I always say that good third party administration (TPA) firms don’t get the respect that they deserve. The reason that they don’t get the respect that they deserve because many plan sponsors and financial advisors don’t know the value that they bring. I tried to note that value. One of the greatest values is plan design which can maximize the retirement savings of a plan sponsor’s highly compensated employees, as well as the use of plan sponsor contributions.
One of my favorite plan designs for 401(k) plans is the combination of a new comparability/cross tested plan design and the 3% safe harbor non-elective contribution. New comparability allows for greater percentage profit sharing contributions to highly compensated employees, as long as a minimum gateway contribution is made to non-highly compensated employees.
Trying not to throw some actuarial mumbo jumbo out there, we look at what the top group of employees gets (percentage wise of compensation). The non-highly compensated employees need to get the lesser of ½ of the percentage that the top rate group gets or 5% of compensation. The beauty of using the safe harbor 3% non-elective is that it can also be used to satisfy the minimum gateway requirements.
So in English, by using the safe harbor 3% non-elective contribution, the top paid group can get 9% of compensation as their profit sharing contribution (barring any unforeseen actuarial issues). With safe harbor, the ADP test, ACP test, and Top Heavy Tests won’t be necessary so highly compensated employees can maximize their 401(k) deferrals without worrying about refunds.
Safe harbor 3% non-elective and new comparability is a design that brings the best of both worlds, maximizing deferrals and profit sharing contributions.
On the flip side, I have seen many plans out there that offer the new comparability and the safe harbor matching contribution. The problem? Since matching contributions are only made to those that defer, it can’t be used to satisfy minimum gateway. So if a plan wants to use both designs, they have to give the safe harbor match and then give an additional profit sharing contribution to satisfy the minimum gateway, While I understand that the safe harbor match is cheaper than the non-elective because you don’t have to give it to people who don’t defer, I think it’s a poor plan design because you are cutting your nose to spite your face because this design won’t maximize retirement savings and may have the plan sponsor make a greater contribution to non-highly compensated employees than they had to. It’s a plan design that reminds me of one of my old TPA bosses, Manny. I used to say about him was that he was the type of guy who would lose five dollars to save a dollar and be happy about it. A safe harbor match and new comparability combo saves a couple of bucks at first, but costs the plan sponsor more if they wants to fully use both designs. Manny might approve.
Great plan designs in a TPA’s repertoire are a thing of beauty, as long as it maximizes the plan sponsor’s contributions. Inefficient plan designs costs the plan sponsors more money in contributions.