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IN THIS ISSUE:
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>Cause and
Effect: Partial Plan Terminations
>Is Market
Turmoil Triggering Reductions in 401k Matches?
>Have You
Considered a Non-Qualified Plan?
>ICI Study
Indicates Significant Growth in the Mutual Fund Industry
>Communication
Corner: Asset Allocation and Diversification
>Communication
Corner: Sample Memos Available
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Cause and Effect: Partial
Plan Terminations
As
a result of the current economic climate, many employers have been forced
to reduce their work forces.
Employers must be aware of the potential impact that downsizing may
have on a company’s qualified plan. If certain elements exist as a result
of a layoff (or multiple reductions) a plan may experience a partial plan
termination. Simply put, a partial plan termination exists if a
“significant reduction” in plan participation results from employer action.
The determination of a partial termination is a facts and circumstances
test, but there are a few factors which serve as good indicators.
The first
factor is the population of affected participants. If it is a class of
participants there is a chance of the reduction being viewed as a partial
termination. More commonly the percentage of participants being affected
will be scrutinized. Per internal IRS guidelines, a 20% reduction is
generally considered “significant.”
Some ERISA attorneys state that a more conservative threshold is a
15% reduction in force. The percentage is determined by looking at all
terminated participants compared to all vested and non-vested
participants. Voluntary
terminations, terminations occurring in the normal course of business, and
terminations due to death, disability, or retirement are not to be included
in determining the percentage reduction.
Another
factor to be considered is the period over which the terminations occur.
The IRS generally includes all employer terminations within a rolling
window unless the terminations can be proven to be unrelated to one
another. In other words, the IRS will consider all terminations to be in
accordance with a single downsizing plan unless proven otherwise. In
addition, separate reductions in force may be combined in the determination
of 20% reduction.
In
the event a partial termination has occurred, all “affected participants”
(those that can no longer participate in the plan) must become 100% fully
vested in their accounts on the effective date of the partial termination.
All other “non-affected” participants continue to participate in the plan
in accordance with the plan’s vesting provisions. If an absolutely
definitive determination of a partial termination is desired a plan sponsor
may file a Form 5300 with the IRS, though this action is not required.
It is important to understand these rules in
advance of any layoffs. If your company is considering reductions please
call us at (800) 337-3353 or email mail@everhartfinancial.com.
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Is Market Turmoil
Triggering Reductions In 401(k) Matches?
Although the media seems a
buzz with big name companies suspending or reducing their employer match, a
new survey indicates 73% of plan sponsors intend no match changes. The
poll, conducted by Callan Associates earlier this year, examined if
employers are in fact changing their employer match due to the recent
market turmoil. The results incorporated responses from over 100
companies with defined contribution plans, most plans
containing over $100 million of assets. The survey indicated that only
1% of plan sponsors polled planned a match decrease, while 20% were unsure
what steps they might take by the end of 2009 regarding their match. This
survey did go beyond this basic question and produced the following
observations:
- 95% of employers plan to increase
investment communications to participants
- 71% of employers plan to increase
communication to stimulate participation
- 64% of employers plan to increase
communication concerning retirement adequacy
Some anecdotal evidence
exists reflecting a somewhat higher percentage of small size plans may
be reducing match, however the vast majority of plans do appear to be
maintaining prior match levels at this time.
If your investment
committee is considering changing your match in anyway, we recommend you
receive guidance from a dedicated plan consultant. Please contact Everhart
Financial Group, Inc. at (800) 337-3353 or email mail@everhartfinancial.com.
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Have You Considered A Non-Qualified Plan?
Given the current economic
environment, many companies are turning to Non-Qualified plans in an effort
to reward and retain key employees. Non-Qualified plans offer greater plan
design flexibility and cost control. With overall 401(k) plan
participation decreasing and many plan sponsors re-evaluating
their company match, a Non-Qualified plan is a key
benefit worth exploring. Much has changed in the Non-Qualified
environment over the past few years and Everhart Financial Group, Inc. offers independent consulting to Non-Qualified plans as
well. Our services range from investment analysis, plan design,
funding vehicle, employee communications and more.
If you have interest in
learning more about the benefits of a Non-Qualified plan or would like us
to evaluate your current plan, please contact us at (800) 337-3353 or email
mail@everhartfinancial.com with your questions or concerns.
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ICI Study Indicates
Significant Growth In the Mutual Fund Industry
A recent study by the
Investment Company Institute (ICI) indicated that mutual fund ownership
continues to be fueled by tax-deferred accounts, such as defined
contribution plans, individual retirement accounts (IRA), and variable
annuities. According to the ICI study, the number of households who
now own mutual funds through tax-deferred accounts has grown some 12
million since 1998, to an estimated 48 million that hold mutual
funds inside tax-deferred accounts. The total households that
hold mutual funds in all types of investments is estimated
at 52.5 million. Retirement planning continues to be the primary
reason for investing in mutual funds.
According to
the study, more than 7 out of 10 investors who own mutual funds in
defined contribution plans view fund companies favorably. Factors that
contributed to their views about mutual funds included the opinion of
professional advisors, personal experience with a mutual fund company,
market fluctuations and of course performance, which was the most
important factor when considering views on mutual funds. “Shareholders
with mutual funds in DC accounts are also confident that mutual funds can help
them meet their financial goals.” Some 97% of those surveyed indicated
that they invest to finance retirement and 83% indicated that retirement is
their primary goal for mutual fund investing.
In
summary, the mutual fund industry has certainly been impacted by the market
volatility of the past year. Despite that, mutual funds are still
an important vehicle for retirement plan investing by individual
participants and those who use mutual funds for investing see them as
their primary tool to building their own nest egg. So the next
question is, are participants using the right funds in their investment
allocation?
Now
is a great time for your participants to review how they are
investing. To discuss ways to assist participants with asset
allocation, please contact Everhart Financial Group, Inc. by calling (800)
337-3353 or email mail@everhartfinancial.com.
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Communication Corner: Asset Allocation and
Diversification
This month’s sample
participant communication memo explains why diversification is the single
most important thing you can do to manage investment risk.
Send an email to mail@everhartfinancial.com
or call (800) 337-3353x106 to request a copy that you can print and
distribute to employees.
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Communication Corner: Sample Memos Available
Each month this section of
our newsletter features sample memos that plan sponsors can print and
distribute to employees. Topics from this year included Making the Most of your 401(k), The Case Against Loans, Dollar Cost Averaging, and Tips for Investing in Turbulent Times.
Send an email
to mail@everhartfinancial.com or call
(800) 337-3353x106 to request a copy that you can print and distribute to
employees.
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To remove yourself from this list, or to
add a colleague, please email us at brianh@everhartfinancial.com
or call (800) 337-3353x106. Securities offered through Cambridge Investment Research,
Inc. Services offered through Everhart Financial Group, Inc. Cambridge Investment Research, Inc. is not
an affiliate of Everhart Financial Group, Inc. This material is intended for
informational purposes only and should not be construed as legal advice and
is not intended to replace the advice of a qualified attorney, tax adviser,
investment professional or insurance agent.
(c) 2009. 401(k) Advisors, Inc. All rights
reserved. 090107©
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