Retirement Plans: the one employee benefit you should watch before you cut.
Time are tough, but never neglect your retirement plan.
As I have stated before, I am loath to hire employees because I was an employee once too. That pretty much means that I never met an employee whoever thought they were overpaid. For that matter, I never met an employer who thought that they pay their employees too little.
Despite what my former colleagues at union side law firms, employers typically don't have a treasure chest of jewels they are keeping away from their employees, it's just the dynamic of a relationship where an employee wants to make as much as they can and an employer wants to pay as little as possible. It's not evil, just human nature.
For those that never ran a business, they don't understand how costs of payroll and benefits must be tied to revenue because an employer's pocketbook is not limitless.
Thanks to medical costs and taxes, it's expensive to have employees. Employers are taking away benefits and not putting benefits out there that are really enticing to current and prospective employees. As an employee, regardless of where I worked, the health plan got worse and worse because medical costs are spiraling out of control and the employer had to rein in costs.
While employers may feel free to cut back on the benefits they offer, the one benefit that they can't afford to neglect is a retirement plan. An employer can certainly cut back on the contributions they make to their retirement plan(s), but they can't just cut back on the services to their plan by sticking the plan with a cheap provider (if they are the ones paying for administration, rather than the plan) if it's going to negatively affect the plan's administration and compliance. The reason is because employers as plan sponsors are also plan fiduciaries too.
So employers still may want to cut back on benefits, they need to make sure that they don't do something that could negatively impact their role as plan fiduciaries.
Any change of plan provider or even in a change in benefits should be done in consultation with your plan providers and/or ERISA attorney to make sure that any cutbacks in benefits you must make won't increase your plan fiduciary liability exposure.
Plan sponsors can't afford to pay more than they should.
Plan sponsors have a duty to pay only reasonable plan expenses,
When I was 13 and I had my Bar Mitzvah, I plucked down about $2,000 in 1985 money for a state of the art Apple IIe with a monochrome monitor. One of the first pieces of software I bought was that top desktop publishing software known as Print Shop. I bought it through mail order (yes, there was life before Amazon.com) for about $30 and I remember that my wealthy uncle bought the very same program for my cousin for about $60. My uncle really thought nothing of the fact that he bought the very same program at double the price I paid. Sometimes people like to overpay.
I have a mantra that I hate to pay retail. I love a good sale. Yet there are some people who thumb their nose at paying at a discount or going to an outlet store. Somehow, it isn't right for these people to pay less.
The problem is that plan fiduciaries such as plan sponsors and trustees don't have that luxury. With their fiduciary duty on the line, plan sponsors need to pay reasonable plan expenses for the services provided. Plan fiduciaries can only determine whether the fees they pay are reasonable by shopping their plan to other service providers or by using a benchmarking service. If they don't shop around and overpay in fees, they may subject themselves to liability from plan participants. It should be noted that plan sponsors don't have to pick the cheapest providers because often, there is a reason why some providers are cheap.
How to determine whether a plan sponsor is paying way too much? Like Justice Potter Stewart would say, I know it when I see it. I have seen the information shown on Form 5500. Whether it's the plan sponsor paying a Big 4 accounting firm $54,000 for a limited scope audit or another plan sponsor paying a broker 60 basis points (.60%) on a $14 million 401(k) plan, there are plan sponsors seriously overpaying for services. Plan sponsors need to check their fee disclosures from plan providers and need to shop it around. Simply accepting the fact that they are paying more than my uncle isn't going to work.
Life situations change, so beneficiary form designations need to change to reflect that.
Yes, I will admit it, I love soap operas. My favorite show of all-time is Dallas and when I was a senior in high school and I was at home around 12:30 pm, I watched in succession, Young and The Restless, Bold and The Beautiful, One Life to Live, and General Hospital. Needless to say, I didn't have the most active social life in high school.
To go through life, you have enough headaches, especially if you are in charge of your company's retirement plan. You don't want your retirement plan to turn into a soap opera and one way to avoid that headache is to make sure that your employees update or review their beneficiary forms every time you have a plan enrollment/ investment education meeting with plan participants. My story will tell you why.
Years ago, I worked for a third party administrator and I had to review a soap opera that was because of an enrollment form.
A law firm partner of a client we were the TPA for, named his children as his beneficiaries. His spouse had predeceased him.
He got married to the new wife and as part of the pre-nuptial agreement; she waived her benefit to the 401(k) plan in question. He died and his two children felt that they were entitled to the benefit. They were right, you think? You'd be wrong.
While a spouse has every right to waive her benefit, a pre-nup by itself is not an actual waiver according to the rules governing retirement plans. So in addition, the spouse had a pre-nup that she signed and then needed to sign a separate waiver form to waive the benefit to make that pre-nup effective. She didn't, her good fortune. The children were horrified and their counsel asked about that one-year provision in the Code that they thought was a smoking gun. Again, retirement plans can require a year of marriage for spousal waiver, they don't need to and most plans I have come across don't have that one-year provision.
End of the soap opera story, in my case, this second wife actually waived her right to benefit and the children got the benefit because this second wife wanted to keep her end of the bargain in the pre-nup, valid waiver or not.
It can't be stressed enough that plan participants need to review their beneficiaries consistently and if the participants gets re-married, widowed, or had new children, they need to sit down and determine what they do with their retirement benefits since these are non-probate assets governed by ERISA and the Internal Revenue Code.