LSW and the 403(b) Market

• LSW is very committed to the 403(b) market. It is our core business

• Our independent agents work with more than 5,100 school districts – some of the largest to smallest districts in the country

• Specialize in traditional fixed and indexed annuities

• Member of the National Life Group, founded in 1850

National Life Group

• $19.2 Billion Assets

• $55 Billion Insurance In Force

• Rated A+ (S&P), A (Best’s)

• Relationship-based Companies

• Mutual Holding Company

“Since inception of its index annuity product, LSW has published its renewal rate treatment of existing policyholder thus providing a level of full and fair public disclosure that is rare in this industry.”

— Jack Marrion

The Final Section 403(b) Regulations…

How will they impact your school district and employees?

IRC§ 403(b) History

• IRS last issued extensive regulations under IRC§ 403(b) in December 1964

• November 2004 IRS issued proposed new 403(b) regulations

• July 26, 2007; IRS publishes final regulations that are generally effective January 1, 2009, but some important exceptions

Final 403(b) Regulations

• Purpose is to organize & consolidate the Section 403(b) guidance issued since 1964 & to override prior guidance that no longer applies

• Introduce new restrictions & rules to make 403(b) programs operate more like 401(k) plans instead of like IRAs, although key differences remain

• IRS perceived abuses of loans & distributions due to employee self certification

Highlights of Final Regulations

• Written Plan Document Required

• School districts responsible for more plan administration

• Direct Transfers and Exchanges allowed with new rules

• Information Sharing Agreements

• Loans: School districts can choose whether or not to will allow loans and hardship withdrawals.

• Universal Availability: 403(b) plans must be universally available to employees, including Roth contributions

Highlights

• Rollover to IRA or other eligible retirement plans not affected by rules

• Dept. of Labor to issue Field Assistance Bulletin regarding ERISA and non-governmental employees

• Life insurance, endorsement, health or accident, property, casualty or liability policies are prohibited as 403(b) funding vehicles

Plan Document Requirements

• All school districts that offer 403(b) salary reductions must adopt a written plan document by January 1, 2009

• Must include basic plan provisions covering plan eligibility and benefits (including time and form of distributions available), applicable limits, and a contract list offered by the plan

• Can incorporate other documents like annuity contracts and custodial agreements

Plan Document Requirements

• IRS will release model plan language

• Permissible to allocate administrative responsibilities to third parties

• Consequences of not having a written plan are severe; if an employer fails to have a written plan by January 1, 2009, any contract purchased by that employee would not be a 403(b) contract

Plan Document Requirements

Your Action Items:

•Wait for the IRS to publish its model language

before adopting any plan document

•If the IRS delays publishing the language, LSW will

make available sample plan document language

•School districts will want to have a plan document in

place by start of school year 2008

School Districts Responsible for More Plan Administration

• After plan goes into effect, self-certification by participants is no longer allowed (withdrawals, loans, or distributions)

• Administrative services will now be the school district’s responsibility (plan administrators) – Deciding whether loans and distributions are

available & approving payouts, subject to IRS and policy rules

– Schools can perform these services or may delegate to an administrator or multiple parties, but not to an employee

School Districts Responsible for More Plan Administration

• If you need outside administrative assistance, LSW strongly recommends an independent plan administrator – not related to a product provider

– Employees’ confidential information can be protected

– Any product vendor that offers no-cost administration should be scrutinized. Often time the companies will hide these fees in lower interest rates or higher fund charges.

School Districts Responsible for More Plan Administration

• LSW can recommend several independent plan administrators that are unaffiliated with the company

• Independent TPAs will perform these services and keep your information confidential.

• LSW will pay the costs associated with plan administration services for LSW’s policies, while other vendors should pay for the services of their own policies

School Districts Responsible for More Plan Administration

Your Action Items:

• Who will provide the administrative services for your plan? Decide if you need a plan administrator or not

• If you would like more information about an independent plan administrator, please contact LSW’s 403(b) hotline at (866) 243-7174

Direct Transfers and Exchanges

• New regulations still allow for the change of contracts within the same plan (exchange), a transfer of assets from one plan to a different plan (transfer)

• IRS Rev. Ruling 90-24 will be revoked on Jan. 1, 2009; New transfer & exchange rules will apply

• New rules require an information sharing agreement with the school district before an exchange or transfer is made.

Direct Transfers and Exchanges

• Potentially there could be a conversion of many orphan “Section 403(b) products to IRAs prior to January 1, 2009

– Employment relationship has ended

– Participant has moved his or her account pursuant to Rev. Ruling 90-24 to product outside scope of employer’s program

– Employer may no longer be in existence

Direct Transfers and Exchanges

• Regs are intended to grandfather only of category of orphan products: those received a valid prior-law transfer on or before September 24, 2007

• Orphan products exchanged after September 24…Products that are exchanged and are currently orphaned and do not become attached to the employer’s plan will fail to qualify

Direct Transfers and Exchanges

• Orphan products never exchanged…

– Unless the participant happens to be working

currently for an eligible employer with a

Section 403(b) plan to which the products

can be transferred or rolled over, then the

orphan products will fail to qualify and there

could be major tax consequences for the

policyholder

Direct Transfers and Exchanges

Contract exchanges between annuity contracts within a 403(b) plan will only be allowed if:

• Plan documents provide for transfers

• Contract to which the transfer is being made has distribution restrictions at least as strict as those imposed by the old contract

• Benefits payable immediately following the transfer is at least equal to the benefit before the transfer

• Transfer is made to a product vendor that has an information sharing agreement with the school district

Direct Transfers and Exchanges

Your Action Items: • Plan document must address permitted plan vendors –

specific list or generic description

• Plan document should allow exchange of investments within the plan between and among approved vendors listed in the plan and vendors who have information sharing agreements

• Plan must state it will accept a transfer from another 403(b) plan or a rollover of a participant’s contribution from another qualified plan

• “A” Mutual Fund Shares with front-end load charges do not qualify as acceptable vehicles to receive exchanges under the new rules

Information Sharing Agreement

To administer you 403(b) properly, you will need policy information for all policies to be covered by the plan

• Information from both current and former product vendors to whom you have remitted salary reductions

• Start gathering historical information on former vendors as they and your current vendors, must be referenced in your plan document

Information Sharing Agreement

LSW’s Commitment

• By receiving 403(b) salary reductions from you, LSW agrees to provide you required information on all LSW 403(b) annuities whether held by your employees because of salary reductions and/or transfers necessary for you to administer your plan properly

• We in turn understand that you will provide us information and guidance about how you want those LSW policies administered

Information Sharing Agreement

Action Items: • Start gathering historical information on your

current and past vendors

• Do you want o develop your own standardized information agreements or will you enter into the agreements offered by product providers?

• Begin entering into information sharing agreements with product vendors.

LSW’s 403(b) Resource Kit

• New Regulations Brochure• Questions and Answer Brochure• To Do List• 403(b) Solutions• Legal Alerts• Information Sharing Agreements (flow and

non-flow)• 403(b) Team and Hotline

New Website for School Districts & Designated Plan Administrators

www.lsw403b.com or www.lifeofsouthwest.com

www.triunecommunications.us/403b