Your Retirement Plan: What To Do Next?
If you provide a 401(k) or other
defined contribution retirement plan for your employees, you are probably
now dealing with a variety of unanticipated issues as a result of the
downturn in the economy. Can you, for example, still afford to match some or
all of your employees’ plan contributions? Does offering a benefit like a
retirement plan still make sense?
What’s more, the severe decline in investment values may have rattled your
employees who participate in the plan. Your employees may be asking you
about losses in their plan accounts and what they should do next--even
if they should continue to participate in the plan. Other employees may
be worried about what will happen to their retirement savings if the
financial firms managing their plan investments fail.
These are all difficult questions. However, the following points may help
you in your decision making.
Continue Offering a Retirement Plan?
The reality is that only you can determine what adjustments, if any, you may
need to make to your benefit structure after looking closely at your
financials. However, odds are that a key reason you offer a retirement plan
to your employees is that you believe the benefit helps your company attract
and keep the most qualified and competent employees. In addition, your
retirement plan provides significant tax benefits. Those tax advantages have
not changed. And keeping the best and most motivated employees working for
your company is probably more crucial to your company’s financial health
during a recession than it is when the economy is strong.
Maintain, Reduce or Eliminate the Match?
Matching contributions have been shown to increase plan participation rates.
Obviously, your decision whether to continue offering a match will depend on
your company’s financial health. Your need to conserve cash may force you to
take an action you’d prefer not to. Still, your employees are likely to
understand the situation if you explain why you plan on reducing or
suspending the match.
Be aware that you’ll have to meet certain regulatory requirements before you
can suspend or eliminate a match. In addition, there may be other
restrictions related to the pension law’s nondiscrimination and safe harbor
rules. So proceed with caution if you choose to take this road.
Answering Employees’ Questions
Employees with questions about their retirement accounts should be
encouraged to access the plan’s web site and to read plan provided
investment education materials. These sources may be sufficient to answer
many of your employees’ questions. Key points that may be relevant in this
environment include the following:
Investment losses: Plan participants should be aware that their losses are
only paper losses until they decide to sell (or redeem) their shares. If
participants plan on making changes in their portfolios, they should
determine if the changes make sense in light of their investing time
horizons, overall financial goals and their tolerance for investment risk.
Volatility: Stocks rise and fall in value every single trading day. These
price movements, known as volatility, can become extreme under certain
circumstances. The conditions of the last several months have created
apprehension among investors and that, in turn, has produced extreme
downward volatility in stock prices. Historically, however, the long-term
direction of the stock market has been upward. (Past performance does not
predict or guarantee future results.)
Safety of plan assets: Your employees need to understand that you--the
employer--and the financial firm(s) acting as custodian, managing and
investing their retirement savings, are not permitted to commingle
participant plan assets with your own accounts. The assets of a qualified
retirement plan are legally held in a trust, separate and apart from the
assets of the employer sponsoring the plan. These assets must be used solely
to benefit plan participants and beneficiaries.
Determining the best direction forward during this challenging period may
require the input of outside advisors. We would be happy to help your firm
look for ways to maximize your financial resources.
Please contact us.
Work-In-Process is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed, please contact
Ken
Hedlund,
Jay Feller,
Steve George,
Chris
Mayfield or
Rebecca Ogle
of our
Construction & A/E Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.IndianaConstructionCPAs.com