Compensation Risk

I was reading Mike Melbinger's blog today about compensation risk assessments (if you want to read online legal analysis of compensation issues, I strongly recommend his blog) and I got to thinking that oftentimes, the people who may be assisting clients with this assessment may not know much about risk. You see, in evaluating compensation risk (and the SEC doesn't really tell us what that means), companies are to look at all elements of remuneration for both executives and for other employees. So, that includes things like deferred compensation which includes both qualified and nonqualified retirement plans.

I've written a lot about risk in retirement plans from the employer standpoint. How much cost variability is there? Does this benefit properly align with corporate goals? In an enterprise risk framework, where do these plans fit in? Is there compliance risk? Is there risk associated with having retirement benefits that are so large that you can't get employees to leave when you'd like them to? Is there risk associated with not having a defined benefit plan when some of your competitors for talent have them?

That last question is confusing, isn't it?. But, think about it. Defined benefit plans to favor older workers, not because they are discriminatory, but because of the shorter discount period until retirement date. So, if you sponsor a generous 401(k) plan and your top competitor sponsors a generous defined benefit plan, then a knowing employee might work for you until they get to be about 45 and then just when they really know the business, take off to your competitor who has a generous defined benefit program. It just makes sense.

So, compensation risk isn't only what you probably think it is. If you want to do a really thorough analysis and consider all of your rewards programs, consider people who have sufficient expertise to help you through the process. You might just learn something about your programs that you hadn't thought of before. And, it might be really useful.

Multiple Employer Plans are for Related Multiple Employers

Last Friday, the Department of Labor (DOL) released Advisory Opinion 2012-04A. I found it interesting because it related to some conversations that I had several months ago. It seems that for the last number of months, one of the very hot topics among retirement plan advisers for smaller plans has been multiple employer plans.

Someone had found a gimmick. You see, a multiple employer retirement plan is a single plan for employees of multiple employers. As a single plan, it needs one Form 5500, one plan audit, one plan document, etc. Each of those elements costs money. Split among lots of employers, that's a lot of savings.

Several of those advisers asked me about this approach. I didn't have statute or regulations in front of me, but remarked that I didn't think it passed the smell test and that government agencies would find a way to kill this idea. The downside of being a part of it if it was found to be non-compliant far exceeded the upside of the cost savings.

Guess what? The DOL Advisory Opinion found more than just failure to pass the smell test. ERISA tells us that a plan must be maintained by an employer or employee organization or both. Employer further includes a group or association of employers acting for an employer.

To break this down into lay terms, organizations in one multiple employer plan need to bear some relation to each other. The DOL found that in the instant plan, many employers bore no relationship to each other.

Bottom line, while the Advisory Opinion only carries limited weight and does not specifically affect qualification under Sections 401 and 501 of the Internal Revenue Code, be assured that Labor and Treasury read each other's pronouncements related to retirement plans.

The downside may have exceeded the upside.