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Glossary

By | Blogs, Plan Sponsors

Glossary

401(k) Plan (Traditional)
A defined contribution plan that permits employees to have a portion of their salary deducted from their paycheck and contributed to an account. Federal (and sometimes state) taxes on the employee contributions and investment earnings are deferred until the participant receives a distribution from the plan (typically at retirement). Employers may also make contributions to a participant’s account.

403(b) Plan
See Tax Sheltered Annuity (TSA).

Actual Deferral Percentage (ADP)
An anti-discrimination test that compares the amount deferred by highly compensated employees to the deferrals of non-highly compensated employees.

Allocation
The employer’s contribution to a defined contribution plan.

Alternate Payee
A person other than a plan participant (such as a spouse, former spouse, child, etc.) who, under a domestic relations order, has a right to receive all or some of a participant’s pension benefits.

Annual Audit
An independent audit required by federal law for all plans with more than 100 participants. It is also common to refer to a DOL or IRS examination of a plan as a plan audit.

Annual Report
A document filed annually (Form 5500) with the IRS that reports pension plan information for a particular year, including such items as participation, funding, and administration.

Annuity
A contract providing retirement income at regular intervals. See also Qualified Joint and Survivor Annuity4

Automatic Deferral Default Percentage
The percentage of pay that is deferred when an employee is enrolled in a plan through its automatic enrollment feature. The typical automatic deferral default percentage is 3% of pay. Participants can generally choose to defer an amount other than the default percentage.

Automatic Enrollment
The practice of enrolling all eligible employees in a plan and beginning participant deferrals without requiring the employees to submit a request to participate. Plan design specifies how these automatic deferrals will be invested. Employees who do not want to make contributions to the plan must actively file a request to be excluded from the plan. Participants can generally change the amount of pay that is deferred and how it is invested.

Beneficiary
A person, persons or trust designated to receive the plan benefits of a plan participant in the event of the participant’s death.

Cafeteria Plan
A benefit plan offering a choice from a “menu” of cash or two or more benefits.

Cash-Out
The distribution of assets from a qualified plan to a participant prior to retirement, or age 59 1/2 typically occurring when a participant has a balance under $1,000 and leaves a company without requesting to have their assets rolled over into an IRA or into a new employer’s plan. Cash-outs are subject to federal withholding tax, and are subject to the 10% early withdrawal penalty if not rolled over.

Cash or Deferred Arrangement (CODA)
A type of profit sharing or stock bonus plan in which employees may defer current compensation on a pre-tax basis.

Cash or Deferred Election
A participant request to defer compensation, on a pre-tax basis to a CODA plan.

Cash Profit Sharing Plan
A type of profit sharing plan in which the company makes the contributions directly to employees in cash or stock. (This type of profit sharing plan is taxable and is not considered a qualified retirement plan.)

Common Control
Business are under common control when one entity owns at least 80% of the stock, profit, or capital interest in other organization, or when the same five or fewer people own a controlling interest in each entity.

Conversion
The process of changing from one service provider to another.

Deferred Profit Sharing Plan
A type of qualified retirement plan in which the company makes contributions to individual participant accounts.

Defined Benefit Plan
A retirement plan in which the sponsoring company provides a certain benefit to participants based on a pre-determined formula.

Defined Contribution Plan
An employer-sponsored plan in which contributions are made to individual participant accounts, and the final benefit consists solely of assets (including investment returns) that have accumulated in these individual accounts. Depending on the type of defined contribution plan, contributions may be made either by the company, the participant, or both.

Department of Labor (DOL)
The U.S. Department of Labor (DOL) deals with issues related to the American workforce–including topics concerning pension and benefit plans. Through its branch agency EBSA, the DOL is responsible for administering the provisions of Title I of ERISA.

Determination Letter
Document issued by the IRS formally recognizing that the plan meets the qualifications for tax-advantaged treatment.

Discrimination Testing
Numerical measurements used to determine if tax qualified retirement plans are in compliance with several regulations. Typically, the process of determining whether the plan is in compliance is collectively called discrimination testing.

Disclosure
Certain types of information plan sponsors must provide to plan participants, including the summary plan descriptions, summary of material modifications, and summary annual reports.

Distribution
Any payout made from a retirement plan. See also Lump Sum Distribution and Annuity.

Early Withdrawal Penalty
A 10% penalty tax for withdrawal of assets from a qualified retirement plan prior to age 59 1/2, death, disability, or retirement. This 10% penalty tax is in addition to regular federal and (if applicable) state tax.

Eligibility
Conditions that must be met in order to participate in a plan, such as age or service requirements.

