Lorraine Dorsa

Headhunter and I have a fundamental difference--I do not see that goal #2 (high profit, long term) requires sale of investment products. Some TPAs have decided that product sale is the way for them to make a profit and that is their choice. My firm has decided not to sell product because we believe we can be most profitable by concentrating our efforts in providing administrative and consulting services. Again, it's a choice that we made. Headhunter sees product sales as important and therefore places high value on salespeople. I see administrative and consulting services as important so I put a high value on technical people. This is not a difference to be resolved, but a function of our different business models. If we can both find markets for the services we wish to provide, we can both be successful. (Being a little less cut and dried about it, I prefer to define success for a business owner as being profitable doing something he wants to do. My firm could probably be profitable doing something else, but if that something else was not what I wanted to do, I would not consider that success.) ------------------

I don't know of any package which "does it all" and my guess is that you will not find one. I'm a pension specialist and I know that pensions are complex and good pension software can only be written by people who focus on pensions. Presumably the same is true for other areas (flex, cobra, HR, etc). I would be surprised to find any one software company that could specialize in so many areas and give each area the resources and priority needed to provide top of the line software. My recommendation would be to look for the best software in each area that also provides for easy transfer in/out of data to/from other software packages.

I don't think things are as cut and dried as Headhunter describes them. SUCCESSFUL TPA firms are headed by people who understand the clients' needs, pension law and administration and how to run a business, whether they started out as sales people or pension geeks. It's necessary to sell to bring in the business and it's necessary to do the detail work to serve and retain the client. Neither one can stand alone. Just because some salespeople are paid more than some technicial people (and this is not always the case, by the way) does not mean that salespeople are more important than technical people. ------------------

ASPA did a survey of financial results for plan adminstration firms in 1997 which has some mention of fees--just some averages, not enough breakdown by plan type, size, etc. to make it really useful to me, but you might find it of some use. I don't know if the survey is still available from ASPA, but it is called "1997 Financial Survey Results" and was offered for sale to ASPA members in late 1997 or early 1998 for about $150 (less for those who actually participated in the survey). Contact ASPA at 703 516-9300 or check their website--aspa.org.

Your model of the TPA working with the asset managers and salespeople, each sticking to their specialty makes a lot of sense. Why should asset manager/salespeople who are not plan administrators try to administer plans and why should plan administrators who are not asset managers try to manage assets--it makes no sense, provides mediocre service to the client and is not cost effective. However, the model of the TPA sharing in the asset fees is not the only model. Our firm specifically does not accept asset fees since we are independent and want to stay independent. We want to be able to offer our services to many asset managers and financial institutions, without any one of them having to worry that we will try to switch the client to an asset manager who pays us a larger asset fee. A model we like is for an asset manager/financial institution to outsource its administration operation to us--we do the admininstration, which is what we know how to do, and they do the assets, which is what they know how to do. ------------------

I agree that if you have both nonexcludable HCEs and nonexcludable NHCEs it is impossible to pass the non-discrimination tests, but if you have NO nonexcludable NHCEs, non-discrimination testing is not an issue. In the example above, the situation was HCEs only. I have a number of plans with only HCEs (consultants, professionals, family members) and I can get quite creative in designing these plans since non-discrimination is not an issue. For example, I have designed plans where the parents benefit and the children do not. This is perfectly acceptable because all employees are HCEs (under family attribution rules of IRC 318 all are owners).

I think your proposed design will probably work, but only because all employees are HCEs. The IRC 404 25% of compensation deductible limit applies only if one or more employees participate in both plans, but since no one participates in both plans this is not an issue. IRC 410(B) coverage is not an issue, again since all employees are HCEs. IRC 401(a)(26) does not apply to DC plans so the MP plan is okay. The DB plan is subject to IRC 401(a)(26) and will require that either 1) at least 50 employees participate or 2) at least 40% of all nonexcludable employees, but not less than 2 employees, participate. Whether the plan passes depends on the number of employees. (Since all employees are HCEs, you could have the DB plan cover the 2 owners plus a few others and have the MP cover the remainder if you need to do this to pass 401(a)(26).) This same approach could work if some of the employees are NHCEs, but then you would have to have a mix of HCEs and NHCEs in both plans, such that the tests are passed.

