Cutting back

In today’s economy, many employers are choosing to suspend their contributions to their employees’ retirement plans or terminate their plans altogether. But before following suit, make sure you understand your actual savings and the consequences of making the cuts.

“In some cases, terminating the plan might be the right decision, but keep in mind that you can also save quite a bit of money reducing or suspending your match until your bottom line improves,” says Paula Lewis, QPA, QKA, director of the retirement plan design and administration department at SS&G Financial Services, Inc.

“Some companies are terminating their retirement plans altogether when there may be better alternatives available, especially when considering the intangible effects of the termination.”

Smart Business spoke with Lewis about what to consider when thinking about suspending retirement plan matches or terminating a plan altogether and what risks you could face with either option.

When looking to cut costs, should a company suspend contributions to employee retirement plans or terminate the plans entirely?

A lot of companies are looking at their retirement plans for ways to reduce costs. Some companies are reducing or eliminating 401(k) matches while others are terminating the plans altogether. Additionally, in a down economy, employees may be cutting back on their 401(k) contributions to have more money in hand, which can imply to employers that it is unimportant. So how do you know what decision is right for your company?

You need take a step back and look at how much you are really spending annually on your match and your retirement plan administration to determine what you will be saving. Your plan administrator should be able to help you determine the cost of your match and your plan as a whole. Are you saving what you had thought? Do you need to suspend your match entirely or would reducing it do the trick? Are you going to save enough by eliminating the match or do you need to get rid of your plan all together? It is important to determine your monetary goals before deciding what to do with your plan.

If you decide to make a change, suspending contributions is obviously less drastic than terminating your plan, especially when business might turn around in a year or two. Another thing to keep in mind is that if you terminate your 401(k) plan, you cannot just start it back up again when the economy turns around. You are required to wait at least 12 months to restart it without facing penalties. In addition, when you restart your plan, you will have to pay initial start-up costs again.

How can an employer suspend contributions or terminate its program and remain in compliance with the law?

For most plans, you can stop matching contributions at any time, but there are certain requirements you must meet. For instance, if your plan document has a specific formula listed (the company matches 50 percent on the dollar up to 6 percent of compensation), you must amend your plan documents to indicate that the company will no longer match contributions.

If your plan documents are set up with a discretionary match, which gives an employer more flexibility, you do not have to do a formal plan amendment, but are required to notify plan participants.

All companies should give employees the opportunity to change their election based on a change in the match.

What should companies keep in mind when communicating plan changes or terminations to their employees?

If you are going to suspend your match, typically you are required to give 30 days’ notice to all participants. It is important to communicate openly with your employees what the company is doing and the reasoning behind the decisions, especially if suspending the match will help you avoid laying people off or reducing salaries. Develop literature explaining the changes, hold a company-wide meeting to let people know what changes are being made, and give all employees the opportunity to ask questions and express concerns.

If it is a temporary suspension, make sure that you clearly communicate the timeframe for renewing/revisiting the decision and reassure everyone that the match will be reinstated once things get back on track. Also, let everyone know that it is effecting every level of the organization, including management.

What intangible effects should be considered when deciding the future of your company’s 401(k) program?

Cost-cutting measures often result in intangible consequences that must be considered. You must always consider the message that you are sending employees. Possible intangible effects include a decrease in employee morale, a decline in employee retention and a more difficult time with employee recruitment, especially with the elimination of a 401(k) plan. While most employees understand cost-cutting measures in this economy and appreciate the fact that the company is doing everything it can to ensure they have a job in the future, there may be a few employees that feel a decline in job satisfaction due to the loss of benefits. Try to put a positive spin on the reduction of benefits (no decrease in salary, keeping other key benefits, etc.) and remind employees that it is temporary, if applicable, to minimize intangible effects.

Paula M. Lewis, QPA, QKA, is director of the retirement plan design and administration department at SS&G Financial Services, Inc. ( Reach her at (800) 869-1836 or [email protected].