What kind of return on time (ROT) does your profit sharing plan have? Some people I’ve spoken to assume that the employees are benefitting, but are they really? Further, what is the return on time for the company and its decision-makers?
What does profit-sharing have to do with retirement?
I find it interesting that profit sharing is associated with retirement. Sharing profits with the shareholders is profit sharing. Sharing profits with the employees through bonuses is another method of sharing profits. Under the Employee Retirement Income Security Act one of the plan types is called a profit sharing plan. Do the employees really understand that this a retirement plan? If they had received the money as a bonus they would have simply received it, paid taxes and used it. Instead, they received a distribution typically tied to a vesting schedule and if they cashed out early would be taxed and penalized 10%.
From a behavioral finance perspective, this may pose further problems with the employees. If there are no profits should they not save for their retirement? If you do not have both a 401k and a profit sharing plan this creates additional complexity in their decision-making process. Few people who are not CERTIFIED FINANCIAL PLANNER™ professionals, Certified Public Accounts and others with specialized retirement knowledge can figure it out.
I find that many plans work with someone that they assume is an expert in retirement planning. Typically it’s how the things get framed. It appears that investment and insurance companies that sell investments considered suitable for retirement plans must know about or be expert at retirement planning. Investments happen to be just one piece of the puzzle. While often treated as an investment plan, a profit sharing plan is a retirement savings plan.
Some companies who are record-keepers (keep track of employment savings) use a prototype profit sharing document. While it appears to make things simple for your company to implement your plan it may be costly to you. There are many different ways to allocate your profits to employees. Prototype documents use a simple formula. You may also use a more sophisticated plan design that allows you to skew the contributions to your more highly compensated workers based on actuarial calculations. You can read this case study to learn more. Suffice it to say that spending a few more hours to learn about your options could be beneficial. It could not only increase your share but also decrease your plants costs significantly.
401(k) and profit sharing
Another plan design combines 401(k) with a profit sharing contribution. I believe the combination benefits both you and your employees. The law and the spirit of the Employee Retirement Income Security Act is that the plan is being run for the sole benefit of the employees. Since the inception of the Employee Retirement Income Security Act much has been learned about employee behavior. We have learned that certain plan design features can help them increase their savings. One of those is a 401(k) feature. In 2015, a 401(k) provides your employees the opportunity to save $18,000 ($23,000 if age 50+). If you are challenged from a company profit standpoint and there’s no profit-sharing available your employees can still continue to save.
Return on time and using a fiduciary providers
Are you and other highly compensated workers unable to save what you need? Have you actually had a CERTIFIED FINANCIAL PLANNER™ professional or other credentialed retirement planning professional calculate your needs? If you can’t save what you need you certainly aren’t maximizing your return on time.
Have you had formal fiduciary education on your responsibilities? Too many company decision makers assume that those they hire to run the plan must be doing that. If that was not included in your RFP or most importantly, if you aren’t monitoring it, how do you know? Are they even capable? Are they sharing in your liability by acting as a fiduciary provider?
Are any of your providers an Accredited Investment Fiduciary® or Professional Plan Consultant™ who can help you with formal fiduciary education? If you haven’t had formal fiduciary education or read any of the Department of Labor’s publications, such as how to select and monitor a qualified default investment alternative, you are exposed to unnecessary risks. I submit that unnecessary risk exposure decreases any perceived return on time.
For Plan Sponsor Use Only – Not for Use with Participants or the General Public This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.