Ask the Experts April 5, 2016

(b)lines Ask the Experts – Why Sponsor So Many Retirement Plans?

“I just started to work for a mid-sized health care organization, and it turns out that they have 10 different plans with 10 different plan documents!
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“Is there any reason in the world a not-so-large organization would be administering 10 separate plans? Just the 5500 filing process—all of the plans are subject to the Employee Retirement Income Security Act (ERISA)—which I am commencing now, is exhausting!” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:      

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The Experts answer to your question is a definitive “Maybe!” Although it is true that a significant number of plan sponsors probably sponsor more retirement plans than they truly need, there could be many reasons why 10 plans are necessary at your particular employer. These reasons include, but are not limited to, the following:

  • The plans are of certain plan types that cannot be merged. For example, 403(b) plans may not be merged with 401(k) or 401(a) plans;
  • The plans contain different provisions (e.g. different plan years, vesting schedules, or other important plan features) that would be difficult/impossible to consolidate into a single plan;
  • Some plans are separate to facilitate compliance testing. For example ADP/ACP testing can generally be conducted on a per-plan basis if the plans that are required to be aggregated pass coverage testing as a whole. In such a situation, it is possible that plans could fail ADP/ACP when tested together, but pass when tested separately; and
  • There are business reasons for maintain separate plans. For example, the plan sponsor may work with collectively bargained employees, and the collective bargaining agreements with those unions may dictate that a separate retirement plan be established for each bargaining unit.

Having said all of this, the Experts would suggest that you work with your plan adviser and ERISA counsel to examine whether 10 documents are indeed truly necessary, especially if this issue has not been reviewed in some time. The administrative costs of sponsoring 10 separate plans are likely to be prohibitive for a mid-sized employer, and the large number of plans increases the likelihood of plan defects and the liability associated with same. By conducting a review of their retirement plan structure, many plan sponsors have been able to successfully reduce the number of retirement plans that they administer.

Thank you for your question, and good luck!

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to rmoore@assetinternational.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.
Data and Research April 4, 2016

Longer Lifespans Challenge Conventional Social Security Wisdom

Conventional wisdom has it that lower-income workers should get the most out of Social Security, but that’s not necessarily the case given uneven increases in longevity across income groups.

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While significant increases in life expectancy have redefined what it means to work and retire in American society, life expectancy has not increased uniformly across all income groups, the Government Accountability Office (GAO) warns in a new report.

This fact has important consequences for retirement policy, the GAO says, as proposed actions to address the effects of greater longevity in the work force will likely impact lower-income and higher-income individuals differently. Especially when it comes to reforming Social Security, the GAO says it is vitally important to understand the interplay of income, longevity and total lifetime benefits. 

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“Life expectancy varies substantially across different groups with significant effects on retirement resources, especially for those with low incomes,” the GAO writes. “For example, according to studies the GAO reviewed, lower-income men approaching retirement live, on average, 3.6 to 12.7 fewer years than higher-income men.”

Conventional wisdom says such an individual will get more out of Social Security over time compared with his higher-income counterpart. But the GAO says it wanted to go deeper, and so it also “developed hypothetical scenarios to calculate the projected amount of lifetime Social Security retirement benefits received, on average, for men with different income levels born in the same year.” In these scenarios, the GAO compared projected benefits based on each income groups’ shorter or longer life expectancy with projected benefits based on average life expectancy and found that lower-income groups’ shorter-than-average life expectancy actually reduced their projected lifetime Social Security benefits by as much as 11% to 14%. This cuts directly against the conventional wisdom, the GAO observes. 

“Effects on Social Security retirement benefits are particularly important to lower-income groups because Social Security is their primary source of retirement income,” the GAO explains. “Social Security’s formula for calculating monthly benefits is progressive—that is, it provides a proportionally larger monthly earnings replacement for lower-earners than for higher-earners. However, when viewed in terms of benefits received over a lifetime, the disparities in life expectancy across income groups erode the progressive effect of the program.”

The full report is presented here.

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