This document discusses 10 things credit union executives need to know about pensions and 401(k) plans. It covers topics such as how interest rates impact defined benefit and defined contribution plans, the risks of bad tax reform proposals, how fiduciary outsourcing can save time and money, and that the primary source of fiduciary risk is plan administration rather than investments. It also discusses how most plans can cut costs by at least 20% through lower fees, ways to run a plan that is above reproach, steps fiduciaries can take to mitigate liability, issues with fee disclosure requirements, the complexity of how pension costs affect financial statements, and developing a proactive plan to terminate a pension in the lowest risk and cost manner.

1. 10 THINGS CREDIT UNION EXECUTIVES NEED
TO KNOW ABOUT PENSIONS AND 401(K)S
Our difference is your advantage
Pete Swisher, CFP®, CPC
Senior Vice President
National Sales Director
Pentegra Retirement Services
November 15, 2012
OUR DIFFERENCE IS YOUR ADVANTAGE

2. BACKGROUND
 Focus of book: fiduciary
governance
 National Association of Plan
Advisors (NAPA) Government
Affairs Chair
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3. ABOUT PENTEGRA
 Founded in 1943 as a not-for-profit cooperative
serving the Federal Home Loan Bank system
 One of the nation’s top pension managers (top 10% in
S&P Money Management Directory)
 Nearly 70 years’ experience with full fiduciary
outsourcing through its unique Multiple Employer
Plans for financial institutions
 Retirement plan service provider for nearly 10% of all
banks and credit unions in the U.S.
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4. 10 THINGS
No. 1: Interest rates
No. 2: Tax reform done badly
No. 3: Fiduciary outsourcing
No. 4: The primary risk
No. 5: Most plans can cut costs 20% or more
No. 6: The irreproachable way to run a plan
No. 7: Fiduciaries can and should protect themselves
No. 8: Fee disclosure is not fee clarity
No. 9: How pension “cost” hits your financials is tricky
No. 10: Cheapest way to terminate a pension plan
No. 11 (bonus): Don’t terminate, redesign
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5. No. 1
Interest rates can’t get much
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lower…honest
Defined benefit (DB) pension plans will
get cheaper as rates go up.
Defined contribution (DC) participants
will likely handle rising rates the same
way they have historically—badly.
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6. Source: What Drives The Bond Market?
Chicago CFA Handout by Bianco Research LLC, 1/18/2011

7. IMPLICATIONS OF RATE ENVIRONMENT
 The perfect storm for DB plan funding cost is over
 As rates rise DB plans get cheaper
 2% rate increase takes a plan that is 80% funded to
100% funded
 Lower rates are possible but there’s not much
room between here and zero—new cost burdens
are therefore increasingly unlikely
 Now is the time to plan for the future of your
pension program
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8. No. 2
Tax reform done badly is bad for
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everyone…and is being considered
If contributions are no longer deductible
people will contribute less.
Less savings means greater strain on
public systems such as Social Security,
Medicaid, and Food Stamps.
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9. BAD TAX REFORM
 Sampling of proposals:
 Bowles-Simpson “Zero” option and 20/20 option
 Transfer payments via refundable tax credits
 Result: retirement saving decreases significantly, including
among the lowest income earners
 8-24% reduction in long term savings per EBRI Issue Brief No. 364
 Less savings means more pressure on government spending
in the future for Social Security, Medicaid, Food Stamps,
and other social insurance programs
 Why it’s being considered: higher taxes packaged as flatter
brackets as part of a plan to reduce deficits
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10. “HOW AMERICA SAVES”
(visit asppa.org)
 62% of tax incentives are received by households with AGI
less than $100,000
 EBRI estimates a 14% reduction in retirement savings under
the 20/20 proposal for younger workers in the lowest
earnings quartile; the loss is 24% under the “zero option”
 72% of low and moderate income workers participate in a
plan when offered at work but only 5% save in an IRA when
there is no workplace plan
 78% of full-time workers have access to a plan at work
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11. No. 3
Fiduciary outsourcing can save time,
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money, risk, and headaches
Most credit unions serve as Named
Fiduciary, Plan Administrator, and Trustee
(or “direct” the Trustee), but could
outsource instead.
Outsourcing means less work and less risk.
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12. WORKLOAD FOR COMPANIES WHO
HOLD ONTO THE FIDUCIARY ROLE
 4-5 two-hour meetings per year for 3-5 people, usually
senior people, with preparation and follow-up between
 A host of minor tasks such as approving and documenting
hardships, QDROs, and other distributions
 Auditor selection and oversight and coordination of the
audit; preparation of plan financials
 Checklists and processes (or ignoring the details)
 Focusing on details instead of the big picture
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13. CASE STUDY
 CFO fills Administrator role and is very experienced
 CFO retires and successor knows less about plans
 Auditor discovers two defects
 Burdens as described by new CFO: learning curve, anxiety,
direct costs of correction (IRS user fee, legal fees, penalties
and interest), “huge time cost”, anger
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14. No. 4
The primary source of fiduciary risk is
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administration, not investments
Very few ERISA lawsuits are about
retirement plan investments.
The overwhelming source of trouble for
retirement plan sponsors is administration.
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15. STATISTICS AND SURPRISES
 10,002 Forms 5500 audited
 5,973 VCP agreements
 3,472 DOL civil investigations closed
 75% resulted in payment
 Average $397,000
 255 cases referred for litigation by DOL, 75 convictions
 8,860 ERISA lawsuits
Sources: 2011 data from IRS and DOL websites
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16. The IRS Top Ten List
of Common VCP Submissions
1. Failure to amend for tax law changes
2. Incorrect definition of compensation
3. Failure to include eligible employees or exclude ineligibles
4. Loan errors
5. Impermissible in-service withdrawals
6. Required Minimum Distribution errors
7. Employer eligibility failure
8. ADP/ACP failure not timely corrected
9. Failure to provide minimum top heavy benefit
10. Exceeding maximum contribution limits
From the IRS Website at http://www.irs.gov/retirement/article/0,,id=155383,00.html
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Copyright 2012 Pentegra

