2nd Annual Clients & Friends Breakfast

1. 2nd Annual Clients & Friends Breakfast Sponsored by: This presentation is available for download: www.alphabenefits.com/seminar

2. 401(k) Update Presented by:Tim MorrisonPresidentAlpha Benefit Administrators

3. Agenda Overview of fiduciary responsibility Minimizing fiduciary liability Investment policy statement Due Diligence Department of labor audits – the real world

4. Recent Trends Increased scrutiny of retirement plans due to recent news makers in the economic and business world has plan sponsors asking: How are we going to protect ourselves and our participants? How can we monitor our investment choices? Where do we invest going forward? Focus on the actions of fiduciaries, particularly in the area of investment

5. Who is a Fiduciary? Under ERISA, a person is a fiduciary to a plan to the extent they: Exercise any discretionary authority of discretionary control respecting management of such a plan or exercise any authority or control respecting management or disposition of plan assets… Render investment advice for a fee or other compensation with respect to plan assets… Have any discretionary authority or responsibility in the administration of such plan.

6. Who is a Fiduciary? Persons who are commonly fiduciaries include: Plan Sponsors Plan Administrators as defined in ERISA Trustees Investment Managers

7. What Defines a Fiduciary? Individuals who have, at any time, exercised authority over what investments should be offered under a plan Sports analogy: You have to know what game is being played. You have to know the rules and how to keep score. You have to know what the score is at all times.

8. Employee Retirement Income Security Act (ERISA) 402(c) Fiduciary may delegate to others 409(a) Fiduciaries can be personally liable to make good losses resulting from breach of fiduciary duty(e.g. consider pending judgements regarding the Enron scandal)

9. Fiduciary Duties and Obligations:Common Steps to Follow Execute responsibilities with care, skill, prudence, and diligence of a prudent expert Make decisions solely in the interest of plan participants and beneficiaries Prudently diversify investments Avoid engaging in prohibited transactions Follow the plan documents

10. Fiduciaries and Plan Assets Fiduciary must be covered by a fidelity bond to help protect plan’s assets from fraudulent activity (ERISA requirement) Coverage must be at least 10% of plan assets Minimum $1,000 Generally up to a maximum of $500,000 Bond helps protect the plan’s assets, NOT the fiduciary Individual fiduciaries have the choice to purchase fiduciary liability insurance.

11. Ways to Help Minimize Fiduciary Liability for Plan Investments Adopt and adhere to an Investment Policy Statement Control total costs and fees of the plan Promote appropriate diversification of the funds Exercise due diligence when executing duties Document, in writing, your actions and decisions Implement ERISA 404(c) procedures Monitor investment funds for performance and adhere to investment objectives and policies

12. Steps to Help Minimize Financial Liability Offer plan participants option of daily account changes Offer appropriate fund menu for employee demographics Fully document reasons for change in investment advisiors Craft a strategic investment strategy (i.e., Investment Policy Statement (IPS)) explaining the plan’s objectives and distribute it to participants

13. Steps to Help Minimize Financial Liability (continued) Avoid “doubletalk” or technical jargon in IPS Get a second look from an independent broker to review current plan investments/fees to see if competitive in marketplace and document these findings along with annual review processes Consider asking a select group of employees/plan participants to be involved with the plan’s fund selection processes

14. “Check” It Out… The following slides attempt to summarize some of the features of ERISA Section 404(c). You should consult other references for additional information. Employers seeking to offer a plan complying with ERISA Section 404(c) should be able to answer “yes” to all of the following questions…

15. Choosing Investments Are at least three investment choices provided, each with materially different risk/return characteristics? Can participants choose their own investments? Can each investment option be classified as a “prudent” investment? Can participants change their investment allocations and transfer among investment accounts at least once every calendar quarter?

16. Have Participants Been Provided With… A statement that the plan intends to comply with ERISA Section 404(c) regulations? Descriptions of each investment option, including: Directions on how to select investments and change investment selections along with access to: Prospectuses? Periodic account statements? • Objective • Asset diversification • Performance • Sales charges • Risk/return characteristics • Plan fiduciary identification • Identity of the portfolio manager

17. What About Fees? ERISA does not set a specific level of fees, but requires fees charged to a plan be “reasonable” “Reasonable” must be determined in each case Ongoing due diligence is critical 401(k) Plan Fee Disclosure Form (www.dol.gov/ebsa/publications) Website URL may change. URL referenced above is valid as of 12/04.

18. Watch Out for Hidden FeesA 1% increase in fees on a $100,000 investment can reduce a portfolio’s gain by $66,254 over 20 years, assuming a 7% return.

