The financial impact of the coronavirus pandemic has put company executives under new pressure to prudently manage the cost of retirement plans and preserve the all-important employer match to employee retirement contributions.
Employer participation in defined contribution plans, such as 401(k) or 403(b) plans or a SIMPLE IRA, plays a vital role in helping employees save for retirement. The economic toll of COVID-19, however, has resulted in a growing number of companies considering or actively reducing, suspending, or eliminating retirement plan contributions. Some of the country's most well-known companies — such as Best Buy, Dell Technologies, Hewlett Packard Enterprise, and Quest Diagnostics — have suspended their 401(k) match as of last October, according to the Center for Retirement Research (CRR) at Boston College.
History, unfortunately, has repeated itself. During the Great Recession, CRR researchers identified more than 200 companies that suspended or terminated retirement plan contributions, which affected around 5% of total U.S. retirement plan participants. CRR also found that only 75% of those companies restored their match when the economy rebounded.
As much as everyone wishes it would go away, the coronavirus pandemic remains a threat to many businesses and to employee retirement savings. CPAs can play a vital role in helping plan sponsors cut costs and make the best of a challenging situation so the business can keep its company retirement plans intact. Here are several approaches to accomplish that goal:
Start with plan forfeitures
When applied correctly under the terms of a company's retirement plan, forfeiture dollars could be an invaluable source of cash — and should be the first accounts to analyze before contemplating an amendment to reduce the employer match or change contributions.
Forfeitures, for plan sponsors unfamiliar with the term, are the nonvested portions of former employees' account balances that are in a company retirement plan. Once employees who are not fully vested are terminated and take distributions, these unvested dollars are tracked and recorded in a special account in the retirement plan's accounting called forfeitures.
Benefits executives must always remember that forfeitures are plan assets. These amounts have been added to the plan balance and allocated to participant accounts. The plan document will contain language that controls how forfeitures can be used. Examples include paying plan administrative expenses or reducing employer contributions. Forfeiture dollars not applied per the terms of the plan document would be considered a breach of fiduciary duty by the employer and put the plan at risk of losing its qualified status with the IRS.
Forfeitures are tied to the plan's vesting schedule (which may be nonexistent in some safe-harbor 401(k) plans). It is not uncommon for forfeiture dollars to build up within the forfeiture account. Oftentimes, the plan's auditor will notify benefits executives that the balance needs to be allocated per the terms of the plan's forfeiture provisions.
Applying plan forfeitures
In many circumstances, plan sponsors can treat unvested amounts in a participant's account as forfeitures, even though a participant has not taken a distribution. This will depend largely on the specific terms of the plan document. A common issue centers on the unvested balances of accounts of terminated participants who have five consecutive years of break in service but have not worked for the company for more than five years. Depending on the plan's forfeiture provisions, those dollars generally could be reclassified and added to the forfeiture balance.
Plan sponsors should also review the vested account balances of terminated participants. A generally accepted best practice is to maintain accurate address and contact information for former employees who have participated in the company's retirement plan.
Administrative problems often arise when employers lose contact with plan participants and they reach the age of required minimum distributions (RMDs). A qualified plan is required to distribute these funds to those individuals. Generally, these small, vested balances can be distributed to the participant or transferred into an individual retirement account in the participant's name and the unvested portion placed in the forfeiture account.
Examine all retirement plan fees and expenses
Benefits executives can avoid taking the draconian step of ending employer contributions by reviewing certain costs related to retirement plan administration and temporarily shifting those expenses to the retirement plan. The charges would reduce participant investment returns for the short term, but preserve the employer match (and help workers save for retirement) while the business recovers from the pandemic.
Retirement plan fees are categorized by the Department of Labor (DOL) as "administrative," which cover plan administration and investment management (and can be charged to the plan), or "settlor," which cover plan formation (and cannot be changed to the plan). Examples of administrative expenses:
- Participant recordkeeping;
- Form 5500 filing;
- Employee enrollment/communications materials;
- Plan audit fees;
- Cost of a fidelity bond.
Examples of settlor expenses:
- Consulting expenses for plan adoption;
- Accounting fees to prepare disclosures in the company's financial statements;
- Actuarial costs to forecast pension expense for plan sponsor's balance sheet reporting.
Plan expense accounts are generally funded from the revenue-sharing dollars created from 12b-1 expenses (such as mutual fund marketing or distribution charges), sub-transfer agent fees, or shareholder servicing fees collected from the investments. Plan expense accounts also can be funded with credits written into the contract with the retirement plan recordkeeper.