Eligible Employees
Employees who meet the requirements for participation in an employer-sponsored plan.

Employee Benefits Security Administration (EBSA)
An agency of the Department of Labor responsible for protecting the integrity of retirement plans, health plans and other employee benefits.

ERISA
A federal law that requires plan sponsors to design and administer their plans in accordance with the Employee Retirement Income Security Act of 1974 (ERISA). Among its statutes, ERISA calls for proper plan reporting and disclosure to participants.

ERISA Rights Statement
A statement required by ERISA that explains participant and beneficiary rights and must be included within a summary plan description (SDP).

ESOP (employee stock ownership plan)
A qualified defined contribution plan in which plan assets are invested primarily or exclusively in the securities of the sponsoring employer.

Excess Aggregate Contributions
After-tax participant contributions or matching employer contributions that cause a plan to fail the 401(m) actual contribution percentage (ACP) non-discrimination test.

Excess Benefit Plan
A plan, or part of a plan, maintained to provide benefits that exceed IRS Code 415 limits on contributions and benefits.

Excess Contributions
Pre-tax participant contributions that cause a plan to fail the 401(k) actual deferral percentage (ADP) non-discrimination test.

Expense Ratio
The percentage of a fund’s assets that are used to pay its annual expenses.

Facts and Circumstances Test
The test determining whether financial need exists for a 401(k) hardship withdrawal.

Fidelity Bond
A bond that protects participants in the event a fiduciary or other responsible person steals or mishandles plan assets.

Fiduciary
A person with the authority to make decisions regarding a plan’s assets or important administrative matters. Fiduciaries are required under ERISA to make decisions based solely on the best interests of plan participants.

Fiduciary Insurance
Insurance that protects plan fiduciaries in the event that they are found liable for a breach of fiduciary responsibility.

Forfeiture 
Plan assets surrendered by participants upon termination of employment before being fully vested in the plan. Forfeitures may be distributed to the other participants in the plan or used to offset employer contribution.

Form 1099R
A form sent to the recipient of a plan distribution and filed with the IRS listing the amount of the distribution.

Form 5500
A form which all qualified retirement plans (excluding SEPs and SIMPLE IRAs) must file annually with the IRS.

Guaranteed Investment Contracts (GICs)
Accounts with an insurance company at a fixed rate of interest.

Hardship or In-Service Distribution 
A participant’s withdrawal of their plan contributions prior to retirement. Eligibility may be conditioned on the presence of financial hardship. These distributions are taxable as early distributions and are subject to a 10% penalty tax if the participant is under age 59 1/2. (Roth 401(k)s have different rules.)

Highly Compensated Employees (HCEs)
An HCE, according to the Small Business Job Protection Act of 1996, is an employee who received more than $100,000 in compensation (indexed annually) during the last plan year OR is a 5% owner in the company.

Individual Retirement Account (IRA)
Personal retirement vehicles that allows a person to make annual tax deductible or non-deductible contributions. These accounts must meet IRS Code 408 requirements, but are created and funded at the discretion of the individual. They are not employer sponsored plans.

Internal Revenue Service (IRS)
The branch of the U.S. Treasury Department is responsible for administering the requirements of qualified pension plans and other retirement vehicles. The IRS also worked with the DOL and the PWBC to develop Form 5500, and is responsible for monitoring the data submitted annually on Form 5500 reports.

Keogh Plan
A qualified defined contribution plan permitting self-employed individuals to contribute a portion of their earnings pre-tax to an individual account.

KSOP
A plan arrangement that includes both 401(k) contributions and an ESOP.

Leased Employee
An individual contracted to a leasing organization that provides services for the company.

Lump-Sum Distribution
The distribution of a participant’s entire account balance within one calendar year due to retirement, death or disability.

Matching Contribution
A contribution made by the company to the account of the participant in ratio to contributions made by the participant.

Material Modification
A change in the terms of the plan that may affect plan participants, or other significant changes in a summary plan document (SDP).

Median Market Cap
An indicator of the size of companies in which a fund invests.

Money Market Fund
A mutual fund seeking to generate income for participants through investments in short-term securities.

Money-Purchase Plan
A type of defined contribution plan in which the employer’s contributions are determined by a specific formula, usually as a percentage of pay. Contributions are not dependent on company profits.

Multiemployer Plan
A pension plan receiving contributions from more than one employer contributes, and which usually is maintained according to collective bargaining agreements.

Mutual Fund
A single account designed to create a portfolio of individual investments that may help to reduce the risk of owning individual investments.

Named Fiduciary
One or more named individuals who have authority to control and manage the operations of the plan.