19. When Evaluating Fees… Make informed decisions Remember fees are just one of several factors Assess the plan’s performance over time for each investment option Look at the full value of services Consider all plan fees because it is not only about fund expenses Choosing lower fees doesn’t necessarily mean a better performing fund

20. When Evaluating Fees… (continued) Compare all services received with total cost Remember that some investments, due to their nature, may have higher fees Ask which services the fees cover Find out which fees are charged directly to the plan or to the employer, and which ones are deducted from investment returns

21. What is an Investment Policy Statement (IPS)? Defines how investments and managers are selected, monitored, and evaluated Describes how investment decisions are related to a plan’s objectives, as well as the strategic vision for the investments

22. What Should an IPS Do? Reflect the employer’s attitudes and philosophy Recognize the participants’ needs, circumstances and goals Document the plan’s goals and demonstrate the foundation for investment decisions Address the quantity and quality of funds provided and determine the benchmarks and selection criteria How much discretion will the sponsor have in the final fund selection

23. What Should an IPS Do?(continued) Provide a policy method to objectively evaluate fund managers Help prudently manage plan assets and conduct due diligence Provide continuity in decision-making as fiduciaries change

24. Key IPS Components for 401(k) Plans Describe the purpose of the plan State the document’s purpose Identify the duties of each party involved Explain plan’s investment philosophy Identify asset classes being offered Establish criterion for manager selection Describe monitoring methodology and frequency Describe methods for replacing or adding funds

25. Procedural Due Diligence Analyze investment documents Review investment compatibility with the IPS Review historical performance Evaluate reasonableness of fees Obtain competitive bids Establish review schedule and procedures Document each step along the way Time consuming

26. Department of Labor (DOL)Audit Cases (The Real World) “A pure heart and an empty head are not enough to defend against a fiduciary breach.” - ERISA Cliché Source: Tess J. Ferrera, Esq., Kilpatrick Stockton, LLP. “What Third Party Administrators Should KnowAbout ERISA Liability and Department of Labor Investigations”, Donovan v. Cunningham, 716 F.2d 1455 (5th Cir. 1983), cert denied, 467 U.S. 1251 (1984).

27. Update on the Health Insurance Market Presented by:Todd HonsVice PresidentAlpha Benefits Group

28. High Deductible Options Health Savings Accounts (HSA’s) Health Reimbursment Arrangements (HRA’s) Medical Expense Reimbursement Accounts (MERP’s)

29. HSA/HRA Comparison

32. High Deductible PlansOn paper, they make sense. Larger employee out of pocket reduces employer cost Turns employee into consumer Employees that utilize medical plan pay more Isn’t insurance designed to pay for catastrophic?

33. Why Haven’t HRA’s/HSA’s Taken Off? Major insurance carriers slow to adopt plan design Not enough of a discount in rates Employee communication issues Confusion over regulations Employers view this as just a “cost shifting” method as opposed to a way to reduce overall costs

34. Some Areas of Confusion Not enough money in account early on Make sure to receive carrier discount at time of service Paying for non-medical expenses through HSA accounts

35. High Deductibles Plans Carriers now offering a full complementof HSA/HRA’s. Most are available effectiveJanuary 1, 2005.

36. Medical Expense Reimbursement Plans (MERP) Stepping stone to HSA’s?

37. Medical Expense Reimbursement Plans (MERP) Governed by IRC Section 105 Utilized with an insurance carrier’s high deductible plan Permits employers to self-insure certain medical expense costs

38. Strategy Employer secures high deductible plan (i.e. $2,000) for major expenses (In/Out patient surgery, etc.) from carrier Generally less than 20% of employees utilize these type of expenses Communicate lower deductible (i.e. $250) to employees Employer self insures from $250 to $2,000, only if actually incurred Employer utilizes premium discount savings to fund the self insured portion Typically part of PPO plan with office visit co-pay and drug card

39. Insured Claims Experience 55% of insureds have claims < $1,000 70% of insureds have claims < $2,000 80%of insureds have claims < $3,000 Milliman USA (2002)

41. Additional Points Alpha Benefit Administrators administers the self funded portion for the employer Advantage over HSA in that employee can retain the doctor visit copays and Rx copay card while still having PPO arrangement for service All expenses over the $2,000 are the responsibility of the insurance carrier

42. Additional Points Serves as a starting point for getting into high deductible plans without having to communicate a complicated process to employees Alpha Benefits Administrators can provide proposal on savings and costs

43. Carrier Update Aetna Reading Hospital Oxford/United Healthcare/Mamsi HealthAmerica and HealthAssurance Dr’s St. Lukes Gnadden Hutten/Palmerton Hospital 1/1/2005 Capital BlueCross/Keystone Demographic under 45 employees 1/1/2005 Integration Keystone/Cross New PPO Plan Designs

44. Carrier Update HealthGuard Ending 12/31/2005 Highmark New PPO plan designs

45. Calendar Year Deductibles

46. Thank you for attending! This presentation is available for download at: www.alphabenefits.com/seminar