Retirement Plans

The Campbell Johnson GroupRandy L. Campbell, Corporate Retirement Director, CRPS ®

Eric A. Johnson, Wealth Management, CFP®

Tyler Beaudoin, Financial Advisor

3102 West End Ave, Suite 200

Nashville, TN 37203

615-269-2426

November 21st 2013

© 2013 Morgan Stanley Smith Barney LLC. Member SIPC.

2011-PS-789 February 2013

Expires January 2014

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Day-to-Day Business Challenges

· Competition

· Consumer spending

· Employee turnover

· Inventory control

· Rising costs

· Supplier problems

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Why a Retirement Plan?

· Longer life expectancy

· Social Security

· Inflation

· Valuable employee benefit

· Tax advantages

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· Profit Sharing Plan

· Money Purchase Pension Plan

· 401(k) Plan

· Safe Harbor 401(k) Plan

· SEP

· SIMPLE IRA

· SIMPLE 401(k)

· Defined Benefit Plan

Retirement Plans

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Choosing a Retirement Plan for Your Business

Employer Contributions Employee Contributions

Requirements Type Permitted Type1

Profit Sharing Discretionary % of compensation No N/A

Money Purchase Mandatory % of compensation No N/A

401(k) Discretionary% of compensation

or matchYes Pre-tax or Roth

Safe Harbor 401(k) MandatoryNon-elective

or matchYes Pre-tax or Roth

SEP Discretionary % of compensation No N/A

SIMPLE IRA MandatoryNon-elective

or matchYes Pre-tax

SIMPLE 401(k) MandatoryNon-elective

or matchYes Pre-tax or Roth

Defined Benefit MandatoryActuarially

DeterminedNo2 N/A

1 Certain plans may allow for other types of voluntary after-tax contributions.2 New rules under PPA allow salary deferrals under certain circumstances.

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· Do not promise a specific amount of benefits at retirement

· Benefits are based on accumulated contributions plus earnings (or minus losses)

· Employer contributes to accounts maintained under the plan, sometimes at a set rate, but often at a discretionary rate declared annually by the employer

· Employees may have a pre-tax salary deferral option and/or an after-tax contribution option

Qualified Defined Contribution Plans

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Let’s review some basic features of qualified defined contributionretirement plans:

· Eligibility

· Vesting

· Distributions

· Loans

· Filing requirements

· Plan fiduciaries

Qualified Defined Contribution Plan Features

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What Is a 401(k) Plan?

· A salary reduction plan that permits employees to save for retirement on a pre-tax basis

· Employee contributions can include–Pre-tax employee contributions–Roth 401(k) contributions–Catch-up contributions for employees age 50 and older

· Employer contributions can include–Matching contributions–Profit sharing contributions

· Maximum contributions–Pre-tax and Roth contributions cannot exceed $17,500 in 2013, or $23,000

for employees age 50 or older –Total contributions (including matching, profit sharing, and employee)

· Lesser of $51,000 (or $56,500 if age 50 or older) or 100% of compensation in 2013

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401(k) Plan

Employer Advantages:

· Means of attracting and retaining valuable employees

· Tax-deductible contributions

· Flexible plan design features

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401(k) Plan

Employer Disadvantages:

· Filing requirements

· ACP and ADP testing requirements

– Consider automatic enrollment feature or Safe Harbor 401(k)

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401(k) Plan

Employee Advantages:

· Pre-tax savings

· Tax-deferred growth

· Easy payroll deductions

· Flexibility and control

· Contribution limits

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401(k) Plan

Employee Disadvantages:

· Distribution requirements

· Limited investment options

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401(k) Plan Candidates

Any Business that Wants to:

· Replace a costly traditional pension plan

· Offer a “big company” retirement program

· Attract and retain valuable employees

· Take advantage of tax-saving opportunities

· Receive a tax deduction for contributions

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What Is a Safe Harbor 401(k) Plan?

· A salary reduction plan that permits employees to save for retirement on a pre-tax basis

· Employer matching or non-elective contributions required for Safe Harbor

· Allows for

– Employee contributions

– Catch-up contributions for employees age 50 and older

– Employer discretionary contributions

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Safe Harbor Employer Contribution Requirements

· A dollar-for-dollar match on salary deferrals up to 3% of compensation and 50 cents on the dollar for salary deferrals between 3% - 5% of employee compensation for all eligible non-highly compensated employees

· Non-elective contributions of 3% of compensation for all non highly compensated employees, regardless of whether or not they makeelective deferrals

· Employer matching and non-elective contributions used to satisfy safe harbor are always 100% vested

or

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Roth 401(k) Contribution Feature

· Available to all participants regardless of income

· Must be maintained in separate plan accounts

· Subject to 401(k) ADP discrimination testing

· Contributions are taxed when deferred from salary

· Earnings are tax-exempt if distributed at least five years after beginning Roth contributions and a qualifying event has occurred

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Defined Benefit Plan

· Promises a benefit at retirement, determined by plan formula

· Annual contributions determined by a variety of factors, including– Compensation– Investment performance– Years until retirement– Life expectancy