Nonelective Contribution
An employer contribution that cannot be withdrawn or paid to the employee in cash. This contribution is neither a matching contribution or an elective contribution.

Non-Highly Compensated Employees (NHCEs)
Employees who are not highly compensated. Generally, they are employees who earned less than $105,000 in 2008 (indexed for inflation). See highly compensated employees.

Non-Qualified Deferred Compensation Plan
A plan subject to tax, in which the assets of certain employees (usually Highly Compensated Employees) are deferred. These funds may be reached by an employer’s creditors.

Participant Directed Accounts
Investment options offered to participants that allow them to choose their own investment mix.

Party-In-Interest
Any individual or group having direct interest in the plan including: the employer; the directors, officers, employees or owners of the employer; any employee organization whose members are plan participants; plan fiduciaries; and plan service providers.

Pension Benefit Guaranty Corporation (PBGC)
A federal agency established by Title IV of ERISA for the insurance of defined benefit pension plans. The PBGC provides payment of limited pension benefits if a plan terminates and is unable to cover all required benefits.

Plan Administrator
The individual, group or corporation named in the plan document as responsible for day to day operations. The plan sponsor is generally the plan administer if no other entity is named.

Plan Loan
Loan from a participant’s accumulated plan assets, not to exceed 50% of the balance or $50,000, whichever is less. Loans are an optional plan feature.

Plan Sponsor
The entity responsible for establishing and maintaining the plan.

Plan Year
The calendar, policy or fiscal year for which plan records are maintained.

Portability
The ability of a terminating participant to transfer retirement funds from one employer’s plan to another without penalty.

Price/Book Ratio
The share price of a stock divided by its net worth, or book value, per share.

Price/Earnings Ratio
The ratio of a stock’s current price to its earnings per share over the past year. The P/E ratio of a fund is the weighted average of the P/E ratios of the stocks it holds.

Prohibited Transaction
Activities regarding treatment of plan assets by fiduciaries that are prohibited by ERISA. These include transactions with a party-in-interest, including, sale, exchange, lease, or loan of plan securities or other properties. Any treatment of plan assets by the fiduciary that is not consistent with the best interests of the plan participants is a prohibited transaction

Profit Sharing Plan
A company-sponsored plan funded only by company contributions. Company contributions may be determined by a fixed formula related to the employer’s profits, or may be at the discretion of the board of directors.

Qualified Domestic Relations Order (QDRO)
A judgment, decree or order that creates or recognizes an alternate payee’s (such as former spouse, child, etc.) right to receive all or a portion of a participant’s retirement plan benefits.

Qualified Joint and Survivor Annuity (QJSA)
An annuity with payments continuing to the surviving spouse after the participant’s death, equal to at least 50% of the participant’s benefit.

Qualified Plan
Any plan that qualifies for favorable tax treatment by meeting the requirements of section 401(a) of the Internal Revenue Code and by following applicable regulations. Qualified plans include 401(k) and deferred profit sharing plans.

Rollover
The action of moving plan assets from one qualified plan to another or to an IRA within sixty days of distributions, while retaining the tax benefits of a qualified plan.

Roth 401(k)
A 401(k) feature that allows employees to make elective contributions on an after-tax basis. Qualified distributions from these plans, including both the Roth contributions and their associated earnings, are distributed tax-free.

Safe Harbor Rules
Provisions that exempt certain individuals or kinds of companies from one or more regulations.

Savings Incentive Match Plan for Employees
See SIMPLE Plan.

Schedule SSA
A form that must be filed by all plans subject to ERISA Section 203 minimum vesting requirements. The schedule, which is attached to Form 5500, provides data on participants who separated from service with a vested benefit but were not paid their benefits.

Service Provider
A company that provides any type of service to the plan, including managing assets, recordkeeping, providing plan education, and plan administration.

SIMPLE Plan (savings incentive match plan for employees)
A type of defined contribution plan for employers with 100 or fewer employees in which the employer matches 100% of employee deferrals up to 3% of compensation or provides nonelective contributions up to 2% of compensation. These contributions are immediately and 100% vested, and they are the only employer contribution to the plan. SIMPLE plans may be structured as individual retirement accounts (IRAs) or as 401(k) plans.

Simplified employee-pension plan (SEP)
A defined contribution plan in which employers make contributions to individual employee accounts (similar to IRAs).

Stock Bonus Plan
A defined contribution plan in which company contributions are made in the form of company stock.

Summary Annual Report
A report that companies must file annually on the financial status of the plan. The summary annual report must be automatically provided to participants every year.

Summary of Material Modifications
A document that must be distributed to plan participants summarizing material modifications made to a plan.