17. TWO WAYS TO GET OUTSOURCING
 Pentegra’s Multiple Employer Plans (MEPs)
 Pentegra’s Full Fiduciary Outsourcing program
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18. No. 5
Our difference is can cut costs
Most plans your advantage by at least 20%
Most plans can cut costs but probably shouldn’t do
so: the point is to recognize that it’s possible and to
have a fiduciary rationale for your approach.
Indexing, advisory “right-sizing,” and affordable
recordkeeping options are the cost drivers.
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19. SMALL 401(K) CASE STUDY
Cost Item Current Net Cost Possible Cost
Funds .50% .09%
Recordkeeping .75% .60%
Advisor .40% .30%
Total 1.65% .99%
Remember that the point of these illustrations is not that cheaper is better but
that the existence of cheaper alternatives requires you to have a rationale.
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20. LARGE 401(K) CASE STUDY
Cost Item Current Net Cost Possible Cost
Funds .35% .09%
Recordkeeping .35% .22%
Advisor .20% .07%
Total .90% .38%
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21. DEFINED BENEFIT CASE STUDY
Cost Item Current Net Cost Possible Cost
Investment Fees .35% .09%
Admin/Actuary .35% .26%
Advisor .40% .25%
Total 1.10% .60%
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22. WHY 20% SAVINGS IS NOT A STRETCH
 Fund expense is the primary cost driver and indexing is
always a valid option
 “Right-sizing” the services of an advisor can raise or lower
cost; the emphasis here is less on cost and more on what
you get for what you pay
 Productivity gains in recordkeeping and administration are
not always passed on to clients: again, the question is what
you get for what you pay
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23. WHY CHEAPER MAY NOT BE BETTER
 Cheaper is neither better nor legally required
 What is required is that you choose your mix of services
wisely and pay fair prices for those services
 Full fiduciary outsourcing is more expensive than basic
recordkeeping; active management costs more than
indexing; handholding and employee advice cost more
than occasional group education; excellence costs more
than mediocrity. You get what you pay for. Just make sure
you know what you’re getting.
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24. No. 6
There is an irreproachable way to run a
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retirement plan
Focus on best fiduciary practices, best
outcomes for participants, and paying
precisely the correct price to achieve them.
“Irreproachable” is not the same as “best.”
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25. PROFILE OF A PLAN NO ONE CAN
CRITICIZE
 “Cheapest to Deliver” or CTD investing
 “10 of 10” fiduciary governance
 Great participant outcomes
Note the emphasis here on what can be criticized: what may
be best for you and your employees goes beyond what
others think. Service, for example, obviously matters.
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26. No. 7
Fiduciaries can and should take steps to
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mitigate their personal liability exposure
Understand what you’re getting yourself
into when you accept fiduciary status.
Follow the four part program.
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27. What happened to Ayres
“…[w]hile we are not unsympathetic to his burden, we note that
fiduciaries may be insured for this type of liability. It would appear
that prudent fiduciaries would have their plan or employers secure
such insurance. In any event, when we consider the overall
purposes of ERISA as a remedial statute designed to protect the
interests of employees in pension plans…we believe the
participants’ rights are the ones entitled to protection.”
From the court opinion in Barker v. American Mobil Power Corp., in
which the court imposed a large financial penalty on a defendant
named Ayres for a breach by Ayre’s predecessor that Ayres failed
to notice and correct.
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28. Four-Part Program for
Mitigating Fiduciary Risk
 Outsource the Named Fiduciary, ERISA Sec.
3(16)(A) Plan Administrator, and Trustee roles to
a regulated financial institution who specializes
in fiduciary management of qualified plans.
 Hire an independent advisor to help oversee the
plan fiduciary
 Buy fiduciary liability insurance
 Insist on an indemnification agreement
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29. CASE STUDY: PENTEGRA’S MEPS
 Non-recourse fiduciary liability insurance
 Full fiduciary outsourcing
 CEM Benchmarking retained by the plan’s Board of
Directors to study Pentegra’s costs and services versus the
marketplace
 An independent fiduciary approves Pentegra’s fees
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30. No. 8
Our difference is your is not fee
Fee disclosure advantage clarity