I will be holding a weekend review course in preparation for the C-2DB exam on Saturday and Sunday May 15 and 16 in Jacksonville Beach, Florida. Cost for the class is $400. If you are interested, please contact me at 800 361-4635 or ldorsa@lda-fcpa.com for more information or to register for the class. ------------------

Try the average benefits test. It is EXTREMELY powerful and well worth the extra number crunching. Also try aggregating plans. Even if you don't pass, you will significantly reduce the margin by which you failed. If you do actually fail, you will have to retroactively amend the plans to include additional NHCEs. This will pass coverage, but you will have to provide QNECs to those you bring in. IRC 1.401(a)(4)-11(g)(4)(v) and (vi) requires than employees retroactively brought back in to a 401(k) or 401(m) plan for purposes of satisfying coverage must be given QNECs equal to 1) their plan year compensation times the average deferral % of the NHCEs who were eligible and 2) their plan year compensation times the average contribution % of the NHCEs who were eligible. (You didn't mention failing coverage re employer contributions, but if you fail here also you'll need to amend to retroactively bring add'l NHCEs in for this purpose as well. This will satisfy coverage, but you will likely fail 401(a)(4) amounts. To satisfy 401(a)(4) amounts, you will need a corrective amendment (see IRC 401(a)(4)-11(g)) which provides additional employer contributions such that 401(a)(4) amounts is passed (either through safe harbor or general test).

I received my number today. Better late than never.

There has been a lot of discussion in the newspaper (I read the Wall Street Journal) about large companies converting their defined benefit plans to cash balance or pension equity plans and I've received several questions about them addressed to my Advanced Plan Design Q&A column. I have very limited practical experience with these types of plans so I thought I throw the questions out comments by the learned and esteemed DB gurus who frequent this message board (it's my experience that flattery might not get you everywhere, but it can get you pretty far). Questions: What is a cash balance plan? What is a pension equity plan? How do they work? Why is there so much interest in them lately? ------------------

Thank you all. I have not received my new number yet and I'll be holding off signing Schedules B until I get it.

As of 4/1/99, enrolled actuaries must use their new EA numbers on any Schedule B they sign, but cannot use such number until they receive official notification from the Joint Board that their enrollment has been renewed. I haven't received my new number yet and as far as I know, no other EA has received their number either. Has anyone received their number or know of any extension on using the old numbers? ------------------

These topics are covered at ASPA and other seminars, but I do not know of any seminar which just addresses these topics. If you are interested in customized training for your employees in your office focusing on the types of plans you work with, our firm offers this type of training. Contact me at lda@leading.net or 904 249-9171 to discuss your needs in more detail. ------------------

When shopping for actuarial services (and any other professional services for that matter), be sure to be clear about the services you are looking for. I have been asked to quote on projects, have done so and then have been told my quote very different from a quote from another actuary. Sometimes the difference is really a difference in our rates or the time we expect to spend on the project, but other times it is due to a different understanding of the project. Also, not all actuarial services will be provided by the actuary him/herself--some work will be done by associates and staff. Rates for staff should also be considered. I provide actuarial services to small plan area and many of my fees are based on a fee schedule, not an hourly rate. This is another reason to define the services requested rather than just looking at hourly rates. ------------------

There was an option, since expired I think, which allowed the transfer of excess assets to pay post-retiree health benefits.

It seems to me you have an not yet terminated plan which needs to be terminated. You've started the process by ceasing accruals, you'll need to continue with IRS & PBGC filings, continuing actuarial valuations/Schedules B through date of termination, etc. With regard to the payouts, the real issue is whether employees terminated in November 1998 must be fully vested. I think they must be 100% vested due to the partial plan termination (your information indicates that almost all employees were terminated in November and this would consistute a partial plan termination requiring 100% vesting of all affected participants). Therefore, since it looks like everyone will be fully vested (either as result of the partial plan termination in November 1998 or the actual termination in 1999) and you say that assets are probably insufficient to pay benefits, I think you need to do an analysis of the plan's liabilities vs. assets and determine if the plan can terminate in a standard termination (unlikely unless there are some majority owners who are will waive benefits since the company probably doesn't have any money to contribute to make the plan sufficient) or if it must file as distress and perhaps get taken over by the PBGC before you pay anyone out. Once you know where you stand with regard to assets vs. liabilities, you can start to make decisions how to proceed. ------------------

I will be teaching 2 C-2(DB) classes this semester--one a semester long class and the other a weekend review class. Both will be held in Jacksonville Beach, Florida and are open to all students studying for the exam or who just want to learn about defined benefit plans. The semester long class will be held on Saturdays March 13, April 10, April 17 and probably also May 29 from 9 am - 3 pm. Cost is $250 per student. The weekend review class will be held on Saturday and Sunday May 15 and 16 from 8:30 am - 4:30 pm. Cost is $400 per student. (Hotel rooms are available at the Comfort Inn Oceanfront for $89/night.) Please email me at lda@leading.net for more information. ------------------

To clarify Pax's comment, "freezing" a plan means ceasing the additional accrual of benefits, which may or may not reduce contributions in the freeze and subsequent years to zero. The plan sponsor is still obligated to fund the plan, but the required annual contribution is usually significantly smaller and in many cases (but not all cases) zero.

