Tag Archives: 401(k)

Administering a 401(k) plan termination

There are certain circumstances that can result in a company terminating its 401(k) plan. Milliman’s Ginny Boggs was quoted in a recent Employee Benefit Adviser article discussing the steps involved with a 401(k) plan termination during the American Society of Pension Professionals & Actuaries (ASPPA) annual conference.

Here’s an excerpt from the article:

Until all assets within the plan are finally distributed the plan still remains in effect and cannot be terminated. During this time, Boggs recommends that advisers work with their clients on:

• Testing
• Distribution requests due to many participants wanting their money immediately and to assist with loan repayments
• Governmental forms and filings
• QDROs

Advisers should remind their clients to use up their forfeiture accounts through expenses, allocating to participants or offsetting final contributions

“You can’t have any unallocated assets going into plan termination and you do have to liquidate,” Boggs said. “You want to make sure the plan termination amendment encompasses everything that the plan document doesn’t already provide.”

Approach 401(k) eligibility provisions strategically

Employers who take a strategic approach to defining eligibility provisions in a 401(k) plan can contain benefit costs, recruit and retain talent, simplify administration, and comply with regulations. In his article “Making participants out of employees via eligibility,” Milliman’s Noah Buck answers six strategic questions that plan sponsors should take into consideration. The excerpt below highlights two of the questions.

To what degree is the plan used to attract and retain talent?
A law firm does not want highly sought-after recruits joining a competing law firm down the road because they can enter the competing firm’s retirement plan sooner. Employers relying partially on their 401(k) plans for recruitment should consider that quicker and easier access to the plan will be more attractive to those in their prospective talent pools.

Are eligibility and entry date provisions cost-efficient with respect to turnover and vesting?
An organization’s turnover rate and average employee tenure are important to consider. A restaurant chain employing high-turnover wait staff will save cost and administrative energy by requiring employees to work six months before entering the plan instead of requiring one month.

It’s also important to consider the plan’s vesting provisions. If the plan has immediate vesting, the employer matching contributions — meant to supplement long-term retirement savings — could be going right out the door to short-term employees who are allowed to enter the plan too quickly. Employers should consider structuring eligibility and plan entry provisions so employer contributions are more likely to stay in-house with longer-term employees.

Retirement income considerations

The latest issue of Milliman’s Benefit Perspectives features two articles that focus on 401(k) plans and retirement income. “Helping employers in their retirement: 401(k) decisions, decisions, decisions!” by Jinnie Olson explores options employers can implement to help employees access retirement savings. A second article, “Helping 401(k) plan participants calculate withdrawal rates in retirement,” by Matt Kaufman, focuses on calculating withdrawal rates in retirement.

Milliman adds Jacobs Management Corporation as retirement services client

I’m happy to announce that Milliman has added Jacobs Management Corporation as a defined contribution client. Jacobs Management Corporation is a privately held corporation that includes FLW, LLC, a premier tournament fishing organization; the J.R. Watkins Company, America’s original apothecary manufacturer; Larson Boats, best known for their experience in quality boat manufacturing; Marquis Yachts, a builder of luxury and sport yachts; and Jacobs Trading Company, a recognized leader in the closeout trading industry.

David Mahler, Vice President-Treasurer at Jacobs Management Corporation, says, “We chose Milliman for their reputation as a trusted service provider who values commitment to client service. In addition, the website is user-friendly and includes robust tools to assist participants in planning for retirement. Partnership with providers is critical, and Milliman’s unique ability to design services and systems to meet the needs of all of our companies was a strong factor in our decision making.”

At Milliman, we believe most plan sponsors want strong service and a commitment to the industry, not just a low-cost or product-oriented sales pitch. Our focus is to provide superior service and value that exceeds our clients’ expectations. Jacobs Management Corporation recognized this when they chose Milliman as their provider, and we look forward to an enduring relationship with them.

Milliman will provide recordkeeping, administration, communications, and compliance services for the Jacobs Group 401(k) Plan. Advanced Capital Group, headquartered in Minneapolis, assisted with the recordkeeper search and is the independent investment adviser providing consulting services for the plan.

For more information about Milliman’s employee benefit services, click here.

Linking NDCPs with 401(k) requires a “contingency” plan for compliance

Pizzano-DominickThis blog is part of a 12-part series entitled “The nonqualified deferred compensation plan (NDCP) dirty dozen: An administrative guide to avoiding 12 traps.” To read the introduction to the series, click here.

Last month’s blog discussed similarities and differences between the rules governing participant deferrals made under a nonqualified deferred compensation plan (NDCP) versus those contributed to a qualified 401(k) plan. This month’s entry will again turn to the NDCP-401(k) connection; however, this time it will show that when NDCP sponsors choose to link their NDCP’s benefits with their 401(k) plans’, they must be aware of and comply with not only Internal Revenue Code Section 409A’s restrictions but also Section 401(k)’s “contingent benefit rule” (CBR). While such compliance does not directly affect the NDCP, it is a qualification requirement for the 401(k) plan.

