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PLAN DESIGN AND ADMINISTRATION
As this course shows, there are a wide range of benefit plans. And the selection is increasing.
The choice can be overwhelming, but selecting a retirement benefits package ultimately comes down to 2 things. The organization’s:
- business goals
- and
- values
Ask yourself:What do you want your retirement plan to do?This is an important question. And you can't properly assemble your retirement plan until you know the answer.
There should be a healthy balance between what your organization wants to achieve based on its business objectives and what your organization wants to provide for the retirement of its employees. Your plan should not only satisfy current employees; it should attract new talent that your organization needs to succeed.
You must CONSTANTLY EVALUATE your plan's COMPETITIVENESS and EFFECTIVENESS.
Your goal is to INCREASE EMPLOYEE SATISFACTION.
Design Issues
Let's review the basic questions you must ask when designing a new retirement plan for your company.
Who will be eligible?
Retirement plans are useful tools for attracting and retaining employees. This may lead you to design a plan that covers all employees. But don't forget these 2 factors:
- Length of time in the organization. If the program is to encourage employee retention, then a waiting period before entrance into the program makes sense.
- The value of the reward to different groups of employees. Certain groups, particularly executives, have needs that are different from those of other employees.
Should the plan be qualified or non-qualified?
Remember, multiple requirements must be met for a plan to be qualified under ERISA. This will allow your employees to make contributions with before-tax dollars. But if the purpose of the plan is to favor certain groups and provide them with rewards not available to all employees, a non-qualified plan is in order.
When will employees be vested?
As we discussed earlier in the course, there are a number of different choices as to when and how vesting takes place. Vesting tends to have the effect of reducing labor mobility before employees are fully vested after which there is a small upsurge in turnover.
When are benefits paid?
For 401(k) plans, employees may begin to access funds upon retirement at 59½. For traditional pension plans, ordinarily, a retirement age of 65 is assumed. This standard is under pressure from both directions today. On one hand, the Age Discrimination Act and state laws have done away with the idea of mandatory retirement. On the other hand, there is a trend in organizations to encourage early retirement of employees before the age of 65 (especially during hard financial times). Most organizations stay with age 65 as a model and actuarily adjust the payments made to people who retire early or late. An alternative way of dealing with this question is to define a number of years of service in the organization before the person is able to obtain full retirement plan benefits.
There are 2 circumstances other than retirement where there's a payout from the retirement plan:
- death
- and
- disability
Death. Upon the employee's death, most plans provide the deceased's beneficiary with the funds that are in trust for the deceased.
Disability. Most pension plans also have a disability retirement clause that, much like an early-retirement provision, pays the employee a portion of the amount that the employee would be entitled to had he or she remained employed until the normal retirement date.
Who pays?
The retirement plans discussed in this course have ranged from plans in which the employer contributed all the funds to those in which the employee contributes all the funds. The problem with the former is that the employee may not be aware of the benefit until just before retirement. However, if the employee contributes all of the funds, it doesn't provide any incentive for them to do anything for the organization.
Troubleshooting Your Plan
Having trouble with your plan? You're not alone. But a solution may be right around the corner. Let's take a look at some common retirement plan problems and what you can do to fix them.
Problem: Your plan is only generating interest from one employee group.
Solution: Different employee groups require different retirement plan strategies. Younger employees tend to be more interested in:
- investment options
- contribution matching
- fund portability
- a loan option
Older employees are typically more interested in:
- contributions connected to business performance
- distributions based on age or tenure
Pay attention to the needs and desires of all of your employees. Constantly doing so will guide how you design your retirement plan now and in the future.
Problem: You're always updating your retirement plan.
Solution: Constant plan updates can be time-consuming and expensive. You might think about investing in a prototype plan. They're available through most plan administrators. Prototype plans can usually be customized to fit your business needs and are updated automatically for statutory changes.
Problem: Employees aren't interested in elective plans.
Solution: SECURE 2.0 requires new 401(k) plans to automatically enroll eligible employees. However, employees can opt to contribute less than the amount prescribed for automatic enrollment, or they may choose not to participate at all. So, some employees may still need an incentive. You might consider the tried-and-true method of matching your employees’ contributions.
Memory Jogger
Josephine is a Human Resources executive for Company C. The organization's established retirement plan is only generating interest from younger employees. What should Josephine do?