Are 401k Plan Goals Really an Employer Responsibility?

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Many companies see their 401k plan as a burden. It can easily become a valuable tool to attract and retain top talent. Proper plan design makes a huge difference to plan success. These services can and in most cases should be outsourced to professionals.

Are 401k Plan Goals Really an Employer Responsibility?

Some employers do not believe it is their responsibility to ensure their employees’ well-being in retirement. Many adopt the philosophy that “we provide the 401k plan, and [in most cases] a matching contribution, and we provide for plan management and incur fiduciary responsibilities….isn’t that sufficient?”

However, a significant number of plan sponsors are concerned about their employees’ retirement readiness. These are the sponsors who are interested in considering ways to improve the successful outcomes of their plans.

Some of the potential solutions require a commitment of time, effort, and additional cost. But few (if any) of the solutions require costs equivalent to those incurred if employers still offered defined benefit plans. In other words, an employer need not incur all the time, effort, cost, and complexity of a defined benefit plan, but neither need they offer a less-than-impactful 401k plan. For sponsors desiring more inspired outcomes, solutions exist within the 401k and 403b world.

For companies to compete in the future they will need skilled employees. A properly managed qualified retirement plan can help attract and retain top talent.

Please comment or call to discuss how this can help your company compete.

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Plan “Symptoms” that it’s time for a Review

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Plan sponsors must begin taking their 401(k) and all qualified plans more seriously or the government will. This may sound like a threat, however if you could go back and do something to prevent the current health carewould you? Now is your chance with retirement plans.blockquote class=”posterous_long_quote”>So while all plans should be reviewed, there are some plans with more glaring problems than others. These plans may have symptoms that the plan isn’t running correctly and should immediately undergo a plan review.

  1. A plan where the third party administrator is not transparent on fees, especially when it comes to indirect payments they receive, such as revenue sharing payments from mutual funds.
  2. A company that has a profit sharing and money purchase plan that covers the same group of employees.
  3. A plan that has consistently failed their discrimination testing, whether it’s the tests for salary deferrals, top heavy, match or 410(b) participation.
  4. A defined benefit plan which is underfunded.
  5. A defined benefit plan for a company that has increased their workforce.
  6. Any plan with no financial advisor.
  7. A money purchase plan that is covering non-collectively bargained employees.
  8. Any 401(k) plan that has not reviewed their contract with their insurance company provider in the last 5 years.
  9. Any plan without an investment policy statement.
  10. Any plan that has not reviewed their choice of investments in the last year.
  11. Any plan that has not seen their financial advisor in the last year.
  12. Any plan without an ERISA bond and/or fiduciary liability insurance.
  13. A 401(k) plan with low participation or low average account balance per participant.
  14. Any plan that has not been updated in the last 2-3 years

This is a good guideline for plan sponsors to follow. Unfortunately many sponsors will delay or ignore this review until it is too late.

Please comment or call to discuss how a review would help your plan.

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Show off your defined benefit plan, experts say

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There are excellent alternative retirement plans which will attract and retain top talent. Potential employees are beginning to look for retirement plans with a hands off approach. They would prefer to have professionals make the choices.

“Employers shouldn’t put all of their money into private equity because that was delivering huge returns at one point, but then it just collapsed,” Mohindra says. “At the same time, you don’t want to put everything into bond funds, which would basically earn very meager returns. That wouldn’t give them what they need.”According to a recent study by the Employee Benefit Research Institution, defined benefit plans have been on a steady decline since 1979 compared to its counterpart, defined contribution plans. While this decline may be true, Mohindra wouldn’t be surprised to see defined benefit plans grow in popularity because they pose less individual risk.

“I think the pendulum has probably swung too far in the direction of defined contributions, so the individual is at risk now,” Mohindra says. “With defined contribution plans, the employer has devolved to risk to the employee and only bares administrative costs, but companies can draw the top talent they need for the long term by offering them a better deal regarding their retirement arrangement.”


There are alternatives to the traditional defined benefit plan that many employers including small employers can implement to attract talent.

Please comment or call to discuss how this might affect your organization.

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Hybrid Pension Plans on the Rebound

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The cash balance plan works very well with companies experiencing steady cash flow. This can be a differentiator when looking to attract and retain talented employees. Given the recent volatility many employees are seeking stability. The cash balance plan can provide this stability.

Hybrid plans have become more popular because they offer employees the security of an old-fashioned DB plan and the portability of a 401(k).”The trend over the past 20-plus years, particularly the last 10 years, was for sponsors to move away from traditional defined-benefit plans because of the volatility of cost and the volatility of the effect on their financial balance sheet,” Young says.

