Bumpy Times: Retirement Plan Shifts?



Retirement plan experts remind plan sponsors that market volatility makes it extra important to review plan investments. Additionally, as cost curtailment becomes a reality for some businesses, experts share tips on how to make changes in the event the retirement plan needs to be adjusted.


Consistent Review—and Action Too

Though it is an ongoing fiduciary responsibility of plan sponsors to ensure participants are benefiting from the plan, market volatility makes it extra important to consistently review investments, document decisions and take action on needed changes. Experts at JD Supra urge:


In light of ongoing market volatility, plan fiduciaries should review plan investments and investment policies on a consistent, periodic basis. Decisions should be documented (for example, in meeting minutes of the plan’s investment committee), and should be consistent with the plan’s investment policy statement and applicable procedures. Plan fiduciaries should also work with their plan investment advisors to determine whether any changes to the plan’s investment line-up or investment policy are advisable. 


If cost controls point the business toward suspending or eliminating the 401k’s employer match or profit sharing options, proceed with caution. Changes must be in line with the plan design:


Employers that sponsor safe harbor 401(k) plans must make annual contributions to be exempt from certain nondiscrimination testing requirements. Applicable regulations generally provide that plan sponsors of safe harbor plans can suspend these contributions only if the employer is operating at an economic loss, or if the annual safe harbor notice provides that the employer can suspend such contributions. If so, plan sponsors must issue a notice describing the change 30 days before the effective date of the change. A mid-year suspension will also require the plan sponsor to conduct certain nondiscrimination tests for the plan year in which the change occurs.


401k plans that are not set up as safe harbors allow plan sponsors more flexibility when it comes to making adjustments related to the employer contribution arrangements. However, compliance with pertinent ERISA and IRS regulations remains a must. Legal experts at Goodwin explain:


If the employer contribution is purely discretionary (for example, if the plan sponsor simply declares its contribution, if any, at the end of each plan year) then a plan amendment may not be required. Otherwise, employer contributions may be adjusted prospectively via plan amendment. Note, however, that ERISA and the Internal Revenue Code contain strict provisions regarding the elimination or cutback of benefits that may have accrued to participants. It is important to consult with legal counsel prior to making any employer contribution changes, as additional considerations may apply regarding impermissible cutbacks and mid-year vested benefits.


Bumpy, change-filled times, by their very nature, increase the possibility of plan sponsor errors in administering the retirement plan. That’s why fiduciary liability insurance is a best practice. Remember, only fiduciary liability insurance protects plan sponsors in the event of mistakes carrying out their duties under the high standards of ERISA law.  In fact, without coverage, even a mere allegation of a fiduciary breach can be ruinous for plan sponsors. Consider, for example, that defense costs alone are about $600 per hour. Since these days a fiduciary breach can arise from even a relatively minor cybersecurity incident, Colonial Surety offers an affordable Fiduciary-Cyber Liability Pack for plan sponsors. Armed with this protection, you’ll have:


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Reduction In Force?

Given the challenges of hiring and retaining employees, most companies are working hard to navigate around the need for cutting staff, despite the challenges posed by the economy. Should your business consider reducing the headcount, keep in mind that there may be consequences for the retirement plan. The experts at JD Supra point out:


Generally, a “partial plan termination” occurs when more than 20% of a plan’s participants have an employer-initiated severance from employment, even if the involuntary termination of employment is caused by reasons beyond the employer’s control (such as an economic downturn). An employer-initiated severance from employment is generally any involuntary termination of employment other than death, disability or retirement on or after normal retirement age….Affected participants must be fully vested in all amounts credited to their accounts, and in all benefits accrued up to the date of the partial termination….For this purpose, “affected participants” include all participating employees who had a severance from employment during the applicable period, even if they voluntarily terminated employment….Employers should work with their legal counsel and other advisers to determine whether their retirement plans have had a partial plan termination, and if so, which participants require an acceleration of vesting. 


Plan sponsors and service providers navigating employee turnover must be diligent about the protocols for recording employee termination dates. Accurate records are critical to the subsequent execution of a multitude of plan provisions. This compliance summary is a helpful reminder about diligence related to employee terminations.


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