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Why we must nag our employers

By Barbara Whelehan · Bankrate.com
Friday, March 18, 2011
Posted: 3 pm ET

The 21st annual Retirement Confidence Survey that Jennie Phipps wrote about earlier this week revealed that Americans are more pessimistic than ever before about their retirement prospects.

It's good that we're finally facing reality. But I wonder: What do employers plan to do about it? Some hints were dropped earlier this week with the release of the 7th Annual Retirement Plan Survey conducted by Grant Thornton, Drinker Biddle & Reath and Plan Sponsor Advisors.

That survey of chief financial officers and human resources managers got less of a media splash, but sheds light on future retirement trends that will affect you and me.

Matching contributions return

Recall that in recent years, many employers eliminated or reduced matching contributions in their 401(k) plans. The bad news is that a majority of the 429 employers surveyed still don't plan to restore them.

But on the positive side: "Almost 30 percent of the respondents to our survey stated that they were planning on reinstating a previously suspended company match in 2011, and another 29 percent have not yet decided for 2011," says Scott Kiper, senior manager, Grant Thornton's Compensation and Benefits Consulting practice. "The message to plan participants is that things are getting better and this could generate some interest among participants who reduced or eliminated their contributions to the plan," he says.

Since they lost the match, some plan participants dropped out of their retirement plans. So are employers reinstating their contributions to encourage better participation because of their concerns about our retirement readiness? Probably not. Only 17 percent of the H.R. folks surveyed heard employees express concern in 2010 about their retirement readiness based on their retirement balances and benefit options. A whopping 83 percent said few or no employees expressed concerns.

I asked Grant Thornton to explain why employers are restoring the match. Kiper says: "Clearly, many employers have restored the match because of a more favorable outlook on their business. However, reinstating the match also does great things for retention, retirement readiness and nondiscrimination testing results."

Nondiscrimination what?

Maybe you don't know this. But if they want to keep the tax breaks associated with qualified plans, retirement plan sponsors (your employer, in other words) must prove their plans don't favor highly compensated employees. Highly compensated employees are defined as those who own 5 percent or more of the business or who earn $110,000 or more annually. They must pass two nondiscrimination tests, including the Actual Deferral Percentage, or ADP, test. "To pass the test, the ADP of that group must satisfy the 1.25 percent test or the 2 percent spread test," says Kiper.  

Let's skip the nitty-gritty details and get right down to an example. If the ADP of non-highly compensated employees is 4 percent, then the ADP of the highly compensated group would be limited to 5 percent, Kiper says. If the rank and file contribute 10 percent of their pay, then the limit for highly compensated employees would be 12.5 percent (10 percent times 1.25).

If too many non-highly compensated people drop out of a plan so they can use the extra money for food and gas, then the plan runs the risk of getting lopsided and failing the nondiscrimination tests. So participation by you and me is good for us and good for the plan.

The demise of pension plans

The other most interesting finding of the survey, in my view, is that more companies are freezing their old-style pension plans. Of the 429 plan sponsors who participated in the survey, 57 percent had frozen their plans. Of those frozen plans, 42 percent did a "soft freeze" that applied to only some employees, while 58 percent did a "hard freeze" that applied to all employees.

The Pension Protection Act of 2006 was supposed to strengthen pension plans by stiffening funding requirements, but as expected by some in the industry, it has helped bring about their demise.

"Plan freezes have occurred for many reasons," says Ray Berry, senior manager of Grant Thornton's Compensation and Benefits Consulting practice. "One reason is the 'perfect storm' of the following events happening almost simultaneously: low interest rates, which increase the liabilities, the drop in assets at the end of 2008 for most plans, as well as the shorter funding periods required for many plans."

The companies that keep their pensions must pony up more money to meet funding requirements. This impacts their financial statements, and you-know-who inspects those very closely. Not me and you, but the company's shareholders.

"Many blame the resulting volatility of both cash-funding requirements and pension expense as well as balance sheet liabilities as the primary reason for the freezes," says Berry.

In other words, companies place shareholder concerns above the retirement planning concerns of their employees.

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Check out Bankrate's Retirement Realities series. We'll be adding stories to it throughout the year. 

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6 Comments
Barbara Whelehan
May 06, 2011 at 12:25 pm

Hey Captain Quirk --

I didn't present my math, but the math of accounting experts at Grant Thornton, LLP. So I asked my source, Scott Kiper, if the blog requires a correction. His response was as follows:

"There certainly isn't anything wrong with the math. The examples provided are completely accurate. The reader may have been a little confused by my reference to the test as the '1.25 percent test,' but I certainly don't think that warrants a correction. Again, the descriptions of the test and the examples provided were accurate."

Diane MacPherson
May 05, 2011 at 9:45 am

Actually my benefits and retirement package were much better when I worked in private industry compared to what I now have working for the Federal government. And my fabulous FERS pension defined benfefit will be $300 per month when I retire at age 62. How will I ever spend all of that money!???!! Amazing.

Captain Quirk
April 29, 2011 at 4:35 pm

This article IS INDEED hard to read -- mostly because the author is really really bad at math. What she calls the "1.25% test" should be the "125% test". She's off by a factor of one hundred!

I couldn't understand how "If the ADP of non-highly compensated employees is 4 percent, then the ADP of the highly compensated group would be limited to 5 percent". The number 5 is 25% more than 4, not 1.25% more. 1.25% more than 4 would be 4.05. So how is the author making this calculation? I don't see it.

Likewise, I was equally confused about how "If the rank and file contribute 10 percent of their pay, then the limit for highly compensated employees would be 12.5 percent." (10 percent times 1.25)" Huh? 10 percent times 1.25 percent equals 0.125 percent, not 12.5 percent!

Oh, wait a minute. I think I see what the author is trying to say. She doesn't actually mean "1.25%" -- she means 125%!!! That's a hundred times MORE! Jeez!

Multiplying a number by 1.25 is *NOT* the same as multiplying it by 1.25 PERCENT.

And this falure in understanding the concept of PERCENTAGES is coming from a website that calls itself...."Bankrate.com"??? Seriously? Isn't the concept of "percent" the very essence of what interest rates are all about?

Wow. That would be like a lawyer not knowing the difference between a criminal case and a civil one. Or an aerospace engineer not knowing the difference between a kilogram and a milligram. Or, for that matter, a NASA satellite contractor like Lockheed Martin not knowing the difference between newtons (force) and pounds. (Oh, wait -- that actually happened! [Google "Mars Climate Orbiter"])

Barbara Whelehan
March 23, 2011 at 8:18 am

Sometimes I get "in the weeds" and think readers would like to know this information, too. I could have tried to make it more entertaining. Certainly I shouldn't have been so data-intensive. Thanks for getting through it. The point was to illuminate trends that will affect us going forward. The match from employers is coming back. That's good, even if one reason it's back is to encourage more participation by employees so that highly compensated employees can contribute more. And pensions are going away because companies are more concerned about shareholders than employees, but that's the way it's supposed to be in our system. C'est la vie.

LaDonna C
March 22, 2011 at 6:33 pm

I agree, you need a retirement planning advisor to explain this and what's your point?

Kesha J.
March 20, 2011 at 10:35 pm

This article is very hard to read. It's sad that we spend over half of our lives contributing our skills and knowledge to these employers and they have the ability to "hard freeze" or no longer contribute to our future retirement.