Here's another installment of how retirement plans are awesome…until they’re not! And they’re not awesome when they’re a drain on your cash flow, a bane of the plan administrator’s existence, and considered a throw away benefit by your employees. Here's another story you can learn from so you can hopefully avoid these mistakes.
We changed our plan design and now…
...it's a giant mess of unintended consequences. Here is the call I loathe getting:
“We need to fix X, so can we just change our plan to allow for Y?”
It’s great when the answer is NO, it’s not permitted, because then the employer is open to having a conversation about solving the problem. It’s when the answer is YES that the conversation usually takes a turn for the worse.
CAN we do this is VERY different from SHOULD we do this. In retirement plans, there’s often a cascade of issues set off by changing what seems like one little thing about the plan.
In this case, it was probably going to screw up their safe harbor design and cause the plan to either undergo testing or end up with an unexpected deposit into the plan. It was also going to significantly change the amount of work needed to administer the plan and the way they communicated with employees. But, when the answer to the initial question was "yes," the ability to hear “yes…but I don’t know that it’s a good idea” went out the window.
This employer, running on a small, multiple-hat-wearing staff was about to set themselves up for failure. They didn’t have the manpower to support the tracking and other admin involved in making the "little" change, the testing issue will cost them money that isn’t accounted for in the budget, and they’ll be right back in the same time-suck at the end of the year trying to figure out how to solve their new issues, rather than hiring someone and allowing that person access to all the information to get it right the first time.
Let’s rephrase, shall we?
Ask, “We think this is what we want to do if it’s allowed. What don’t we know?”
…Better yet, hire a retirement planologist with the specialization and service-oriented attitude to give you the answer to the problem lurking around the corner and answers the questions you don't know to ask.