· Allowable compensation used to calculate benefits is $255,000 in 2013

· Maximum Benefit: Lifetime annual income at retirement of $205,000 (for 2013) or highest three year average compensation, whichever is less

· Vesting schedule differs from defined contribution plans– 5 year cliff vesting– 3-to-7 year graded vesting

· Certain plans may incorporate a salary deferral option

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Defined Benefit Plan

Advantages:

· High contribution limits

· Favors older, more highly-paid employees

· Amounts forfeited by terminated employees may be automatically applied to reduce future contribution requirements

Disadvantages:

· Usually fully funded by employer

· Requires sufficient cash flow each year to meet minimum funding requirements

· Plan’s actual investment experience may affect the level of future contributions

· High level of administrative complexity

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Definition of Fiduciary

fi·du·ci·ar·y

A person to whom property or power is entrusted for the benefit of another.

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Plan Fiduciaries

· Generally, those individuals or entities who manage an employee benefit plan and its assets

· Plan fiduciaries may be

– Plan sponsor

– Trustees

– Investment advisors

– Other individuals exercising discretion in the investment and/or administration of the plan

· Status is based on the functions performed by the individual

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1. ERISA definition of Fiduciary Standards

2. Who is a Fiduciary

3. Managing Fiduciary Responsibility

4. Ongoing Fiduciary Responsibilities

5. Limiting Fiduciary Liability

Fiduciary

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ERISA Fiduciary Standards

A qualified retirement plan fiduciary should:

Act for the exclusive purpose of providing benefits to participants and their beneficiaries;

Pay only reasonable plan expenses;

Act with requisite care, skill, prudence, and diligence;

Diversify the investments of the plan; and

Act in accordance with the documents and instruments governing the plan.

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Who is a Fiduciary?

ERISA generally defines a fiduciary to include anyone who exercises discretion, control or authority over plan assets or the management of the plan, or in the administration of the plan.

Fiduciaries may include:

The business owner / plan sponsor;

The plan administrator;

The Board of Trustees of the plan sponsor; and / or

A specially designated Investment Committee.

All plan fiduciaries must understand that they may be held personally liable for a breach of their responsibilities.

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Managing Fiduciary Responsibility

How does a fiduciary manage their responsibilities?

Become familiar with ERISA requirements and Department of Labor (“DOL”) guidelines on plan operation and investment management;

Establish, adhere to, and document a structured, prudent set of procedures.

FIDUCIARY

PLAN OPERATIONS

INVESTMENTS

PROCEDURES

PLAN COMPLIANCE

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The Role of a Fiduciary

If a plan’s fiduciary does not have the expertise to carry out any of its

functions, it is the fiduciary’s responsibility to hire plan service providers

who do have that expertise.

FIDUCIARY

Recordkeeper

Consultant

Administrator

Advisor

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Selecting a Service Provider

Among other things, a fiduciary should consider the following when selecting a service provider:

Information about the provider firm itself: financial condition and experience with retirement plans of similar size and complexity;

Information about the quality of the provider’s services - the qualifications of professionals who will be handling the plan’s account and the firm’s experience or performance record; and

A description of business practices and the proposed fee structure (including all direct and indirect fees).

An employer should document its selection (and monitoring) process.

Proposed DOL regulations discuss additional considerations regarding a plan sponsor’s selection of a service provider.

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Ongoing Responsibilities

Important areas that will require attention over the life of the plan include:

Investments

Plan Maintenance Participation

Plan Sponsor

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Investment Policy Statement

The “Investment Policy Statement” should:

Clearly identify plan investment goals,

Provide specific guidelines for investment decisions,

Establish the broad range of asset classes in the plan,

Establish investment parameters to help measure success,

Create a process to periodically review plan investments against stated goals, and

Identify process by which plan investment options will be removed or replaced.

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Investment Selection

Prior to selecting the investment options for the plan, the Investment Committee should outline specific screening guidelines, by category, that each of the investment options must meet. A process for selecting investments should include consideration of a variety of statistical and non-statistical factors including:

· Investment objectives, · Performance relative to its index and peer group, · Risk characteristics, · Investment style, · Fees (including expense ratios and other potential costs, such as

redemption fees), · Manager tenure, · Style consistency, and · The degree of correlation with other plan investment options.

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Investment Monitoring

A process for monitoring investments should include:

Establishing objective criteria to effectively measure investment performance;

Identifying criteria that may be used in considering whether to replace an investment vehicle, including

· Fund manager changes and/or changes in fund company ownership

· Performance and risk relative to appropriate benchmarks

· Performance in varying market conditions

· Portfolio changes and/or style consistency

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Investment Direction

Who will direct the investment of assets, the plan fiduciaries or the participants?

Can a fiduciary obtain relief from liability for losses that result from the participant’s exercise of control over the assets in his or her account?

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ERISA Section 404(c)

For participants to have control over their own investments AND afford the fiduciary some protection from liability:

There must be at least three different investment options;

Participants must be given sufficient information to make informed investment decisions; and

Participants also must be allowed to give investment instructions at least once a quarter, and perhaps more often.

