Retirement Plans: Time for Another Look?
August 8, 2008

If you own or run a small or medium size business, you probably sponsor a tax-qualified retirement plan for your employees (including yourself) - most often a 401(k) plan or profit sharing plan. Do you know that the regulatory environment in which these plans live has actually improved in may ways? Chances are that, although you like the tax deferral and other benefits that the plan provides, and you have learned to accept as a necessary evil the annual costs of administering the plan and keeping it out of trouble, you are not enamored of the complex rules that govern such plans, or the fiduciary risks inherent in their sponsorship. But when was the last time that you really looked at the plan to see if you are getting the biggest possible “bang for the buck”? If your plan emphasizes retirement benefits for rank and file employees, are the benefits reasonable in light of current market conditions in your industry? Conversely, if your plan is “owner-oriented”, does it maximize benefits for owners and/or key employees (lets refer to them as “principals”), while not requiring an unreasonably high level of benefits for rank and file employees? If it's been some time since you really examined your plan design and considered all of the available options, it may be time to take another look. The Internal Revenue Service and Department of Labor rules are constantly changing (and usually becoming more restrictive and complex), but in many very significant ways the rules have actually become more favorable to businesses. For example:

• There are now effective ways to design “safe harbor” 401(k) plans that eliminate the need for complex annual testing (and, as well, the need to put more money into the plan, or to refund contributions to your principals, when the tests are failed).

• If your principals tend to be older than the average age of your employees, methodologies exist (with names such as “age-weighting”, “cross-testing” and “new-comparability”) to allocate employer contributions disproportionately in favor of the principals - taking advantage of the IRS recognition of the fact that older employees have fewer remaining years to accumulate benefits than do younger employees.

• New mechanisms have been developed to help:

• shift fiduciary responsibility for investment performance away from employers; and

• lessen the burdens placed upon employees to make investment choices that will affect their ability to retire at a reasonable age.
Of course, there is no free ride. In order to maximize benefits for the principals, it is necessary to make a reasonable level of contributions for rank and file employees (or at least those who must be included in the plan in order to pass the coverage tests). But, in most instances, an employer contribution level of 3% to 5% of compensation - well within the normal range - should suffice to allow the principals to maximize benefits, minimize complexity, and reduce fiduciary risk.

So maybe it's time for another look at your plan (or perhaps a first look if your business has no tax-qualified retirement plan in place). The Thomas & Libowitz Employee Benefits and Executive Compensation Group has the expertise and experience necessary to help you evaluate available options (i.e., we've seen it all), and we have developed very sophisticated plan documents (in both individually-designed and prototype formats) to quickly and efficiently implement all that needs to be done.

If you have any questions, please contact:

Barry D. Berman, Esquire
bberman@tandllaw.com
(443) 927-2115

or

John R. Paliga, Esquire
jpaliga@tandllaw.com
(443) 927-2114