The importance of reviewing plan expenses
Plan sponsors should review vendor contracts and investments to understand fully how these fees are applied to the plan expense account. This analysis also allows plan sponsors to determine if the fees are reasonable, which is an annual requirement on the Form 5500 filing. Cash balances that build over time in the plan expense account can help defray some out-of-pocket administrative expenses associated with the plan — which can then be applied toward the employer contribution.
One such expense commonly paid by the employer that can be easily allocated to the plan expense account is the cost of the annual plan audit that accompanies filing Form 5500. In many instances, the audit costs and similar plan management expenses are reported as corporate general and administrative expenditures to reduce federal, state, and local taxes. When cash flow gets tight, however, sponsors may be able to allocate those expenses across participant accounts.
When the plan pays expenses, the plan sponsor has an obligation to ensure that the fees are reasonable for the services being provided. In addition, the plan must clearly state that the expense is allowable. Care must also be taken to ensure that the costs are for plan administrative (and benefit plan participants) and not settlor functions that benefit the plan sponsor. The DOL provides guidance to help plan sponsors allocate plan costs correctly.
Understanding plan expenses is not as easy as it sounds because some vendor invoices can be particularly confusing. Fees are billed on a flat rate, per retirement plan participant, and/or a percentage of assets in the plan. Services also are often provided by different vendors. Further complicating the matter, fees are separated into these three general classifications:
- Administrative/recordkeeping: All fees that are not related to managing plan assets;
- Investment: Fees based on managing plan assets; and
- Advisory: Consulting fees to help manage the plan.
Under the Employee Retirement Income Security Act (ERISA), plan sponsors are not required to pay the lowest fees. Sponsors do, however, have a fiduciary obligation to ensure the fees paid are reasonable and that there is a clearly defined, objective process to validate the cost for the services rendered.
To determine the reasonableness of the fees, plan sponsors should conduct a benchmarking analysis. Retaining an independent adviser to manage the study is preferable to undertaking the project internally. Benefits executives will find it challenging to obtain current, reliable data that can be used to compare the cost of their company's plan to industry peers. An independent analysis by an adviser with a proven track record will provide plan sponsors an unbiased look at plan costs and confirm that services are fairly priced.
Invite other vendors to bid for the retirement plan
Another potential solution to lowering fees is to put the retirement plan up for bid. Fee compression during the past several years has pushed down the cost of managing company retirement plans.
Not surprisingly, more benefits executives are switching providers because of the need to lower costs, according to Deloitte. In its 2019 Defined Contribution Benchmarking Survey Report, Deloitte found that 25% of plan sponsors changed providers to reduce fees, up from 7% in 2017, marking the first time in the survey's history that cost, instead of the quality of recordkeeping services, was the number one reason for switching providers.
In addition to possibly lowering fees, a thorough vendor search may also identify retirement plan advisers who can provide better service, which in turn could help increase employee participation. A new vendor may offer improved communication and educational tools to participants that may boost employee engagement. The vendor may also offer a better selection of investments that could over time increase the amount of money employees have available at retirement.
Putting a retirement plan up for bid does not necessarily result in changing service providers. To retain the business, the incumbent adviser will often introduce new services and/or reduce fees. One important note of caution: Beware of service providers who submit bids that seem too good to be true. More often than not, the initial low fees are replaced with much higher charges after a few years of service.
Fee benchmarking and putting the plan up for bid once every three to five years are considered best practices for managing the company retirement plan. The extensive data collected through a vendor search process and benchmarking study provides plan sponsors with a better picture of plan costs and services. Armed with this intelligence, benefits executives are in a better position to negotiate lower prices (and improved services) to sustain employer contributions to the company retirement plan and help employees save for later in life.
The gut punch of the COVID-19 pandemic has resulted in a growing number of employees who have fewer dollars to save for retirement. By rethinking how plan expenses are allocated, benefits executives can play a major role helping employees build their nest egg by safeguarding the employer match to retirement plans.
— Chris W. Shankle, CPA, CGMA, is a senior vice president with Argent Retirement Plan Advisors and specializes in employee benefit plans where he assists plan sponsors with fiduciary responsibilities and plan governance. He has more than 25 years of experience of providing tax and retirement solutions. He is a member of the AICPA Employee Benefits Tax Technical Resource Panel and a former member of the Tax Executive Committee. To comment on this article or to suggest an idea for another article, please contact Sally Schreiber, senior editor, at Sally.Schreiber@aicpa-cima.com.
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