Defined Benefit Plans
Does your CU have a defined benefit plan? If so, congratulations. You are part of a group of employers who offer employees the security of a guaranteed income in retirement. While defined benefit plans can be costly, they are highly valued benefits to your employees, especially senior managers. Although less than 25% of credit unions offer a defined benefit plan to their employees, their plans are generally more generous and well funded than national averages. The following chart compares standard features of financial service firms' defined benefit plans with national averages. How does your defined benefit plan compare?
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Defined benefit plan features
|
CUs and
community banks*
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National
averages**
|
|
Average accrual rate
|
1.75%
|
1.5%
|
|
Number of years of final salary used to calculate benefit
|
3 or 5
|
6
|
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Early retirement reduction factor
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Subsidized benefits
|
Reduced benefits
|
|
Lump sum distribution option?
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Yes (more than 50%)
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No
|
|
Post-retirement increment
|
Yes (57%)
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No
|
|
Social security integration
|
No (85%)
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Yes
|
|
Average funding ratio
|
85%
|
83%
|
* Pentegra Retirement Services Bank DB Survey, based on internal data covering 259 banks and other financial institutions.
** Pension Benefit Guaranty Corporation Survey and Watson Wyatt “ Accounting for Pensions and Other Postretirement Benefits.”
Defined contribution plans
Most financial services employers offer a 401(k) plan. In fact, financial services companies are usually more generous than the average plan sponsor. Over 80% of credit unions offer some form of a defined contribution plan such as a 401(k) or profit sharing plan. The following chart compares financial services firms' plan features against national averages for defined contribution plans. How does your plan measure up?
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Defined Contribution Plan features
|
Other CUs and
community banks*
|
National averages**
|
|
Average employer contribution
|
3.2%
|
3%
|
|
% of plans that make employer
contributions
|
90%
|
77.5%
|
|
Average participation rate
|
90%
|
75%
|
Vesting schedule:
- Immediate vesting
- 6 months or more |
30%
70%
|
25%
75%
|
|
Number of investment options
-Asset allocation funds?
|
15
Yes
|
14
|
|
Investment cost to participant
< 100 basis points
> 100 basis points
don't know/other
|
100%
|
37%
17%
46%
|
|
Cost to plan sponsor
< 1% of plan assets
> 1%
don't know/other
|
100%
|
50%
19%
31%
|
* Pentegra Retirement Services Bank DC Survey, based on internal data covering 264 plan sponsors and nearly 20,000 participants.
** Profit Sharing/401(k) Council of America Annual Survey
Are you meeting your fiduciary responsibilities?
Retirement plans carry fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA) administered by the Department of Labor (DOL) and IRS regulations.
Did you know that breach of fiduciary duties can result in personal liability for plan losses?
If you are your plan's fiduciary, use this checklist to make sure you are following best practices.
- Appoint an individual or committee to be named fiduciary(ies).
- Establish an Investment Policy Statement that covers investment objectives, selected investments to meet investment objectives, and process for periodic review and documentation of investments.
- Provide multiple investment options, diversified by risk and return characteristics.
- Give at least 30 days' notice for a blackout period for a change in plan provider.
- Furnish a Summary Plan Description (SPD) to participants outlining the plan.
- Provide information about each investment option.
- Provide educational information about investing and asset allocation to help participants make informed decisions.
- Provide convenient access to account information.
- Make sure employee salary contributions are invested in a timely manner.
- If you allow loans, make them available to all participants on a reasonably equivalent basis, at a reasonable rate of interest and have them adequately secured.
- Prepare Form 5500 Annual Return/Report and perform other filings and tests.
- Prepare Form 1099-R with the IRS for participants who have taken distributions.
- Provide ongoing investment education, such as newsletters and enrollment meetings.
- Provide individual benefit statements upon written request and at least annually.
- Furnish Summary Annual Report (SAR) to participants.
Source: Based on information provided in US Department of Labor booklet, “Meeting your Fiduciary Responsibilities”, www.dol.gov/ebsa.
Pentegra Retirement Services was founded as a not-for-profit cooperative in 1943 by the Federal Home Loan Banks to manage retirement benefits. Today it administers over $4 billion in assets for community based financial services firms nationwide and is the NAFCU Services Preferred Partner for qualified retirement plans. Pentegra acts as the named fiduciary for plans under its administration for both plan investments and plan administration. For more information about Pentegra Retirement Services visit www.pentegra.com or call David Brown , 770-579-8754.