Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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.