A professional service firm was struggling to meet the diverse savings needs of the different levels of its workforce, which consisted of staff, associates, and partners. Partners sought to save more for their retirement than what was available under the existing plans.
One-size plan does not fit all
The original retirement savings program lacked the flexibility required to meet the needs of lower and higher-paid employees. Firm partners and staff were entitled to make 401(k) contributions, with the first 2% matched by the firm, and received a share of the company’s profit-sharing contributions. The defined contribution plan allowed only a maximum of $45,000 in total annual contributions, which was often much less than partners wanted to contribute. In addition, the partners participated in a modest defined benefit plan established some years ago to provide a funding mechanism for deferred compensation amounts to be paid to certain partners at retirement. Associates were covered under an additional, separate 401(k) plan with no firm matching contributions.
Using regulations to the greatest extent provides better opportunities
Milliman was asked to evaluate the retirement plans and, if possible, redesign the firm’s benefit program to provide increased income deferral opportunities for the firm’s partners while allowing individual partners to choose their levels of benefits. Milliman met the challenge by carefully reviewing all of the nuances of the law and applying the regulations to their fullest extent.
The new defined benefit plan enables partners to put away a much broader range of savings. In the new plan, partners who want to save more can defer up to $200,000 annually above the maximum annual defined contribution amount. By increasing staff profit-sharing contribution levels from 5% to 7.5%, benefits for partners are increased up to tenfold.
Flexibility was created for partners who desire lower deferrals by tying the partners’ defined benefit accruals to their annual elections to make after-tax contributions to the defined contribution plan. For partners who want to maximize deferrals, those electing to make an after-tax contribution of $2,800 for the year receive the maximum defined benefit plan accrual for that year, with those electing to make lower after-tax contribution amounts receiving proportionally lower defined benefit accruals.
Greater flexibility leads to high participation
By avoiding shorthand interpretations of IRS regulations and seeking to completely understand the implications of the law, Milliman devised a plan that met the diverse needs of the professional service firm’s employees and passes IRS anti-discrimination tests. The initial rollout was enthusiastically received and participation rates are high.