In general, an employer may not directly or indirectly condition another employer benefit (other than matching contributions) upon an employee’s election to make or not make elective contributions. If the employer conditions any such other employer benefit upon elective contributions, it is a qualification defect. The purpose of this rule is to prevent employers from encouraging employees to make or not make elective contributions by linking valuable benefits to their contributions or lack of contributions. These other benefits include but are not limited to the following:

• Benefits under a defined benefit plan
• Nonelective employer contributions to a defined contribution plan
• The right to make after-tax employee contributions
• The right to health and life insurance
• The right to employment
• Benefits under a NDCP

Because NDCP benefits are included among the items for which 401(k) contingency is prohibited, NDCP sponsors must guard against including provisions in their NDCPs under which participants may receive additional deferred compensation under the NDCP, depending on whether they make or do not make 401(k) elective contributions. Each of the following three examples illustrates provisions that would create such a contingent benefit and thus a violation of the CBR:

Example 1: Employer T maintains a 401(k) plan for all of its employees and a NDCP for two highly paid executives, Employees R and C. Under the terms of the NDCP, R and C are eligible to participate only if they do not make elective contributions under the 401(k) plan. Participation in the NDCP is a contingent benefit because R’s and C’s participation is conditioned on their electing not to make elective contributions under the 401(k) plan.

Example 2: Assume the same fact pattern as Example 1 except that this time, under the terms of the NDCP, Employees R and C may defer a maximum of 15% of their compensation and may allocate their deferrals between the 401(k) plan and the NDCP in any way they choose (subject to the overall 15% maximum). Because the maximum deferral available under the NDCP depends on the elective deferrals made under the 401(k) plan, the right to participate in the NDCP is a contingent benefit.

Example 3: Employer S maintains three plans: a 401(k) plan, a qualified defined benefit (DB) plan, and a defined benefit NDCP. Under the terms of the NDCP, each participant’s NDCP benefit is offset not only by the qualified DB plan benefit but also by the total account balance under the 401(k) plan. Because the amount a participant elects to defer or not defer under the 401(k) will directly affect the amount of the offset and thus the resulting NDCP benefit, the offset is a contingent benefit.

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A “Sign O’ the Times” for 401(k) plans?

Laursen DarleneTimes have changed since 401(k) plans were started back in the ’80s, just like hair styles and rock bands. Where most 401(k) plans only offered a lump-sum distribution option, the new trend in retirement plans may have you facing a decision. Could additional options, such as installments and ad hoc distributions, be the new featured value to plan participants? Could a lack of more distribution options be affecting participants’ distribution behaviors? Let’s look at the options and effects for the participants.

A 401(k) retirement plan that offers only a lump-sum distribution option requires participants to move the full account balance before they can even access one dollar from their accounts. While this may seem like no big deal, let’s turn this soup can around and read more about this lump sum on the label. It may provide greater insight into the lump-sum option.

If the need for cash at retirement is immediate, a participant may be forced to distribute the full account balance when the investment market is down. Participants would be locking in the investment loss on their entire account. This effect of the lump-sum distribution option affects participants whether rolling over their account or taking a distribution in cash.

These same lump-sum distributions can also adversely affect the plan as a whole. You may be scratching your head at this point and asking what do you mean? How can only having the lump-sum distribution option adversely affect the plan? Consider the scenario of a large population of plan participants retiring or terminating within a similar time period and possibly carrying away the larger balances in the plan. A tsunami of lump-sum distributions may trigger a significant drop in the total plan assets. This drop in assets may adversely affect the asset pricing structure for the remaining population of participants in the plan, creating a higher asset expense. Not to be a downer on lump-sum distributions, as they certainly have their place in retirement plans, but it may be time to consider offering additional options.

Installment payments can be a second option for a retirement plan. I like to call them the “Pac-Man” of the payment structures. This stream of same bite-size payments works like the Pac-Man arcade game. Pac-Man just kept munching his way around the board, eating until every bite was gone. The upside to installment payments is that participants can have a steady stream of income from the retirement plan and still remain invested. The participant continues to glean the benefit of lower investment pricing by remaining a participant in the plan. What participants should be considering, however, is the effect of these steady Pac-Man installment payments, which continue to happen in a downward investment market. Those installment payments can result in a larger reduction or faster depletion of a participant’s account than planned. For plan sponsors who offer the installment payment option, it is one way of potentially slowing down abrupt changes to the assets in the plan.

The third option, ad hoc distributions, may be considered the most flexible option in retirement plans. Let’s unpack how the ad hoc option can provide an ongoing investment benefit as well as distribution flexibility through retirement. Participants can leave their retirement accounts in the plan and remain invested in the plan’s institutional fund options. The ability to request a distribution when needed, or at the peak of a market upswing, can provide the ability to manage retirement drawdown. For participants who can afford to retire on other sources of income but may incur an unexpected medical cost during retirement, the ad hoc option provides a financial source to tap into only when needed.

Each distribution option has something to offer plan participants. Is it time to offer all three?