Suspending contributions can increase regulatory risk

Reducing or eliminating contributions to 401(k) schemes along with other defined contribution plans is one route organisations in the US are exploring in order to preserve cash amid the recession.

Although the regulatory implications vary according to the different retirement plans, employers should consider whether a formal plan amendment is required and if this raises any potential "anti-cutback" issues, where pre-agreed benefits cannot be reduced, Mercer said.

Reducing or suspending employer contributions could also impact upon the plan's non-discrimination requirements - when the change could potentially favour a high paid employee over a lower-paid one.

Mercer Retirement Consultant and author of Mercer's survey update Bill McClain said that in order to "avoid surprises and potentially costly remediation" employers could project the impact of contribution changes on non-discrimination tests.

Separately, plan sponsors offering auto-enrolment should also review this with regard to any suspended or reduced matching contributions. Plans which provide a true-up matching contribution at year end require attention to the pay and contributions that will be taken into account when calculating true-up.

Organisations with nonqualified deferred compensation programs also need to consider other potential effects, such as whether any matching contributions should be suspended in the nonqualified program.

In terms of reducing employer contributions, McClain said that although the loss of one year's employer contribution may not have a huge impact on an employees's retirement benefit, it could represent "yet another incremental loss to an already weakened benefit."

He added: "Suspending contributions also results in a lost opportunity to purchase equities at historically low prices. These implications need to be weighed against the organization's need to preserve capital."

Recent Mercer surveys show that in the first three months of 2009, more than 80 employers publicly declared plans to reduce or suspend contributions to DC plans.