Could your business benefit from combining its retirement plans?
Businesses often maintain several retirement plans, particularly after mergers and acquisitions. Plan sponsors should evaluate costs, benefits, and risks associated with maintaining multiple plans and determine if it’s time to consolidate them. Here are some steps you can take now.
In an economy where growth by acquisition is a key component of many business plans, it’s important to remember that administrative requirements and the risk of mistakes increase with each new operation brought into the fold. Retirement plan management is one key area to monitor. Post-transaction businesses often take the path of least resistance — or so they think — by continuing to operate multiple retirement plans rather than examining the potential benefits and costs of merging plans. The practice of operating multiple plans can lead to demonstrably higher fees and complexity, as well as a heightened risk of errors that could result in significant additional costs and penalties to the ongoing business.
The practice of operating multiple plans can lead to demonstrably higher fees and complexity.
Whether your company is mid-merger or months removed from a transaction, or even if you’re just starting the process, it’s crucial to understand the pros and cons of upkeep for several plans and what’s involved when consolidating them. The most sensible starting point is to conduct a review of your current retirement plans.
Review before you integrate
If your business currently maintains multiple retirement plans, you need a clear picture of the administrative requirements specific to each plan, the benefits that the plans provide to your employees, and the costs associated with the plan throughout the year. A thorough review not only shows plan sponsors the value of consolidating administrative costs but how plan integration can provide meaningful benefit to participants. What’s more, an extensive review can help sponsors create a plan design that aligns with the goals of the company.
When considering the best approach for plan integration, plan sponsors should review the current plan design, participant demographics, and conduct mock nondiscrimination testing to determine:
- Whether the plan provisions must be aligned for nondiscrimination testing purposes, or if they can remain as is based on relevant Internal Revenue Code rules.
- Whether it’s in the employer’s best interest to combine plans.
- If the plans can remain separate and it’s in the employer’s best interest to keep them separate, how the employer can reduce the administrative burden of operating them separately.
When it’s time to harmonize: The benefits of retirement plan harmonization
Once you have a clear picture of the costs and benefits of maintaining the status quo, you can better evaluate the potential advantages and disadvantages of integrating the retirement benefits. Ideally, you’d accomplish this by comparing key plan design features of each retirement plan and using that analysis to model different scenarios based on the employer’s goals. After you’ve determined those scenarios, you can review the cost implications and perform mock nondiscrimination testing to make sure that the proposed plan(s) will comply with nondiscrimination rules going forward, should a new plan design be implemented. In addition to considering nondiscrimination testing requirements, employers should also compare their plans to what’s common in the market to help with recruiting and retention.
For most plan sponsors maintaining three or more plans, retirement plan harmonization is likely to ease administrative burden, save money, and reduce the potential for future operational errors. To learn more about how consolidating or harmonizing retirement benefits could help your business, contact our employee benefits consultants today.
