Company matches, or employer contributions to defined contribution plans, such as 401(k) or 403(b), are fundamental to help employees save for retirement. Unfortunately, the recent economic turbulence caused by the COVID-19 pandemic has put company executives under new pressure to preserve the company match to employee retirement contributions.
The financial pressure has caused several businesses, including big corporations like Dell Technologies and Hewlett Packard, to reduce, suspend, and even eliminate their retirement plan contributions. This is not the first time employee retirement plans have taken the hit for an economic downturn. Similar patterns were observed during the Great Recession, affecting around 5% of the total retirement plan participants in the U.S.
While the threats remain, the good news is that the current situation is rectifiable. Here are some actions that plan sponsors can take to cut costs and traverse these unprecedented times.
Consider Applying Plan Forfeitures
Forfeitures are determined based on the plan’s vesting schedule. Forfeitures are the nonvested part of former employees’ account balance in the company retirement plan. The unvested dollars are a valuable plan asset recorded in a separate account known as a forfeiture. Keep in mind that the plan document dictates how the forfeitures can be used – whether it is used to pay plan administrative expenses or allocated to participant accounts as an employer contribution. Therefore, be aware of document language when utilizing the forfeitures.
Before considering amendments to reduce, suspend or eliminate the company match, benefits executives should analyze the forfeiture account to determine if it can be used to fund the retirement plan’s company contributions.
Sponsors may treat the unvested dollars in an employee’s account as forfeitures after a benefit distribution has occurred and, in some cases, even if the employee has not taken a distribution. Once again, it depends on the terms specified in the plan. In many cases, unvested balances in accounts of terminated employees who have not worked for the company for more than five years, and incur a five-year break in service, can be reclassified and included in the forfeiture balance.
Scrutinize Fees & Expenses
Another potential option is to review costs related to retirement plan administration and shift some of those expenses from the plan sponsor to the retirement plan participants. This could be a short-term fix; however, it reduces the retirement plan’s investment returns. Regardless, it can help reduce the overall Company cost of the Plan as the business recovers from economic downturns.
Reviewing Plan Expenses
When companies are faced with an uncomfortable financial situation, it is a good idea to review contracts and investments to understand how these fees are applied in the plan’s expense account. Cash balances in an ERISA expense account may help you settle some of the administrative expenses. In such a case, these expenses can be applied towards the employer contribution.
The cost of the annual plan audit is one such expense that is often paid by the employer and can be allocated to the plan expense account. Similarly, other plan management costs may be recorded as administrative or corporate expenditures to reduce tax. However, during a financial crisis, the sponsor may allocate these costs to the plan participants’ accounts.
Retirement plan fees are categorized as “administrative” or “settlor.” The administrative expenses cover plan administration and investment management, such as audit fees, form 5500 filing, participant recordkeeping, fidelity bond cost, and other related expenses. On the other hand, the settlor fees cover the costs that benefit the plan sponsor such as those related to plan formation, consulting fees for plan adoption, and actuarial costs to predict expenses. Settlor fees are paid by the plan sponsor.
The Department of Labor (DOL) provides in-depth guidance on Settlor vs. Plan Expenses. However, understanding plan costs and expenses is not always easy. Benchmarking is a good practice to determine the sensibleness of the fees and costs.
It is advisable to retain an independent advisor for this purpose instead of taking it on as an internal project. An experienced independent advisor can provide insights into the plan and an unbiased view of the costs to ensure that the services are reasonably priced. If discrepancies are found, the benefits executives can investigate further to develop viable solutions that help reduce costs and expenses.
Retirement Plan Bid
An alternative to reducing the company contribution and/or passing through fees to participants is to put the retirement administration plan up for bid. The cost of retirement plan management has been going down for several years. Therefore, it does not come as a surprise that benefits executives often switch providers to reduce costs. Additionally, searching for vendors may also help identify experienced retirement plan advisors who provide exceptional services to enhance employee participation.
Putting the plan up for bid does not necessarily mean changing the service provider. The incumbent advisor is likely to introduce new services or agree to lower fees to retain business. Considering the monetary benefits, it is best to invest in fee benchmarking and put the plan out for bid every 3 to 5 years.
Windes Can Help Preserve Your Retirement Plan’s Company Matches
Windes is a leading accounting firm providing a host of Audit, Tax, and Advisory services. We specialize in employee benefit plan audits and employee benefit services geared towards helping businesses preserve the all-important company match. Our goal is to provide tailored financial solutions that enable firms to successfully navigate the pandemic and recover any losses. Contact us today to explore your options.