Alternatives to Terminating a Retirement Plan

Once you understand the steps required for terminating a retirement plan, you might consider other alternatives.  Depending on your pain points, we’ve outlined some suggestions for your consideration before taking the drastic step of terminating your Plan.alternatives to terminating a retirement plan

 

CUT CONTRIBUTIONS :  Depending on the type of Plan that you have, you may be able to suspend employer contributions until business improves.

  1. 401(k) Plans – Employer match, and/or Profit Sharing contributions may be suspended.  Contributions for future payroll this year can always be discontinued, and sometimes the suspension can be for the full year.
    • Safe Harbor contributions can only be suspended at the beginning of a Plan year.  Small businesses should remember that after a suspension of Safe Harbor contributions, you will no longer be exempt from the compliance tests required for your Plan and top-heavy minimum contributions (3% of compensation) may still be required, so the Highly Compensated Employees payroll deductions may be limited.
  2. Profit Sharing Plans – Profit Sharing contributions can be suspended for several years without consequence.  The IRS regulations say that contributions must be “significant and recurring,” however given a down business cycle if their profits are down the contributions are likely to be down as well!
  3. Defined Benefit and Cash Balance Plans – Pension plan funding has been given some additional leeway under recent legislation.  If your Plan has been well funded in the past, the minimum contribution may be zero in the current year.  Then when you return to profitability, you may be able to contribute up to 150% of your contribution liability.
    • Pension plans may also be frozen.  Freezing a pension plan essentially stops all future benefits from accruing.  Contributions made after freezing benefits are used to either restore Plan losses or to reduce future contributions.  The Plan can be unfrozen at any time.  It is important to note that you can only freeze future accruals. If the participants already have 1,000 or more hours in the Plan year, you can only freeze benefits for the next Plan year.

 

Summary – Profit sharing plans have always offered discretionary contributions, and defined benefit plans have recently been allowed some funding flexibility.  Why not continue to offer the elective deferral for the 401(k) without any employer funding until things turn around? Click here to request a free review of your Plan’s contribution alternatives.

 

REDUCE FEES :  There are a variety of fees charged to qualified retirement plans:  investment management fees, custodian fees, transaction fees, recordkeeping fees, administration and possibly audit fees.  One cost-saving measure is to use the Plan assets to pay all Plan-related fees to save out-of-pocket expenses.  Of course, what the company doesn’t pay for, you’ll be paying for with your account balance in the Plan.  And if you elect to have fees paid out of the Plan, the Plan document must allow for it, and your Plan participants must be advised that fees will be charged.

 

  1. Investment-related charges – Generally, the fees for services provided by investment custodians and managers are charged against plan assets.  The rate at which these fees are deducted is disclosed in the prospectus and/or contract.  In the new Participant Fee Disclosures required beginning in 2012, fees must be illustrated as a dollar cost for every $1,000 invested.  Ask your investment representative to review your Plan assets.  Get an understanding about what the dollar amount being charged is, and work together to determine if there are ways to reduce any of those fees.  Anything you save here may be used toward other fees without increasing costs to the participants.
  2. Administration fees – Annual administration services are necessary to confirm that your Plan meets the rules and regulations outlined by the government for qualified plans.  Your Third Party Administrator (TPA) will review your employee records, check contribution limits, perform non-discrimination testing, confirm trust activity and prepare financial statements for the Plan assets.  Administrators also prepare required reporting (Form 5500) and maintain the Plan document to keep it up-to-date.
    • Provide your TPA with good records in electronic format promptly, and confirm that the TPA can receive reports directly from your investment custodian.  Anything you can do to streamline the TPAs work may avoid additional fees.
    • If you have been paying administration fees as a company expense, consider using Plan assets to pay the fees.  Many plans charge participants for requests that they make (distribution and loan processing, for example) but did you know that all of the administration fees can be charged against the Plan?  You can charge the Plan in one of three ways:
      • Forfeitures – use Plan forfeitures to pay fees
      • Per-capita – charge a flat fee to each participant’s account
      • Pro-rata – charge the fees to each participant’s account based on their account balance
  3. Audit fees – If the number of eligible participants in your Plan is over 100 you may be required to have an independent CPA auditor’s report attached to your Plan’s Form 5500 filing.  These audits often start at $8,000-$10,000 per year.  Again, Plan assets can be used to pay these costs.
    • If you have fewer than 200 employees, one consideration for avoiding the audit costs is to split your Plan into two side-by-side Plans; each under 100 participants.  The Plans are tested together as one Plan, and the assets could remain in one trust. There would be two documents, and two 5500 filings each year, but often the additional administration expense is less than the cost of an audit.

Summary – Plans can be self-sufficient and can be structured to minimize the company’s out-of-pocket costs.  Understand what services are being performed, and what fees are being charged for each of those services.  Spending a little bit of time performing this analysis will help you better understand the true cost of your Plan.  Click here to request a free consultation about how you might be able to reduce fees in your Plan.

REDUCE TIME SPENT ON THE PLAN : If your office staff is stretched thin when it comes to Plan-related functions, talk to your TPA or your investment advisor.  Many custodians have developed time-saving methods through which some of these functions are processed.

  1. Web-based solutions – Many investment custodians offer everything online: remitting contributions, processing distribution and loan requests, generating statements, and so on.  These new systems save time and money over the old paper-driven processes that you may still be using.
  2. ACH debit – Instead of cutting a check to remit your contributions each pay period (for 401(k) plans) ask your investment advisor if the custodian offers an automatic debit feature.  So when you upload your payroll file to the custodian website, the funds are automatically withdrawn from your checking account.  No lost checks, no delay, no mismatched amounts!
  3. Outsource – If you have a part-time bookkeeper, perhaps he/she could remit the 401(k) contributions for you.  Or talk to your payroll provider; perhaps they could provide an electronic report so that the remittance process is simpler and faster for your internal payroll processor.  Click here to request information about our back-office support platform called VistaCore.
  4. Download data – Census data requests don’t have to take days to complete.  Use the download feature from your payroll provider and/or HR system to put together a simple spreadsheet or text file for your TPA.  You shouldn’t have to complete theirs as long as our file includes all of the the necessary data fields. 

Summary – 401(k) investment custodians are updating their platforms regularly and providing enhanced services.  Talk to your investment advisor to make sure that you know what services are available to you to save time spent on your Plan.

Retirement plans are not programs that can be started and stopped easily.  So take some time.  Talk to your advisors.  Examine your alternatives first.  Click here if you would like to discuss some of these ideas with our consultants.

 

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