403(b)s, Cash Balance Plans and other topics

1. 403(b)s, Cash Balance Plans and other topics A value-added conference call from BPAH

2. A few short updates for clients… • bpah.com has a new look! • Rollout of the DCRN (delinquent contribution reminder notice) to assist plan sponsors • Additional education /guidance tool in participant website • Numerous product initiatives underway • 2008 shaping up as a year of strong growth for our partners • In this call, we look forward to sharing ideas • The new 403(b) landscape • Cash Balance Plan review • Open Q&A

3. Final 403(b) Regulations • Generally effective January 1, 2009 • Greater Plan Sponsor Responsibilities • Plan Document Requirements • Contract Exchanges-Information Sharing Agreements • Multiple Vendors vs. Single Vendor

4. Final 403(b) Regulations • Greater Plan Sponsor Responsibilities • Plan Document Requirement • Plan Investment Committee • Investment Policy Statement • Plan Decision Makers • Coordinating Plan Administration among Multiple Vendors • Timely Deposit of Contributions

5. Final 403(b) Regulations • Plan Document Requirement • All 403(b) contracts must be governed by a plan document that satisfies the requirements of 403(b) in form and operation • Must contain all of the following: eligibility, contribution limitations, vesting, time and form of benefits, distribution guidelines • Plan can incorporate other documents by reference so there is no need for a single document

6. Final 403(b) Regulations • Contract Exchanges-Information Sharing Agreements • Plan must specifically allow for contract exchanges • Distribution restriction rules must be followed by the receiving contract from the original contract • Employer must have Information Sharing Agreement (ISA) in place with issuer of receiving contract • Rules apply to exchanges after September 24, 2007 • If no ISA is in place on January 1, 2009, the exchange is a taxable event

7. Final 403(b) Regulations • Multiple Vendors vs. Single Vendor • Plan sponsors must now decide whether to offer a single vendor solution or continue with multiple vendors • The ability to offer a multiple vendor solution will require the gathering of all data from all vendors to coordinate loans, distributions, and account recordkeeping for participants • The single vendor solution will offer a plan sponsor a consolidated plan offering for all plan participants

8. Final 403(b) Regulations • How can BPAH help? • We work with plan sponsor and financial intermediaries to help guide through these changes • We are currently working with a document provider to offer plan documents for all sponsors • We are in the final review stages of an ISA for our plan sponsors • We offer a single vendor and can be a part of a multiple vendor solution to all 403(b) plan providers and sponsors (single vendor is generally the way to go)

9. Contact Information • Joseph Corona, QKA - BPA • Phone: (315) 292-6953 • Fax: (315) 292-6420 • Email: jcorona@bpah.com • Website: www.bpah.com

10. The environment today • DC Plans remain extremely popular ($2.5 trillion of plan assets, over 65 million participants) • For some firms, however, there is a desire to contribute much more than a DC plan will allow • There are many possibilities, provided that the employer is willing to meet some level of “gateway” contribution (typically, 7.5% of pay in ER contributions to rank and file) • For the right type of employer, some excitingnew possibilities become available

11. Retirement Income Issues • In a low interest rate environment, one will need a larger pool of assets to provide the same retirement income. • To provide retirement income at age 62 of $100,000 per year to a married couple, one will need to accumulate about $1.6M…and that’s if one buys an annuity. If one wants to draw down at a rate of 5% per year and preserve principal, then one needs $2M to provide $100,000 of annual income. • How many employees are “on target” for their retirement income goals?

12. Retirement Income Issues • If an employee is receiving maximum DC plan contributions of $46,000 in 2008, and earns annual investment returns of 7%, it will take more than 18 years to accumulate $1.6M, or 21 years to accumulate $2M. • If an employee is over age 50, there is not enough time to accumulate a large enough balance in a 401(k) plan alone. • How can an employee get to this goal faster? A) take more investment risk, or B) contribute more. • A defined benefit plan allows a much greater amount to be contributed on a tax-deferred basis than a DC plan alone.

13. DB plans for small business owners/professionals • DB plan allows for significantly larger tax-deferred savings than a 401(k) Plan, and increases as business owner ages:

14. DB plans - Selling Points • Significantly greater tax-deferred savings than in a 401(k) Plan. • Maximum target benefit is a life annuity of $185K per year starting at age 62 or older. This has a lump sum value of approximately $2.24M at age 62. • Unlike a DC plan, a DB plan allows company to target a benefit based on past service and “make up for lost time”. • Benefits may be taken as a lump sum that can be rolled over to an IRA at termination of employment, retirement or death.

