Defined Contribution Plans
Defined Contribution Plans are among the most popular form of saving for retirement in the United States. These plans are funded by employee contributions (401(k)) and/or employer contributions (profit sharing, 401(k) matching, safe harbor, etc). Unlike Defined Benefit Pension Plans that promise a fixed benefit at retirement, Defined Contribution Plan accounts accrue value for the employee based on fixed contributions and investment gains. At retirement, participants may rollover their accrued funds into an IRA and begin taking annual distributions or take the accrued benefit as an annuity.
We were recently referred a takeover plan through a trusted partner. The plan was a basic 401(k) plan with a non-elective safe harbor contribution of 3% of eligible employees' salary. An initial analysis of the reports and data presented to us, showed that the plan was in compliance and operating as it should under ERISA regulations.
The issue at hand and the reason for our involvement as a no-cost second opinion was the plan's expenses. Specifically, the client and the participants did not have a clear understanding of how the plan was paid for and who was actually paying for the plan.
Our team took a deep look at the fee structure and discovered that the client was paying the plan's adviser and the TPA from plan funds, causing the participants to bear the brunt of operating expenses. The fee structure appeared straight-forward on the surface, but the mechanism underneath was complex.
Though TPAs are not commonly considered fiduciary agents, the compensation structure to the former TPA on this plan made them an acting fiduciary. And there has been a major increase in scrutiny of fiduciaries and added rules by the Department of Labor in the past five-ten years. Notably, plan fiduciaries are required to fully disclose a plan's expenses and how the expenses work.
We discussed this with our trusted partner, were given an introduction to the client, and were able to clearly explain our findings. The client subsequently retained us as their new TPA and (a) benefited from a 50% reduction in total fees, (b) had a much clearer understanding of how plan fees are charged, and (c) participants were no longer bearing the cost of plan's operations.
Last Call in December
Through a colleague, we received a call from a business owner (a PR/Marketing Agency) in December that quickly wanted to establish a plan in order to reduce their tax burden for the year. It was too late for a standard year end 401(k) Plan with a Safe Harbor provision and they did not have teh revenues to justify a Defined Benefit Pension Plan. We otherwise were able to propose a Profit Sharing plan for the current year and then provide for the 401(k) and Safe Harbor provisions to become effective the following year on February 1.
The client saw the benefit and knew to act quickly. Before December 31, a new Defined Contribution Plan was installed with a Profit Sharing provision only. While it would have been ideal to have a 401(k) and a Safe Harbor provision kick in on January 1, a 30-day notice to employees for a Safe Harbor provision needs to occur. Meaning, a Safe Harbor Notice would go out to employees on the first of the year and 30 days later (i.e., February 1), the 401(k) and Safe Harbor provisions would kick in. This also allows for time for the employees to enroll and research the investment funds provided to them.
Key to this plan design was the fact that three separate provisions with two distinct effective dates needed to be written into one document. Alternatively, the document could have been initially written as a Profit Sharing only plan, and then later an amendment could have been added to allow for the 401(k) and Safe Harbor provisions. Taking the time on the front end to properly design a plan saved the client time and ultimately money by avoiding the cost of amending the plan.