(b)lines Ask the Experts – Why Sponsor So Many Retirement Plans?

I just started to work for a mid-sized health care organization, and it turns out that they have 10 different plans with 10 different plan documents!

“Is there any reason in the world a not-so-large organization would be administering 10 separate plans? Just the 5500 filing process—all of the plans are subject to the Employee Retirement Income Security Act (ERISA)—which I am commencing now, is exhausting!” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:      

The Experts answer to your question is a definitive “Maybe!” Although it is true that a significant number of plan sponsors probably sponsor more retirement plans than they truly need, there could be many reasons why 10 plans are necessary at your particular employer. These reasons include, but are not limited to, the following:

  • The plans are of certain plan types that cannot be merged. For example, 403(b) plans may not be merged with 401(k) or 401(a) plans;
  • The plans contain different provisions (e.g. different plan years, vesting schedules, or other important plan features) that would be difficult/impossible to consolidate into a single plan;
  • Some plans are separate to facilitate compliance testing. For example ADP/ACP testing can generally be conducted on a per-plan basis if the plans that are required to be aggregated pass coverage testing as a whole. In such a situation, it is possible that plans could fail ADP/ACP when tested together, but pass when tested separately; and
  • There are business reasons for maintain separate plans. For example, the plan sponsor may work with collectively bargained employees, and the collective bargaining agreements with those unions may dictate that a separate retirement plan be established for each bargaining unit.

Having said all of this, the Experts would suggest that you work with your plan adviser and ERISA counsel to examine whether 10 documents are indeed truly necessary, especially if this issue has not been reviewed in some time. The administrative costs of sponsoring 10 separate plans are likely to be prohibitive for a mid-sized employer, and the large number of plans increases the likelihood of plan defects and the liability associated with same. By conducting a review of their retirement plan structure, many plan sponsors have been able to successfully reduce the number of retirement plans that they administer.

Thank you for your question, and good luck!


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to rmoore@assetinternational.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.