Reducing DC Plan Costs During Financially Challenging Times

There are several options for changing benefits and shifting costs, and proper communications can help avoid participant backlash.

Plan sponsors’ businesses might have suffered financial setbacks because of the COVID-19 pandemic. To cut costs, some might feel they have no other choice but to terminate their defined contribution (DC) retirement plan. However, there are other ways to reduce the cost of DC plan administration without terminating the plan.

Gregg Levinson, senior director of retirement at Willis Towers Watson, says the first option is to suspend employer contributions while still allowing employees to make deferrals into the plan. “Plan sponsors can work with providers to enhance participant support and access to financial management tools to make up for the loss of employer contributions,” he says. “Sponsors could also tell participants, ‘Your retirement is important to us. We are not currently in a position to contribute to your retirement savings, but we will when we can, and you should save if you can.’”

David Klimaszewski, a partner at Culhane Meadows, says that, for most employers, the cost of running a plan is lower than contributions.

He warns that if the plan is a money purchase pension (MPP) plan, cutting back on contributions requires a plan amendment and a 45- to 60-day advance notice to participants, so it will take a few months for MPP plan sponsors to realize cost savings from reducing or suspending contributions.

Levinson says DC plans can be frozen in the short-term, but it becomes a plan termination at some point. Freezing a plan would mean no employer or employee contributions are made to the plan, and it could decrease some operational costs. “It’s not exactly clear when that would become a plan termination. After a Form 5500 is filed when the plan is frozen, once the plan sponsor files a second Form 5500, the IRS says the plan is effectively terminated,” he explains. “Just as with DB [defined benefit] plans, freezing the plan is the second criteria for termination, after making plan amendments.”

Klimaszewski says freezing a plan so participants can no longer contribute could possibly cause a partial plan termination, and participants would have to be fully vested. It’s not clear when it becomes a partial termination, so he recommends that plan sponsors that take this route go ahead and make everyone fully vested.

Rick Skelly, client service executive, Retirement Services Division, Marsh & McLennan Agency LLC, says there are no provisions in the Employee Retirement Income Security Act (ERISA) that allow DC plans to stop and restart due to difficult economic times for the plan sponsor.

DC plans can be frozen, Skelly says, but not as a means to temporarily suspend or avoid the ERISA requirements of offering a plan. “While not common, freezing a plan could be done in some M&A [merger and acquisition] situations so as to avoid coverage testing requirements until plans are merged or one is terminated. In addition, we have seen frozen plans due to severe non-compliance issues and long-term IRS audits where the plan is at risk of disqualification,” he says.

Even if a plan sponsor suspends match contributions, there are still operational costs to the plan that it might have trouble paying. Levinson suggests plan sponsors transfer costs to employees to the extent they are not already paying. “It doesn’t look good, but plan sponsors can explain that they need to focus on managing the company and while they realize saving for retirement is important, in the short term they are passing costs to participants,” he says. “How participants take the news depends on how it is communicated. Put participants in the same boat and say, ‘We’re all in this together.’”

Skelly explains that under ERISA, there are two main categories—settlor and fiduciary—for any type of fees or costs to operate a retirement plan. He says only those defined as “fiduciary expenses” can be charged to and paid by the plan assets, i.e., participants. The most common of these are recordkeeping and administration and investment adviser fees and, occasionally, plan audit fees.

“If a sponsor is paying some of these fees currently, it can contact its provider and shift the fees to the plan by amending documents or service agreements and giving participants advance notice of 30 to 90 days and a new 404(a)(5) fee disclosure notice,” Skelly says.

While plan sponsors can pass certain plan fees to participants, Klimaszewski says that is not something he would recommend. He says plan sponsors are not worried about “nickels and dimes” anyway; they are more worried about big costs. So, benefits staff might try to determine how to free up costs from other benefits. Klimaszewski notes that the two most costly benefits are typically medical and retirement benefits.

For example, he says, plan sponsors could shift more medical costs to employees to free up money. They could also stop coverage for dependents or charge dependents for the full cost of coverage, although this might create an employee relations issue.

“It’s hard to generalize which solutions are best because each company and their benefit plans are different,” Klimaszewski says. “A clever idea for one company may be specific to that company and won’t work for others.”

Another way to streamline the costs of the plan, if the employer doesn’t want to pass costs to employees, would be to strip out non-protected features of the plan that create administrative costs, such as loans or hardship withdrawals, according to Levinson. However, this could be a difficult decision as participants are feeling financial stress as well and might turn to the DC plan for help.

Levinson says plan sponsors could also streamline DC plan investment menus, offering a solid core structure that keeps costs down but keeps returns consistent. He adds that plan sponsors can switch to offering advice solutions, letting employees pay for managed accounts.

In the long term, plan sponsors could start looking for other providers with whom they can negotiate smaller fees, Levinson suggests. The process of switching providers comes with a cost, but, for the future, plan administration would be less expensive. Levinson adds that smaller employers could look into whether pooled employer plans (PEPs) would help lower their costs.