White Paper: Defined Benefit Plans Administrative Services Only Patrick J. Kendall Vice President, Defined Benefit Practice Leader Diversified

Table of Contents PAGE

1 Creating Parity with Defined Contribution Administration 1 The Challenges 2 The Downside of Doing it Yourself 2 The Administrative Solution 3 Benefits of Outsourcing Your Administrative Services 3 Administrative Services Outsourcing: Could it be right for you? 4 How Administrative Services Works 5 Total Retirement Outsourcing Makes Total Sense Conclusion

About the author Patrick J. Kendall is a Regional Vice President and Defined Benefit Practice Leader at Diversified. Mr. Kendall manages Diversified sales offices located in the northeast, and is also responsible at the national level for all aspects of marketing, product development and sales regarding the defined benefit and total retirement outsourcing platforms.  His duties include reviewing pricing and proposals, interfacing with intermediaries to ensure strong partnership relationships and participating in presentations to a wide variety of audiences.  In addition, Mr. Kendall directs efforts to design, implement and maintain marketing materials and campaigns to accurately exhibit continually evolving product features and market forces to target audiences.  Mr. Kendall has been in the retirement plans business since 1989.  He is a Fellow in the Conference of Consulting Actuaries, an Associate of the Society of Actuaries, a member of the American Academy of Actuaries and an Enrolled Actuary.  Mr. Kendall is a Registered Principal, having completed FINRA Series 6, 26, and 63, and is a graduate of Dartmouth College.

Creating Parity with Defined Contribution Administration In the aftermath of the economic turmoil over the past few years, many organizations are re-evaluating their businesses, looking for ways to streamline costs and enhance productivity. This may include assessing the efficiency of the overall retirement program, and whether it is addressing both the needs of the plan’s sponsor and participants. For example, if your organization offers a defined benefit plan, you might want to take a fresh look at how you’re handling administrative duties – particularly if services such as benefit calculations and projections are still being performed internally or manually. Addressing the volume and expense associated with providing these services may be especially important if your current approach relies on historical records that are incomplete, out-of-date, or kept in paper files. Maintaining your retirement plan represents both hard and soft dollar costs – so it makes sense to examine both of these factors in order to determine whether your current practices are working to your best advantage. This paper provides an overview of some of the challenges plan sponsors may face when performing benefit calculations and projections internally – and identifies solutions to modernize a defined benefit plan’s administrative platform, streamline processes, and reduce expenditures.

The Challenges Changing the way the defined benefit plan is administered can not only impact costs, but may in fact be necessary in order to limit fiduciary liability. Effective defined benefit plan management begins and ends with good data, and well managed plans require a database that is complete and accurate and eliminates intensive manual, error prone processes. Since both plan sponsors and participants are making critical decisions based on these calculations, achieving the greatest level of accuracy is essential. In addition, the Sarbanes-Oxley Act mandates that all business records must be saved for “not less than five years”, which can be exceptionally cumbersome and risky if records are paper based. A simple fire, flood, or misplacement of records could mean facing some serious consequences under the Sarbanes-Oxley Act, including fines, imprisonment or both. Why are benefit calculations so challenging in terms of accuracy? There are two forms of 1

benefit calculations – current and projected. Calculating current benefits is dependent upon the timeliness and accuracy of historical data, which can be challenging for many organizations to produce. When it comes to projecting future benefits for a defined benefit plan, organizations must deal with a number of unpredictable variables and often they lack the sophisticated systems to realistically address all the various factors that impact results. For example, the methodology for projecting benefits must incorporate unpredictable factors such as: • Future employee salary and compensation growth rates, and estimated length of employees’ working careers; •Whether employees will work long enough to vest their retirement benefits, or elect to take early retirement instead of working until normal retirement age;

• Retirement payout assumptions which may change as employees’ beneficiary status and need for survivor benefit changes; and • Cost of living adjustment provisions based on what the benefit rate might be and how often it might be implemented.

The Downside of Doing it Yourself One of the primary weaknesses for those organizations that perform their own benefit calculations lies in their methodology. Unless the company has undergone a significant systems upgrade in recent years, it is very likely that they are using outdated, archaic legacy systems, which can be both inefficient and labor intensive. The results can be imprecise at best and inaccurate at worst. In turn, inaccurate benefit calculations impact the plan’s actuarial projections, which form the cornerstone for long-term strategies. At the same time, participants may be at a disadvantage when it comes to planning for their financial futures. These days, nearly all defined contribution plan participants will have access to Web planning tools that allow them to model their future potential income. However, defined benefit participants are often relying solely on annual statements from their employers, with no ability to incorporate these figures into any kind of holistic retirement planning model.