With the significant market declines over the past decade, many employers have switched primarily to 401(k)s. But now that the hybrid regulations have been clarified, employers may give pension plans a second look — in the new, improved form of the < cash-balance plan.

The portability of the hybrid plan is especially popular with a mobile, younger work force.

“Over the past decade, there has been more movement job-to-job and the idea of portability is important. An account plan allows you to move money,” says Glickstein.

“[The hybrid account] is portable,” he says. “[Younger workers] can take it with them. … It’s really appealing to employees that change jobs often. … A lot of traditional plans don’t allow you to take a lump sum

The cash balance plan works well when converting a current defined benefit plan. There are other attractive uses for the cash balance plan. Professional services firms, closely held family owned businesses among others can work very well combined with a 401(k)/profit sharing plan.

Please comment or call discuss how the cash balance plan might work in your organization.

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Need to Catch Up on Retirement Savings?

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The events of the last few years have had a profound
effect on many executives, professional and business owner’s ability to retire
on schedule.  The market volatility may
have decimated their 401k and other retirement accounts.  Along with this problem there continues to be
a threat of increased taxes to pay for the deficits.

Enter the cash balance plan where pre tax contributions
can be as much as $220,000 per year plus your 401k and profit sharing
contributions.  The cash balance
contribution limit is based on the participant’s age.  Each principal participant is able to
determine their own level of contribution.

As a hybrid plan, the cash balance plan design includes
features of defined contribution (401k) and defined benefit (pension
plan).  They are best suited for
companies enjoying stable, high incomes.
The contribution levels must be continued for at least 2 to 3
years.  There is more flexibility than
the traditional defined benefit plan and there should be an analysis performed
to determine feasibility.

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Main Street Solution.

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Beginning in the 1980’s there was a fundamental shift from defined benefit (pension plan) to the defined contribution (401k) plan.  Companies found the defined benefit plan expensive with unpredictable cash flows.  By terminating their company defined benefit plan and adopting a defined contribution plan companies transferred the cost and risk to the employees.

This shift left the employees with a task they were and are unprepared for and in most cases unwilling to assume.  They were forced to become their own actuary, investment advisor, budget analyst, portfolio designer and on and on.  Left unchecked most employees are ill prepared to retire.  The latest statistics show over 80% of employees are NOT on track to successfully retire.

The solution must come from Main Street rather than Wall Street.  The next generation defined contribution plan must satisfy the goals of the employer while providing employees with a simplified approach to investing for retirement.  This solution must continue to allow employees a choice and at the same time must provide a meaningful benefit.

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Why Fees Matter for 401(k) Plan Fiduciaries, But Not Defined Benefit Pension Plans

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Defined Benefit: Plan Sponsor Bears Risks

Plan sponsors more or less guarantee a predetermined benefit to participants in traditional pension plans. This is why they’re called defined benefit (DB) plans. Whether plan sponsors spend wisely or foolishly on their plans, the sponsors are still on the hook for paying the agreed-upon pensions to their retirees.

For example, let’s say a plan sponsor invests in a global index fund with an expense ratio of 2% instead of 1%. The additional 1% in expenses has no direct impact on plan participants’ retirement income because participants’ benefits are set independently of investment returns. Also, the extra 1% in expenses comes out of the plan sponsor’s pockets, not the plan participants’. Pensions’ investment portfolio assets belong to corporations, not employees. This contrasts with the situation for defined contribution plans.

Defined Contribution: Plan Sponsors “Off the Hook” for Benefit Level

Plan sponsors make no promises about the level of benefits that participants in defined contribution plans will receive. In fact, the only thing participants know for sure is what is contributed into their defined contribution (DC) plan. The plan sponsor isn’t even required to contribute to participants’ retirement. Moreover, in contrast to the DB situation, the assets in the DC plans don’t belong to the corporation. They are held in trust for the benefit of the participants and their beneficiaries.

Here’s why plan expenses matter in 401(k) plans: The level of portfolio returns will affect the participants’ retirement income. Expenses—along with contributions and investment performance—are an important factor in long-term returns. Plan participants bear all of the risk if their portfolios don’t return enough to provide the retirement income they anticipated.

Higher expenses mean lower returns. This is why DOL sets high standards for DC plan sponsors’ expenses, yet pays little attention to expenses of their DB peers.

Plan sponsors maintain the responsibility to monitor plan expenses. The new fee disclosure regulations will show employees that they the employees are paying all or most of the fees associated with their plan. Questions will begin soon after the regulations take affect January 1, 2012.

Please comment or call to discuss how you will be affected.

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