This is the first article of a three-part series that provides guidance for plan sponsors who are faced with cash flow pressures at their business. (You can find the second article here and the final one here). The goal of the series is to offer alternative solutions to consider before reducing employer contributions to participant benefit accounts.
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, play 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 Enterprises and Norwegian Cruise Lines – had suspended their 401(k) match as of June 18, 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 five percent of total U.S. retirement plan participants. CRR also found that only 75 percent of those companies restored their match when the economy rebounded.
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.
How the federal government classifies retirement plan fees
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.
The one-two punch of the COVID-19 pandemic and rising healthcare costs has resulted in a growing number of employees who have fewer dollars to save for retirement. By re-thinking 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.