It’s Time to Amend Your Retirement Plan

It’s Time to Amend Your Retirement Plan

By Randall W. Cook

As we reported in an earlier issue of Business Briefs, Congress recently enacted several new laws affecting all retirement plans. Most of the new laws, which came under the umbrella of “Pension Simplification,” make sponsoring and operating a retirement plan more attractive than ever. However, as is the case with most legislation affecting retirement plans, the new laws do require all plan sponsors to make a significant number of amendments to their plan documents before the end of 1999. Because all plan documents must be completely restated anyhow, 1999 is an excellent year to consider adding a few “bells and whistles” to your retirement plan.


If you currently sponsor a stand-alone profit sharing plan (i.e., where the employer alone makes all of the contributions), then consider adding 401(k) features to your plan in 1999. Under a 401(k) profit sharing plan, each eligible employee (including the owners) can make voluntary, pre-tax contributions to the plan in addition to the amounts contributed by the employer each year. In the past, many employers shied away from sponsoring 401(k) plans because of the complexity of administering such plans. However, most of the new laws enacted by Congress under “Pension Simplification” were specifically targeted at making 401(k) plans easier to administer and therefore more attractive to the employer. As a result, adding 401(k) features to your plan can result in a significant enhancement to your plan at little or no additional cost to the employer.


Under traditional profit sharing plans, the employer contributions that are made each year are allocated to the eligible participants’ account pro rata according to relative compensation. Thus, for example, if the employer makes a profit sharing contribution equal to 5% of eligible payroll, then each eligible participant receives a 5% allocation to their account. Under a “cross tested” profit sharing plan, the employer is allowed to go through its workforce and place the eligible employees in different job classes. At the end of the year, the employer then decides how much of a profit sharing contribution goes to each job class, and then allocates that contribution pro rata according to relative wages within the job class.

Not only do cross-tested plans allow the owners of a company to allocate significantly higher portions of the profit sharing contributions to their own accounts, they also give the employer the opportunity to place valued employees in job classes that receive higher annual contributions than other employees.


Under the traditional type of retirement plan, the owner serves as the “Trustee” of the plan and invests the plan assets as a whole. Although this eases plan administration, it also means that employees with different risk tolerances are forced to accept the same rate of return received by all participants in the plan. More and more, employers who sponsor retirement plans are switching to participant-directed investments. Under this approach, the employer typically chooses a single investment company and selects between three and ten funds within that company. The employer than tells the employees that they may elect to invest their own account balances in one or more of the investment alternatives. To the extent that the employees do elect to invest their own accounts, the employer can then be relieved of any fiduciary liability for investment losses that the employee may incur. With the recent arrival of a volatile stock market, participant-directed plans have become even more popular with employers, especially in the case of 401(k) plans where most of the participant’s account balance represents his or her own salary deferrals.

The foregoing are just a few of the new “bells and whistles” that you may wish to consider when restating your plan documents this year. If you are currently using retirement plan documents prepared by Saalfeld, Griggs, you will received a letter in the next few months inviting you to come to the office to discuss restating your plan to comply with the new laws. At that time, we can explore some of the optional plan features you may wish to include in the restatement. In most cases, adding these optional plan features at the time of restatement will not add to the cost of the plan amendments. If you are currently using someone else’s plan documents, we invite you to contact us to discuss using our firm to meet your retirement plan needs.