15. DB plans - Selling Points • Can have 401(k) plan deferrals in addition to the contributions to the DB Plan. (Employer provided match and contribution in the 401(k) plan may be reduced or eliminated if a DB plan is also sponsored.) • If ratio of employees to owners is 5 to 1 or more, typically owners can receive DC plan maximum contribution in addition to DB plan contributions. • The contributions made on behalf of employees to permit maximum DB/DC contributions for owners is typically 7.5% of compensation (divided in some manner between the DB and DC plans). • Certain companies are already making total retirement plan contributions in this range. In this case, DB plan may end up being an add-on benefit, mainly benefiting company owners.

16. DB plans - Selling Points • Funded through one pooled investment account—no need for individual funds or investment education. • Benefits accumulate in an ERISA trust, safe from creditors and potential lawsuits (a far better environment than non-qualified plans) • Trustee will manage Plan assets, keeping accounts on its trust system • For larger incorporated groups, the savings in FICA (Medicare portion) is often greater than the DB Plan’s administrative costs since pension plan contributions are not subject to FICA (either going into or coming out of the plan). Therefore, in may cases administration is “free”.

17. DB plans – Issues to Consider • Business owners/Professionals needs to be committed to level of contribution…it’s not a profit sharing plan. That said, if financial conditions change down the road, the DB plan can be frozen to reduce or eliminate required contributions. • Permanency requirement means plan should be in force for at least five years. • If there are older employees, DB plan may be expensive. • Funding levels are typically for 10 years, with plan being fully funded thereafter. • Requires actuarial valuation and may require non-discrimination testing. • Employer bears the investment risk, but this can be tempered with low guarantee to employees (e.g. yield on Treasuries).

18. What IS a Cash Balance Plan? • A defined benefit plan where instead of funding for an annual benefit payment beginning at retirement age, participants have an account balance (easier to understand, conceptualize) • Each year, participants receive service credits per a formula (e.g., 5% of compensation as defined by the plan) • Each year, participants receive an interest credit, somewhere between the guaranteed minimum and maximum rates of return (as defined by your Plan) • A reasonable degree of parity must be maintained between the accrued benefit obligation and the plan’s actual level of assets • An actuary helps the plan sponsor manage the plan and anticipate / plan for various issues

19. DB plans – Administrative Costs • One-Person Plans (i.e. business with no employees) • $800 to set-up • $1,600 annual administrative fee, (covers actuarial valuation and Form 5500) • Company with employees (e.g. Professional Practice Groups) • $8,500 to design and create a plan document, implement Plan. • Annual Administrative fees of $5,000 plus $25 per participant, which includes actuarial valuation, participant statements and IRS/PBGC forms. • If company is not a professional services firm or has more than 25 employees, plan must be covered by PBGC at a cost of $33 per participant annually (2008 level). • If creative plan designs are used requiring non-discrimination testing, $1,500 to $2,500 to cover testing every one to three years.

20. Example 1: Physician Group with 20 Doctors, 200 Employees

21. Example 2: Dentist with Spouse, and 5 Other Employees In this plan, the total Cash Balance plan contribution for the initial year was approximately $203,680. Of this total, $196,440 (96%) was credited to the owner and his spouse. While this company had an ideal configuration (and the demographics of each employee group will ultimately determine the outcome), these concepts can make a Cash Balance Plan very compelling to certain plan sponsors.

22. DB plans - Proposals • For Harbridge to prepare a potential Plan Design, we need census data: • Name • Date of Birth • Date of Hire • Salary Level We also have a questionnaire about company objectives, other plans, and income/profits available for funding. • No cost for Harbridge to prepare potential design—cost is incurred only if Harbridge is engaged to prepare a plan document.

23. Who are typical candidates for Cash Balance plans? • Sole proprietors who are age 40 or older, earn more than $200,000 and want to save as much as possible on a pre-tax basis. • Profitable, closely-held small businesses. • Professional service organizations like physician groups, law firms, dental groups, accounting and engineering firms. • Companies who have non-qualified retirement plans in place for their key executives.

24. Full-service retirement provider, servicing the entire spectrum of retirement plans DC plans: 201,000 employees, 130,000 with balance; 1,400+ plans DB plans: 50,000 participants, 130+ plans 170 employees, within parent company of 1,400 Wholly owned subsidiary of a NYSE-traded company (NYSE: CBU) Recordkeeper, agent-to-trustee and NSCC member, all in one firm (BPAH / CBNA) Harbridge: Previously a division of PriceWaterhouseCoopers LLP, an actuarial practice located in Syracuse, NY Eleven credentialed pension actuaries with vast experience The highest level of plan design and consulting expertise, but provided at reasonable fees BPAH: Who we are (www.bpah.com)

25. Getting more information • Ken Pliszka, Harbridge (315) 703-8987kpliszka@bpah.com • Ken Prell, Harbridge (315) 703-8993kprell@bpah.com • Paul Neveu, BPAH (603) 580-5522pneveu@bpah.com • Kay McManus, BPAH (713) 725-7304kmcmanus@bpah.com For more information or a proposal for a specific company, please contact Ken Prell or Ken Pliszka.