Summary Plan Description (SPD)
A document describing the features of an employer-sponsored plan. The primary purpose of the SPD is to disclose the features of the plan to current and potential plan participants. ERISA requires that certain information be contained in the SPD, including participant rights under ERISA, claims procedures and funding arrangements.

Target-Benefit Plan
A type of defined contribution plan in which company contributions are based on an actuarial valuation designed to provide a target benefit to each participant upon retirement. The plan does not guarantee that such benefit will be paid; its only obligation is to pay whatever benefit can be provided by the amount in the participant’s account. It is a hybrid of a money-purchase plan and a defined-benefit plan.

Tax Sheltered Annuity (TSA)
Also known as a 403(b) plan, a TSA provides a tax shelter for 501(c)(3) tax exempt employers (which include public schools). Employers qualifying for a TSA may defer taxes on contributions to certain annuity contracts or custodial accounts.

Top Heavy Plan
A plan in which 60% of account balances (both vested and non-vested) are held by certain highly compensated employees.

Trustee
The individual, group of individuals, bank, or trust company having fiduciary responsibility for holding plan assets.

Turnover Rate (of a mutual fund)
A measure of the trading activity in a mutual fund.

Vesting
The participants’ ownership right to company contributions.

Vesting Schedule
The structure for determining participants’ right to company contributions that have accrued in their individual accounts. In a plan with immediate vesting, company contributions are fully vested as soon as they are deposited to a participant’s account. Cliff vesting provides that company contributions will be fully vested only after a specific amount of time, and that employees who leave before this happens will not be entitled to any of the company contributions (with certain exceptions for death, disability or retirement). In plans with graduated vesting, vesting occurs in specified increments.

Fiduciary Tools

By | Blogs, Plan Sponsors

Fiduciary Tools

PSCA’s ERISA Fiduciary Training Program offers comprehensive curriculum developed in conjunction with plan sponsors, fiduciary consultants and ERISA attorneys.

  • Self study, online program. Learn at your own pace.
  • Designed for members of fiduciary committees and other employees who have responsibility for the operation of their companies’ ERISA plans.
  • Goes beyond investments to address topics such as plan governance, plan documents, monitoring service providers and participant communications, including fee disclosure.
  • Continuing education credits available.
  • Certificate of completion provided to serve as evidence for the DOL or other regulatory agency of plan sponsors’ compliance with ERISA.

Click to be directed to the main training section.

2018 Contribution Limits

By | Blogs, Plan Sponsors

2018 Contribution Limits

2018 Key Plan Limits

A few of the key plan limits changed for 2018. Below are the limits for 2016-2018.

2016 2017 2018
Elective Deferrals – 401(k), 403(b), and Most 457 Plans $18,000 $18,000 $18,500
Catch-up Contribution $6,000 $6,000 $6,000
DC Plan Combined Annual Contribution Limit $53,000 $54,000 $55,000
Annual Compensation Limit $265,000 $270,000 $275,000
Highly Compensated Employee Threshold $120,000 $120,000 $120,000
Top Heavy Key Employee Dollar Limit $170,000 $175,000 $175,000
SIMPLE Plan Contribution Limit $12,500 $12,500 $12,500
SIMPLE Plan Catch-up $3,000 $3,000  $3,000
Defined Benefit Annual Benefit Limit $210,000 $215,000 $220,000
ESOP Maximum Balance Subject to Five-Year Distribution Rule $1,070,000  $1,080,000  $1,105,000
ESOP Amount to Determine Lengthening Five-Year Distribution Period      $210,000 $215,000 $220,000
IRA Contribution Limit $5,500 $5,500 $5.500
IRA Catch-Up $1,000 $1,000 $1,000

See IRS announcement IR-2017-64 for a complete list of all plan limitation amounts.

Reexamining Asset Allocation

By | Blogs, Plan Sponsors

Reexamining Asset Allocation

Michael Falk, CFA, CRC, Partner, Focus Consulting Group & Founder, MSF Asset Consulting serves PSCA in a number of roles including Co-Chairman of PSCA’s Investment Committee. In the September/October 2012 issue of Defined Contribution Insights, he provided an excellent reexamination of asset allocation in his article, “Asset Allocation for Today’s Times?”

Modern portfolio theory (MPT) and strategic asset allocation are scrutinized more closely in this economy because both investors and investment professionals are less confident. This becomes increasingly problematic for the plan sponsors who must rely on outside investment consultants and advisors in selecting appropriate investment options for their participants.

In his article, Falk presents how our original approach to asset allocation may no longer be as valid as originally conceived.  As a result, there is increased awareness of the concept called adaptive asset allocation. 