Defined benefit plans are subject to the minimum funding standards of IRC 412 and as such, contributions are required. Only profit sharing plans (which include 401k plans) can allow the employer to determine the amount of contributions, if any, to be made in any given year. Therefore, the company needs to think carefully before it adopts the plan. Be sure that the plan is designed to produce a cost that the company can expect to afford each year. If, even after careful planning and reasonable budgeting, the company cannot afford to make a contribution in any year, there are some outs. First of all, contributions may be made as late as 8 1/2 months after the close of the plan year, so maybe by that time the company can come up with the $. If the company is just short one year, the contribution can be missed and made up the next year. However, a 10% excise tax on the amount not contributed will apply. (Expensive, but that's the way it goes.) If the company realizes that it's initial estimate re how much it can afford for the plan was overstated, the plan can be designed to provide lower benefits and therefore lower future contributions. In the worst case, the plan can be terminated. Note that termination of the plan does not relieve the employer of the responsibility for making contributions for any missed prior years and that to terminate assets must be sufficient to pay all benefits earned to date. All in all, defined benefit plans involve an obligation which the company must be prepared to meet and the plan must be designed within the employer's budget. The employer must also work closely with the plan's actuary and let him know about the company's expectations so he can recommend adjustments to address issues before they have become a problem. As an actuary, I have found that sponsors who understand DB plans and work closely with their actuary are very happy with them. Those who simply adopted a plan with a big cost since they had a large profit one year and never think about the plan again except when they write the contribution checks run the risk of being very unhappy.

I presume that Client sponsors a DB plan in which leased employees participate and that these leased employees were leased from Company B for some period ending on day X and then leased from Company C from day X+1 to date. If this is the case, there has been no change in the status of these employees and they should continue to participate without change. If my interpretation of your situation is not correct, please provide more details (does the message topic "Terminated DB Plan" mean that the plan was terminated?).

You might also want to consider Sal Tripodi's The ERISA Outline Book. It is extremely thorough and detailed. We use it all the time. The ERISA Outline Book and other reference materials are available from ASPA. Call them at 703 516-9300 or check their web site for their catalog.

ASPA will be offering 2 test "Virtual Study Groups" this semester with the idea of offering more in future semesters. A "Virtual Study Group" is a group of 25 or so students plus a facilitator. The faciliator will send the students a schedule of topics to be discussed each week (generally by chapters of the ASPA course material). The students will "meet" online and discuss the topics, asking questions and answering questions of other students. The faciliator will monitor the discussions and jump in occasionally with comments or help as needed. Since this is a somewhat formal and organized study group (schedules, lesson plans) with a facilitator, study group registration will be limited and ASPA will charge students a fee. (I will be the faciliator of the the C-2DC study group.) Your proposed message boards would be a lot more informal than ASPA's virtual study groups. I think there is room for both formal and informal study groups since students have different study patterns and different ability to work online. ASPA is giving its organized approach a try this semester. I think it would great to try an informal approach like the one you suggest. I'd be glad to be on call as an "ASPA person" for questions regarding which exam to take first, what each exam covers, who to contact at ASPA and so on for the study groups. (I'd also like to take a look at the activity on your informal online study group and compare it to the formal ASPA virtual study group I will be facilitating.) Go for it!

ASPA has posted the results of the December 1998 exams on its website www.aspa.org. ------------------

How does your document provide that the money purchase contribution be limited? Most documents do not provide for such a reduction, although I know it can be done. Generally, there are two ways to define a money purchase allocation -- one is to define the dollar amount the employer will contribute by some formula and then to provide a method for allocating the contribution (sort of like a profit sharing allocation)and the other is to define how much will be contributed to each individual by formula with the employer contribution being the sum of the individual amounts. If your plan uses the first option, the amount to each participant will flow from the allocation method. If your plan uses the second method, I would expect it to define how the reduction applies to the individual allocations. ------------------