Trends & Developments - June 2014 - Three Common Considerations of Employee Benefit Plan Sponsors in 2014
1. Taking a close, but difficult, look at employer matching contributions made to defined contribution plans.
What do IBM and AOL have in common with each other and many other companies that sponsor defined contribution employee benefit plans? They recently changed the frequency of the deposit of their 401(k) plan employer match. Such a move causes a rumble from the active plan participants.
As employers strive to balance the cost of doing business, rising health care costs and employee benefits, many have changed the timing of the deposit of the Company’s matching contribution into their 401(k) plan. Assuming the plan document properly reflects such a provision, there is nothing in the Employee Retirement Income Security Act (“ERISA”) requiring an employer to contribute the matching contribution with each payroll throughout the year. The only requirement is to deposit the matching contribution into the plan prior to the last day of the following plan year. However, in order to deduct the contribution for tax purposes in the year for which the match is allocated, the employer must make the deposit into the plan prior to the extended due date of the employer’s corporate tax return.
By changing the timing of the employer match contribution, IBM and AOL are able to reduce the administrative burden of monthly remittances and typically, although not required, most plans require plan participants to be employed on the last day of the plan year to receive the annual match. Thus, by making only an annual match contribution, a plan sponsor can save significant contribution dollars when no contribution is required to be made for those participants who left the company during the year.
From an employee stand-point, having matching contributions submitted throughout the year is preferable for two reasons: 1) if the employee leaves during the year, they still get the benefit of the match for the time they worked and 2) the employee benefits from the earnings on those matching contributions throughout the year.
About 10% of plan sponsors providing a match contribution make the deposit once each year. IBM made the change in December 2012 and AOL in early February 2014. However, after employee and media backlash, AOL quickly reversed their decision shortly thereafter and continued to deposit the match into the plan on a per-pay basis.
Employers, as plan sponsors, have difficult decisions to make and it truly is a balancing act. These employers did not reduce the amount of the match, just the timing; not unreasonable when a match is designed to attract and retain talent. In addition, there is no requirement in ERISA for a plan to provide a match at all.
2. Having a heightened sense of awareness regarding rollovers out of a plan.
The Department of Labor (“DOL”), generally having primary responsibility for reporting, disclosure and fiduciary requirements, and other regulators as well, have their eyes on rollovers out of employer sponsored qualified employee benefit plans. Usually, employers’ involvement in rollover transactions is to assure the funds are (a) rolled over to the proper institution selected by the participant, (b) timely, and (c) in the proper amount. Beyond that, they are done. What’s getting attention is the rollover on behalf of a distribution-eligible participant from an employer-sponsored qualified employee benefit plan to an Individual Retirement Account (“IRA”), as opposed to a rollover to another employer’s plan. The burden to make the decision as to what financial institution the rollover funds should be invested with and what investment options to select is on the participant, and it is up to them to seek the proper guidance. Often, the third-party investment institution engaged by the plan sponsor to hold and administer plan assets is familiar to the participant and funds are rolled over to an IRA sponsored by that same provider. This is one of the transactions under focus by regulators. It could be viewed that the plan sponsor’s service provider improperly leveraged its relationship by recommending its own proprietary products to the distribution-eligible plan participant. On the other hand, an investment provider unrelated to the plan may have an unfair advantage simply since they are unrelated even though they may provide an essentially identical product.
There will be more surrounding this issue for sure. The focus seems to be on the investment provider receiving the rollover funds, however, as with most things, there will be an impact on the employer sponsoring the plan as it monitors its service providers and an impact on plan participants who must be aware of the regulations related to rollovers when they become distribution-eligible.
3. Considering options to obtain relief from defined benefit plan obligations.
There has been much buzz surrounding de-risking strategies, which involve reducing or eliminating a company’s defined benefit pension obligations. This strategy stems from efforts to realize a reduction in future volatility of plan contribution amounts, a future reduction in plan administrative expenses and PBGC premiums, and possibly significant changes to the company’s financial statements and the plan’s financial reporting. Significant reductions in the liability for the defined benefit plan on the plan sponsor company’s books are an attractive proposition.
Several de-risking strategies are available. One strategy is a buy-out, whereby a plan purchases an annuity contract and the risk for paying the defined benefit earned by the participant is transferred from the plan sponsor company to the insurer. Thus the insurer assumes the liability to pay the plan’s benefits. In summary, those subject to the buyout, generally a specific group of retirees, are no longer plan participants as assets leave the plan to purchase the annuity contract.
There are tough decisions to make when considering such a plan of action, one being that when the risk is removed from the qualified defined benefit plan to the insurance company, participants no longer have Pension Benefit Guaranty Corporation protection for their benefits.
Plan sponsors considering a de-risking transaction will find themselves paying close attention to the annuity rates from the insurance company; they can be volatile and there is a small window to act in deciding to purchase the annuity or not.
In summary, it is not surprising that sponsors of qualified retirement plans have their hands full. The regulations surrounding qualified plans will most likely rise to address these current concerns and more. This means there is no end in sight for plan sponsors struggling to keep up, struggling with tough cost balancing decisions, trying to stay on top of decisions contemplated by regulators who have a heightened sense of participant protection and, of course, managing participants’ awareness of these issues.
Trends & Developments June 2014