The Administrative Solution There are three components that comprise defined benefit plan services: investment management, benefits administration, and actuarial services. These components can potentially be outsourced to a single source in a “bundled services” arrangement. However, this is not necessarily a practical or appealing solution for plan sponsors that are perfectly satisfied with their investment managers and actuaries. Yet there is an alternative – a solution that allows plan sponsors to work with the various vendors of their choice for

investment and actuarial services while adding a new level of experience and expertise on the administrative side. For plan sponsors still confronting the challenges of defined benefit plan administration, an administrative services solution provides a defined contribution-like administrative functionality – alleviating the sponsor’s workload and responsibility with minimal disruption to existing service relationships. It allows plan sponsors to delegate the benefits administration, calculations and reporting to a “center of excellence” – one that specializes in this aspect of the defined benefit program and is therefore equipped with state-of the-art systems and methods to produce the most accurate and efficient results. Delegating these functions allows staff resources more time to focus on the organization’s core business. The solution isolates the administrative services function from those of investment management and actuarial. These providers remain in place, working with an additional team of professionals. The administrative services solution will provide: • Methodology for accumulating and warehousing data; • Payroll feed based administration (i.e., weekly, bi-weekly, or monthly payroll feed with data needed to calculate benefits); • “Real time” preparation of benefit calculations for plan participants; • Participant Web Site with modeling and projection tools; • Preparation and filing of IRS Form 5500 and related schedules; • Comprehensive and integrated Contact Center services; and • Participant statements.

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Benefits of Outsourcing Your Administrative Services Through outsourcing a plan’s administrative services, the sponsor can recognize the benefits of: • State-of-the-art systems which can ensure improved data quality and an integrated database (calculations and payroll information) and eliminate potential errors; • Reduced responsibility and workload for internal staff, allowing them to be deployed to other projects; and • Vendor-to-vendor cooperation without the need for staff to coordinate among the vendors or oversee the process.

Administrative Services Outsourcing: Could it be right for you?

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• How many retirement plan vendors do you currently interact with? If you’re working with more than one and are satisfied with their services, adding an additional vendor with benefits administration expertise can help you align all your plan services with experts in their respective fields. • How are benefit determinations, both estimates and final calculations, currently handled? When is the last time you re-evaluated the systems being used to perform benefits calculations? If you are still relying on legacy systems, multiple handoffs, manual processing, and billable fees, your calculations may not reflect the more sophisticated data and techniques that are used in today’s state-of-the-art systems.

Handling your plan’s benefits administration can be a significant challenge – and it could be undermining your plan as well as your organization. You may be relying on outdated systems to perform benefit calculations, which could be costing you not only time and money, but also doing considerable disservice to your plan participants if there is any possibility those calculations are inaccurate. In addition, that inaccurate information is passed along to your actuary. This can put the basic health and solvency of the plan at risk and expose you to significant liability.

• How much time does your staff spend managing vendor relationships and performing plan related functions? For example, providing participant data or calculations to your actuary, or gathering data to generate required IRS forms such as Form 5500? If your staff is spending a great deal of time on these types of activities, you may be able to delegate the majority of this work to a third party administration services vendor that will interact directly with your other vendors, and put your employees’ time to better use.

In order to assess whether your plan might benefit from outsourcing your administrative services, take an inventory of your current situation by asking yourself the following questions:

• What resources do you have to ensure that you are keeping current with changes in pension and tax law? If your organization is taking responsibility for performing benefit calculations, you’ll have to ensure that your methods are keeping pace with legal requirements or you could be facing significant fines. Doing this research takes time and puts pressure on your internal staff to remain up to date.

How Administrative Services Works Organization A’s retirement program offers a defined benefit plan, performs their plan’s administration in-house, rely on a third party investment manager as well as an outside actuary. Organization A has continued to grow routinely adding employees over the course of many years. The organization has found that as a large number of their older workers have begun to reach retirement age the manual processes they have relied on to project and calculate benefits for the defined benefit plan are severely taxed as the volume of benefit projections and calculations have escalated. This process is time-consuming, and participants in the plan must rely solely on receiving paper-based calculations in order to evaluate their potential benefits. The organization also has only one individual in-house that understands the whole process and that individual is about to retire. With increased regulatory scrutiny of fiduciary responsibilities and duties, Organization A is becoming more concerned about not only the time and cost required to produce benefit calculations but also the uncertainty over the accuracy of these projections, which are provided to their plan’s actuary. Organization A recognizes using and providing inaccurate data has numerous negative implications. It may subject the organization to fines and lawsuits, as well as damage the organization’s reputation. It could also lead to audits and job losses for those found to have prepared inaccurate benefit calculations. Organization A is very satisfied with its investment manager and plan actuary, but neither of these firms has the ability to provide plan administrative services such as benefit calculations. Organization A has been approached by other companies that offer a “bundled” approach for defined benefit plans, but this would mean using their investment management and actuarial services as well. Instead, Organization A opts for an administrative services only solution that utilizes a “center of excellence” allowing for the “outsourcing” of this aspect of the program, addressing only the need for benefit calculations and plan reporting, and alleviates concerns over inaccuracies by using a sophisticated, state-of-the-art administrative system.