However, a fiduciary retains the responsibility for selecting the plan’s investment options and for monitoring their performance.

Please note that the 404(c) rules are long and complicated. Plan sponsors should consult with legal counsel in order to ensure that the plan

meets all of the 404(c) requirements.

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Participants Who Fail to Select Investments

How do you address the situation when a participant doesn’t make an investment election?

Default investments

Qualified Default Investment Alternatives (QDIAs)

A plan fiduciary that follows the QDIA rules will not be liable for loss that occurs as a result of a participant’s investment in a QDIA.

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Qualified Default Investment Alternatives

Investments that qualify as Qualified Default Investment Alternatives (“QDIA”):

A product with a mix of investments that takes into account the individual’s age or retirement date (e.g. a target date fund);

An allocation among existing plan options based on individual’s age or retirement date;

A product with a mix of investments based on characteristics of the group of employees as a whole (e.g. a balanced fund);

A capital preservation product may be used for only the first 120 days of participation.

QDIAs generally may not invest participant contributions in employer securities.

Stable value funds DO NOT qualify as a QDIA for new contributions.

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Communication with Employees

Employee communication is an integral component of fiduciary responsibility. Employees need to understand:

How the plan works, and

How their participation could affect their personal situations.

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Communication with Employees

The following documents must be furnished to participants and beneficiaries.

Quarterly benefit statements

Summary Plan Description (SPD)

The summary of material modification (SMM);

An individual benefit statement;

A summary annual report (SAR); and

Any applicable blackout period notice.

Certain other plan-related documents must be available upon request.

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Participants should be provided with information about investment alternatives. The following would be considered investment education:

General financial and investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return and tax-deferral benefits;

Historical differences in rates of return among asset classes;

Effects of inflation;

Estimating future retirement income needs;

Determining investment time horizons; and

Assessing risk tolerance.

Participant Education

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Fidelity Bonds & Fiduciary Liability Insurance

ERISA Section 412 generally requires that every person who handles plan funds or other property be bonded to protect the plan against loss due to fraud or dishonesty.

The amount of the bond must be at least 10% of the amount of funds handled, but no less than $1,000.

An ERISA bond is not required to exceed $500,000 ($1,000,000 for plans that hold employer securities, effective January 1, 2008).

Plan fiduciaries may also wish to purchase fiduciary liability or pension trust liability insurance.

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Government Reporting

Plan sponsors have the responsibility to file the plan’s annual financial report (Form 5500).

Penalties may be assessed against a plan administrator for failure to file a timely complete report.

The most recent report must be made available for participant examination or provided to participants upon request

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Maintaining Plan Records

Once a set of procedures has been established, a plan sponsor can create and maintain a set of written records to document these procedures.

A “fiduciary audit file” helps:

Organize plan documents and records

Demonstrate that policies and procedures were established

Document adherence to those policies and procedures

Manage the plan’s administrative and investment issues more effectively

Respond to participant or government inquiries

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Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise agreed to in writing by Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.

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02/13 CRC 627712

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Eligibility

Can exclude employees:

· Under age 21

· With less than one year of service

– Defined as 1,000 hours (or less) during a specified 12 month period

– May have a two years of service requirement with immediate vesting

· Covered under a collective bargaining agreement, if a separate retirement arrangement was a specific subject of negotiation under the CBA

· Who are non-resident aliens with no U.S. source income

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Vesting

· Vesting determines the percentage of a plan participant’s account the participant actually “owns” and can take when he or she leaves the employer

· Employee contributions must always be 100% vested

· Most types of employer-funded defined contribution plan contributions are eligible for either

– Three-year cliff vesting

– Two-to-six year graded vesting (at least 20% each year starting with two years of service); or

– Any vesting schedule that is faster

· Forfeitures occur when employees separate from service and are not fully vested. These amounts can be used by the employer to reduce future contributions, pay plan expenses, or they can simply be reallocated to other plan participants

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Distributions

· Must have a triggering event:– Death– Disability– Separation from service– Plan termination– Meet requirements for in-service withdrawal

· Ordinary income tax and an early distribution penalty may apply (10%)– Age 55 exception to 10% penalty (not available in IRAs)

· 20% withholding unless directly rolled over or transferred into an IRA or another qualified plan

· RMDs generally required by April 1st of the year following the year in which the participant attains age 70½ – Qualified plans may allow postponement until April 1st of the year

following the year of retirement

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Loans

· Participant loans may be permitted under the terms of the plan document

· Loans are generally limited to the greater of

– 50% of the participant’s vested balance, up to a maximum loan amount of $50,000; or

– 100% of the participant’s vested balance up to $10,000

– These loan limits may be reduced based on outstanding loans during the previous year

· Loan terms (repayment period, interest rate, etc.) are arranged in a separate

loan agreement

· Loan repayment period cannot exceed 5 years (except if the loan is for certain home purchases)

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Filing Requirements

· Form 5500 required annually by the Department of Labor

· 1099-R tax reporting is required to report distributions to participants

· 5500 filing usually handled by a Third-Party Administrator; 1099-Rs may be as well