Although, not a new concept, Falk introduces the approach in his article:

 “Among those different behaviors are more adaptive styles of asset allocation.  Remember that expected returns over time do not necessarily accurately describe returns in the short-term.  In fact, the short-term often shows prices significantly above or below what might be considered fair value according to Benjamin Graham, noted financial author and father of value investing (not to mention Warren Buffet’s teacher) – “In the short run, the stock market is like a voting machine, but in the long run it is a weighing machine.”

Adaptive Asset Allocation

By | Blogs, Plan Sponsors

Introducing Adaptive Asset Allocation

Adaptive asset allocation is a relatively unknown yet increasingly popular emerging investment strategy that, at its core, has two basic elements: rebalance more frequently and align the portfolio to reflect current market trends. Historically, the foundation of this discussion began in 1955 with Harry Markowitz and his Portfolio Theory, which became more popularly known as Modern Portfolio Theory (MPT). From these roots, we saw the development of strategic asset allocation, subsequently the development of asset allocation funds, and, ultimately, the creation of target date funds.

Additional work on adaptive asset allocation began in the early 1990s by the Compass Institute and the work of Kevin Coppola. His proprietary approach produced impressive results over an extended period of time and was further refined through Compass Investors under the Horizon brand.  For a detailed explanation of this concept, we suggest reading the November 2009 white paper, “Adaptive Asset Allocation Policies,” published by William Sharpe, Professor of Finance, Emeritus, Graduate School of Business, Stanford University, Nobel Prize winner in Economic Sciences in 1990 and cofounder of Financial Engines.

Kevin Coppola writes eloquently about the need for retirement income and the development of adaptive asset allocation as a strategy to help mitigate some of the long-term risk and disappointing future returns.   As a fiduciary, it is prudent to closely examine this approach as a potential strategy for your plan. For further information and to read more details, visit www.compassinvestors.com.

From Advocates to Raving Fans and Beyond

There are an increasingly number of advocates of adaptive asset allocation with one of the most vocal being Adam Butler and Mike Philbrick, Portfolio Managers with Butler/Philbrick/Gordillo & Associates at Macquarie Private Wealth in Toronto, Canada. Their article, “Volatility Management for Better Absolute and Risk Adjusted Performance,” presents a strong argument.  Perhaps more fun to read, albeit openly biased, are their blogs as they prostelize about their approach with colorful language to describe current strategies such as “GIGO,” or, “garbage in, garbage out.”

PSCA does not advocate any one approach, investment strategy or product over any other. Our role is merely to provide a platform for plan sponsors to explore new trends and developments. We welcome input, articles, case studies and all opinions on adaptive asset allocation that you wish to share with the plan sponsor community.

ERISA Fiduciary Training Program

By | Blogs, Plan Sponsors

ERISA Fiduciary Training Program

This program contains four modules. Modules 1-3 are mandatory if you are seeking a certificate of completion. Module 4 is optional, but highly recommended especially for members of retirement plan committees.

Instructions:

Note: In order to properly view the training, you need Flash installed on your computer.

  • After registering for training, and paying using a credit card, you will have access to the four modules.
  • Work through the modules in order. Subsequent modules build on information provided in earlier modules.
  • At the end of each module you will have the option to take the associated test. You must pass the tests for Modules 1-3 in order to receive a certificate of completion.
  • To pass, you must get at least 11 out of 15 correct for each test.
  • Module 4, although optional, includes a test for you to check your level of knowledge.

Existing users already registered for the training: Access Your Training Session
New users: Register for Fiduciary Training

Couples

By | Blogs, Financial Education

Couples

Compatibility means a lot more than liking the same movies or flavor of ice cream. It also means being able to successfully talk about and manage your finances. Begin now so that you can merge your money and your life.

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Financial Topics for Couples

Retirees

By | Blogs, Financial Education

Retirees

More than ever before, Americans need to take responsibility for saving for retirement. Whichever savings vehicles you choose—from 401 (k) plans to mutual funds to annuities—it’s never too early to begin preparing you for your Golden Years.

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Financial Topics for Retirees

In Crisis

By | Blogs, Financial Education

In Crisis

Sometimes the unexpected happens. You lose a job, your home is devastated by fire, an illness affects a loved one. Learn more about how to manage your finances during life’s difficult times. And start planning now so you’ll be prepared.

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Financial Topics for In Crisis

College Students

By | Blogs, Financial Education

College Students

College is a time of new found freedom for many students. But that can spell trouble if that freedom applies to personal finances too. Students need to understand basic money management skills such as living within a budget and handling credit and debt. A solid financial foundation can lead to a lifetime of financial success.

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Financial Topics for College Students

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