• How long does it take for a benefit calculation to be produced? Various calculation activities can be extremely labor intensive and cumbersome if not automated. The volume of calculations performed will generally tax manual processes. A third party administration vendor will have the streamlined, modernized automated systems to provide these services in a timely, efficient, and accurate manner.

• How much does your plan really cost when you factor in both “hard” and “soft” dollars? Are you satisfied with the costs associated with the services provided to your retirement plan? Remember that there is a cost to your organization even when certain activities are performed internally. Your hard dollar costs likely already include paying a third party to manage plan investments, and accounting and tax services. However, soft dollar costs are reflected in the time spent by your inhouse resources to help manage the plan, and you may well be able to recognize more efficiency by redeploying those resources to attend to other business needs.

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• What is being done to ensure your participants fully appreciate the plan and understand how it fits into their total compensation and benefits package? Effective plan communications are essential in terms of increasing participation and retaining valuable employees. A third party benefits administration service with a modern systems application can ensure the completeness of participant data, allowing you to be more proactive in educating and reaching out to plan participants with actionable information. • Do your plan participants have an effective way to facilitate retirement planning? This capability is even more important if employees have both defined

benefit and defined contribution plans available to them. A third party can provide a secure web site from which your plan participants can check all their retirement plan activity, account balances, and model scenarios for future benefits. • What is your communication strategy for new participants coming into the plan? It takes time and effort to build a communications plan and execute it. On an ongoing basis, you’ll want to maintain awareness about the plan and how participants can access information quickly and easily. A third party can help you facilitate these types of communications, working with you and your other vendors.

Total Retirement Outsourcing Makes Total Sense What is Total Retirement Outsourcing (TRO)? TRO is the placement of all or most of the services required for retirement plan management of a full-service defined contribution plan and the defined benefit plan administrative services only with a single provider. Comprehensive administrative services include recordkeeping, complete transaction processing, retiree benefit calculations, participant and sponsor reporting, participant and sponsor web sites, as well as compliance and testing services. TRO assists with meeting a plan sponsor’s fiduciary duties and allows the sponsor to retain full control over the strategic direction of their retirement program. TRO has been implemented by nearly 25% of U.S. firms with more than 1,000 employees and another 50% of U.S. firms are now actively considering doing the same.1

What are the Benefits of Total Retirement Outsourcing? Ninety percent of organizations that employ TRO as a full service solution for their defined contribution plan and administration only services for their defined benefit plan, are either satisfied or very satisfied, citing such benefits as reduced plan costs, convenience for employees, and ease of data management1. In particular, TRO can reduce compliance risk and administrative complexity, improve the audit process, provide access to professional risk management tools and advice, reduce time spent on vendor management, provide integrated online services to participants and enable participants to see their complete retirement picture. Additionally, and perhaps most importantly, sophisticated tools which take into account both assets and liabilities can be used to assist with risk management of the defined benefit plan. 1

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2008 report by Cerulli Associates, Inc.

Conclusion Effective defined benefit plan management begins and ends with good data, and well-managed plans require a database that is complete and accurate and eliminates intensive manual, error prone processes. In today’s business environment, employers must manage their organizations at peak efficiency to reduce cost and deploy all available internal resources to business retention and growth. With an administrative services only solution, defined benefit plan sponsors now have the ability to eliminate inefficiencies in administrative services and re-deploy staff resources to meet more pressing business needs without making dramatic changes to other aspects of their plans. What’s more, the defined benefit plan immediately achieves parity with the defined contribution plan, (which typically provides a centralized contact center for participants,) along with comprehensive retirement planning tools to provide holistic modeling of potential retirement income sources. Overall, a defined benefit plan administrative services only solution can allow you to save time, reduce inefficiencies and inaccuracies, and enhance your plan participants’ overall experience.

About Diversified Diversified is a leading provider of customized retirement plan administration, participant communication and open architecture investment solutions for mid- to large-sized organizations. The company’s expertise covers the entire spectrum of defined benefit and defined contribution plans, including: 401(k) and 403(b) (Traditional and Roth); 457; nonqualified deferred compensation; profit sharing; money purchase; cash balance and Taft-Hartley plans; and rollover and Roth IRA. Diversified helps two million participants save and invest wisely for and throughout retirement. Headquartered in Harrison, NY, the company’s regional offices are located in Arkansas, California, Florida, Illinois, Iowa, Louisiana, Maryland, Massachusetts, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Utah and Wisconsin. To learn more, visit www.divinvest.com.

440 Mamaroneck Avenue, Harrison, NY 10528 (914) 627-3000 | (800) 770-6797 | www.divinvest.com

This paper is general in nature. Because each employer is unique, an employer should consider its individual circumstances when evaluating a defined benefit plan administrative solution and should consult their retirement plan advisor.

PS-6602-01 (08/11) © Diversified Retirement Corporation