When it comes to plan design, sponsors sometimes don’t know what they don’t know. Maybe you’re not sure if your plan actually operates in full compliance with its design provisions, or even if you’re using the right plan design options to help your employees get retirement ready.
I get it entirely if you haven’t had time to study your plan’s documents in depth or keep track of all the changes with retirement plan regulations and plan design best practices. This stuff is incredibly complicated, and you’re probably already overburdened and wearing a lot of hats in your job. But it’s important to keep an eye on plan design and compliance for several reasons: to understand what your plan document says; to know that your operational processes are set up correctly; and to revisit your plan design regularly to make sure that it continues to meet the goals of your organization and your employees.
I joined ARP this fall, and I’ve worked on plan design issues for nearly 20 years, most recently as a Principal/Relationship Manager with the third party administrator Qualified Plans, LLC, an Ascensus Company. As a Retirement Plan Consultant at ARP, I’ve got a two-fold focus on plan design:
- Helping sponsors operate their plan in compliance with its plan design provisions as well as current laws and regulations, and
- Helping sponsors take a regular, strategic look at how plan design can help their employees better prepare for retirement.
Preventing Compliance Snafus
Let’s talk first about helping sponsors address their plan compliance issues. I’ll give you two quick examples of common problems, and how you can strive to prevent them.
Using an incorrect definition of compensation:
This is one of the biggest issues in plan compliance. Your plan document spells out the definition of compensation you should use to calculate employee deferrals and the employer match. It tells you things like whether the calculations should include bonuses, how to handle post-severance compensation, and fringe benefits and other compensation. This language can be confusing and plan sponsors unintentionally end up misdefining compensation, so the deferral and related match formulas are set up incorrectly with the payroll provider. That means the deferral and match amounts are wrong which could lead to additional corrective employer allocations down the line.
This is a whole lot of hassle I can help you avoid by working with you to understand your plan document’s definition of compensation, and make sure your payroll provider uses that definition to set up employee and employer contributions. The first thing I like to do with a new client is walk the sponsor through the plan document. Yes, it’s true that plan documents are easy reading if you want to go to sleep at night—but that’s why I like to sit with the sponsor and point out the document’s key features. I also can work with your payroll provider to make sure that any current problems are fixed.
Failing testing due to design issues:
Failing nondiscrimination testing usually relates to problems with plan participation. We can talk about your options on how to fix that. You can change to a safe harbor plan design, which may increase current employer allocations but eliminates the need to pass nondiscrimination testing and possibly help employees get closer to preparing for retirement. You can shift the eligibility for your plan, allowing employees to participate sooner. If you haven’t added automatic enrollment and auto escalation already, I can show you examples from other employers so you can see how these design features do help significantly. And moving to a stretch match gives participants the incentive to contribute more, so they get the full employer match.
Doing the Deep Dive
At least once a year, I like to take an in-depth look at a plan’s current design and utilization with the sponsor. Sometimes I do it more often depending on the situation, such as if your company is considering an acquisition or had a significant change in the size or demographics of your work force.
We can work with your provider(s) to pull together the data on your employees’ current utilization of the plan, and talk at our meeting about what it shows. Has participation dropped in a particular employee segment? I can walk you through the ways to kick-start participation. Have participant behaviors changed in any important ways, like a big jump in new loans? I can guide you in figuring out how to use plan design or education to help.
At these meetings, I also like to hear about how satisfied you feel with the plan’s current design and your participants’ current projected outcomes to see if there is a better use of plan design to gradually move your participants closer to retirement readiness. We can work together so they’ll feel confident that when they retire, they’ll be able to live comfortably. And we can make plan design as smooth as possible for your company, saving you time and money, and enhancing a major employee benefit for everyone.