Further data on the growing incidence of 401(k) and defined contribution (DC) plan contribution reduction in the U.S. reveals that employers who choose this path to cost savings risk not only the morale of their plan members, but the wrath of regulators as well.
According to an employer survey conducted by Mercer in November 2008, 17% of respondents said they were likely or very likely to suspend contributions to their DC plans. Sure enough, during the first three months of 2009 more than 80 major employers publicly announced plans to do so.
“Distressed organizations may feel they lack sufficient time or resources to carefully consider the impact of contribution reductions or to evaluate alternative approaches,” says Bill McClain, Mercer retirement consultant. “But the effort invested up front could save considerable time and expense later in dealing with unintended consequences.”
McClain warns of regulatory implications of a match reductions or suspension that plan sponsors need to consider. He says that employers maintaining an IRS safe harbour design are subject to specific rules and restrictions on suspending or reducing contributions during the plan year. Other plan designs may offer more flexibility in terms of changing employer contributions, but even these plans must satisfy various regulatory requirements.
Additionally, if plan sponsors decide to proceed with contribution cutbacks, they must inform employees the reasons for doing so, when the new provisions will take effect and for how long the company contributions will be halted.
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“Participants need to receive sufficient notice to allow them to change their deferral elections if they wish,” says McCain. “And safe harbour designs carry specific notification requirements.”
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