There are three separate disclosures and
they never match.
Sponsors still have a hard time answering
a simple question: “What am I paying,
and what am I getting for it?”
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31. THREE LOCATIONS FOR FEE DATA
 408b-2 disclosure to plan sponsor and fiduciaries
 404a-5 participant disclosure
 Form 5500 Schedules A and C
 If you study all three you will find no consistency because of
how the regulations are written
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32. No. 9
What a pension plan “costs” is not the
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same as how it affects your financials
Pension costs are a future unknown that
actuaries can only estimate.
The rules for booking the costs are
complex and often seem to bear little
relation to the actual flow of dollars.
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33. HOW PENSION COSTS HIT THE FINANCIALS
 You don’t necessarily recognize pension contributions as
an expense when you make them.
 Unrecognized contributions pile up (“prepaid” expenses).
 If you terminate with a large prepaid you take a big hit to
earnings.
 Remember that the cost is what it is, but how the cost is
accounted for is something else entirely. Managing the
financials is generally as important to credit unions (or more
so) than managing the cost.
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34. CURRENT FUNDING STATS
ERISA Funding
Assets $6.7 million
Liabilities $7.6 million
Actuarial Shortfall $900,000
Termination Liability $9.9 million
Termination Shortfall $3.2 million
Accounting Treatment
Prepaid Expense $4 million
Ideal Annual Expense $350,000
Current Expense $450,000+
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35. CURRENT ANNUAL EXPENSE
Interest on $6.7 million assets at 2.75%
= $185,000
Interest on $7.6 million liabilities
= $368,000
$5 million AOCI amortized over 15 years
= $284,000
Total: $467,000 per year
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36. ANNUAL EXPENSE AT 110% FUNDING
Interest on $8.3 million assets at 6%
= $500,000
Interest on $7.6 million liabilities
= $368,000
$5 million AOCI amortized over 15 years
= $284,000
Total: $152,000 per year based on $1.7 million contribution
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37. ANNUAL EXPENSE AT 154% FUNDING
Interest on $12.7 million assets at 6%
= $762,000
Interest on $7.6 million liabilities
= $368,000
$5 million AOCI amortized over 15 years
= $284,000
Total: -$110,000 per year ($110,000 of income) based on $6
million contribution
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38. No. 10
There is a cheapest, lowest risk method
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for terminating a pension plan
There is such a method but it is impossible
to predict. But it is possible to develop
and implement a plan for getting as
close as possible. Be proactive.
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39. LEAST COST PENSION TERMINATIONS
 Proactive Plan: 0, 3, 5, 10, 15 year windows
 Opportunistic approach based on an annual review of
capital market forecasts, interest rates, and annuity costs
 Rule of thumb approach to estimating termination liability
(“street liability”)
 Annuities are more expensive than lump sums and long
term management may be cheapest of all
 The plan must manage the impact on credit union
financials
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40. No. 11 (Bonus)
DON’T TERMINATE: REDESIGN
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For participants there is no comparison:
DB plans are better in nearly every way.
But the cost and cost volatility are what
kill these programs. Solution: redesign,
don’t terminate.
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41. DEFINED BENEFIT VS. DEFINED CONTRIBUTION
 46% lower cost to deliver a given benefit
 Sources of savings (from “Better Bang for the Buck,” a
National Institute of Retirement Security study, 2008):
 15% Longevity risk pooling
 5% diversification and investment balance
 26% superior investment returns
 Numerous studies over the years have confirmed the DB
performance advantage. Globally the source is believed to be
the “self-direction penalty.”
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42. Global Perspective

43. CLOSING RECOMMENDATIONS
 Outsource
 Know what you’re paying and what for. Avoid paying
premium prices without demonstrable benefits.
 Be proactive. Examine your program design and look for
ways to make it better.
 If you have a DB pension plan, proactive planning is
especially important. Redesign if costs are too high.
 Rely on Pentegra.
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44. THANK YOU!
Our difference is your advantage
Pete Swisher, CFP®, CPC
Senior Vice President
National Sales Director
Pentegra Retirement Services
pswisher@pentegra.com
OUR DIFFERENCE IS YOUR ADVANTAGE