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403b PLAN UPDATE Is Your Plan in Compliance?

March 23, 2010

Cynthia L. Keith, CFA Executive Director-Investments and Senior Portfolio Manager Oppenheimer & Co. Inc. Erin Hultman, CPA, MST Senior Manager-Audit and Assurance Services Tate & Tryon, CPAs and Consultants

Final Regulations
Effective for plan years beginning on or after January 1, 2009 Written plan document Nondiscrimination rules Closes the gap between 403b and 401k plans Form 5500 filing requirements

Plan document
Must be written Stand-alone or collection Must include material provisions Eligibility Benefits Investment options

Nondiscrimination rules
No more good faith Universal availability

Closes the gap between 403b and 401k regulations

Timely employee deferral remittances Form 5500 filing requirement if subject to ERISA Plan administration Fiduciary responsibilities

Who are the plans fiduciaries?

Discretion Control Examples Administration Trustee Investment consultant or manager

Who is not a fiduciary?

Attorneys for the plan Accountants for the plan Actuaries for the plan

What are the fiduciaries responsibilities?

Act solely in the interest of participants Act prudently Follow plan documents Diversify investments Pay reasonable expenses

What is the liability for fiduciaries?

Personal liability Ways to limit that liability 1. Document processes 2. Full reporting 3. Provide participants with control over investment options 4. Provide default investment options 5. Liability indemnification or fidelity bond

Form 5500 filing requirements

ERISA v. Non-ERISA new regulations did not impact directly Non-ERISA plans
Church & governmental plans Employee deferral ONLY plans Increased scrutiny by DOL of sponsoring organization

Form 5500 filing requirements

ERISA plans Small plan v. large plan 80/120 rule Schedule H eFiling required

Determining Plan Assets

Transition guidance
Revenue Procedure 2007-71
Contracts issued prior to 1/1/2005 Contracts issued 1/1/2005 1/1/2009 reasonable good faith effort Contracts issued after 1/1/2009 include in plan assets

Transition Relief: DOL Field Assistance Bulletin 2009-02

Contract issued before 1/1/2009 No obligation to make contributions since 1/1/2009 Rights under contract enforceable against insurer, no employer involvement Owner of contract is fully vested

What qualifies as employer involvement?

EBSA Field Assistance Bulletin No. 2010-01 Involvement can include keeping plan compliant Employer can confirm employee information Employer cannot approve transactions

So you have to have an audit

Preparing for the audit

Obtain TPA reports, 2009 and 2008, by investment and by participant Document internal controls Determine participant count and plan asset totals Properly value plan assets

Accurate investment valuation is a fiduciary duty

Why is accurate valuation important? Responsibility to maintain records and report on form 5500 Plan Distributions need to be correct

What is fair value? GAAP requirement Old definition of fair value New definition of fair value

How should investments be valued?

Level 1 quoted prices in active markets for identical assets

1. For identical assets only 2. Accessed at the measurement date 3. Must be used if available

Level 2 observable inputs

1. Not exchange prices but directly or indirectly observable 2. What market participants are using 1. The plans assumptions about market price 2. Based on information available 3. May rely on investment manager

Level 3 unobservable inputs

Ensuring appropriate investment valuations

Why is this important to you as a fiduciary? Custodian etc may provide prices Fiduciary remains responsible Fiduciary required to evaluate pricing

Internal controls
Process for determining fair value Select appropriate valuation method Identify and support assumptions

Practical steps
Obtain SAS #70 report 1. Type 1 report 2. Type 2 report Caveats 1. Without SAS #70 2. Mutual funds and marketable securities 3. SAS #70 does not cover alternative investments

Valuation short cuts that may not work

Custodial reports 1. Valuation date not equal to plan year end 2. Pass through pricing Certification from custodian or trustee 1. ERISA allows this in certain cases 2. Should state prices are fair value Hiring an appraiser 1. Relieves some responsibility for fair value pricing 2. Fiduciary still responsible for review

Types of audits
Limited scope Full scope

Audit opinions
Unqualified full scope only Qualified possible as a result of missing plan information Disclaimer due to limited scope audit Disclaimer due to other limitations Adverse What opinions will DOL accept on Schedule H? Good faith effort

Common audit pitfalls to avoid

Employee contributions not remitted timely no safe-harbor for large plans Incomplete employee files