Reserve in the coming year
as inflationary pressure builds, waiting for the muchanticipated increase in interest rates. Paul Kasriel, Director
of Economic Research at Northern Trust in Chicago,
commented that the longer the Fed waits to raise interest
rates, and hence the cost of credit, the more rapid the rise
in prices of goods and services.
Examining History to Help Predict the Future.
Reflecting on the past is interesting and informative;
however, it comes too late for an investor to make any
investment decisions. Recently, I was asked to be part of a
panel discussion on economic forecasting. I focused my
discussion on the complexity of forecasting—exactly the
information investors want to know. Economists often use
history as a future indicator following the theory that
history repeats itself. Examining the economies of the past
and its relation to the economy of today can provide some
insight into the future. However, to assume the past will
repeat itself implies we have learned little to nothing.
What we have truly learned from the past is how different
variables relate to each other, therefore allowing a better
understanding for how our decisions impact us.
Ultimately, with the advantage of this knowledge, we can
make better decisions going forward. Information is more
freely available today and the average investor is more
sophisticated. At a minimum, investors today understand
the need to diversify. One example of using history to
forecast the future is presidential elections.
What has history shown us to expect in an election year?
Year
Dow Jones
Industrial Average
Political Party
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
+8.4%
+2.3%
-9.3%
+14.6%
+4.3%
+14.6%
+17.9%
+14.9%
-3.7%
+11.8%
+4.2%
+26%
-6.2%
?
Republican
Republican
Democratic
Democratic
Republican
Republican
Democratic
Republican
Republican
Republican
Democratic
Democratic
Republican
?
Interestingly enough, whether the Democratic or
Republican Party took office, the market was up, except
on three occasions. Additionally, there are studies that
show the stock market follows a four-year election cycle.
Given this evidence, all else equal, we should expect a
positive year for the stock market. However, is all else
equal? Not only is this an election year, but the economy
and corporate profits have been improving. So, to which
variables are the markets responding?
History does not provide us with certainty. Relationships
between variables appear to exist, but there are always
examples where the implied relationship fails. As these
relationships fail, we begin to look for other connections
to accurately forecast the future for the stock market and
interest rates. Will the presidential election relationship
hold this year? Or, will a positive stock market be the
result of something else? Learn from the past and position
your portfolio to be ready for whatever may happen.
We Can Help.
At Alerus Financial, we can’t predict the future, but we
can help you plan for it. An intelligent asset allocation and
diversification strategy needs to be consistently applied
across your entire investment portfolio. We can help you
determine a personal strategy that will maximize the
likelihood of meeting your investment goals. Call us—we
can help.
The opinions expressed within this letter are intended for informational purposes only and subject to change without notice, and past performance is not
indicative of future results. The products offered (1) are not FDIC insured; (2) are not deposits or obligations of a bank; and (3) involve investment risk, including
possible loss of the principal amount invested.