Your Plan Passed. But Is It Working?
A message from Daniel McWhirter
Anyone who knows me knows that I enjoy spending fall Saturdays watching football. A win always feels good, but no good coaching staff looks at the final score and assumes everything went according to plan.
They review the film. They study what worked, what almost went wrong, and whether the same performance will produce another win next week. A team can win despite missed assignments, poor execution, or weaknesses that a better opponent may expose.
The scoreboard tells us who won. The film tells us how the team performed. Retirement plan testing should be viewed the same way.
When a plan’s annual testing results come back “passed,” the natural response is relief. The plan satisfied the applicable requirements, no corrective action is needed, and everyone can move on.
But passing the test is like winning the game. It is the result—not the complete evaluation.
Testing Is More Than a Compliance Exercise
Annual testing measures how the plan’s design interacts with the company’s actual workforce. Compensation, participation, ownership, contribution levels, and employee demographics all influence the results.
Those results can reveal much more than whether the plan technically passed.
Repeated refunds to highly compensated employees may indicate that certain employees cannot save as much as they would like. A plan that passes by a narrow margin may be vulnerable to relatively small changes in participation or compensation. Unexpected top-heavy or minimum contributions may increase employer costs without advancing the company’s primary objectives.
A plan may also pass every required test while still producing disappointing results. The employer may be making a substantial contribution, but the allocation formula may no longer direct benefits toward the employees it most wants to reward. Participation may be low. Key employees may not recognize the plan’s value. Administrative provisions may create unnecessary work without providing a meaningful benefit.
In each case, the plan may be compliant—but that does not necessarily mean it is performing.
Let the Results Start a Conversation
Testing results should not simply be filed away after the word “passed” appears on the report. They should be used as a diagnostic tool.
Depending on the employer’s objectives, the results may lead us to evaluate a safe harbor design, a different matching formula, a new comparability profit-sharing allocation, revised eligibility provisions, automatic enrollment, or even the addition of a cash balance plan. In other situations, the right answer may be to simplify the plan rather than add more features.
Not every testing result requires a change. Sometimes the existing design remains the best fit. The important thing is to ask the right questions:
What is the company trying to accomplish through the plan?
Who does it most want to benefit?
Is the current design producing that result?
Is the employer’s contribution being used effectively?
Would we build the same plan if we were designing it today?
Why the Conversation Should Happen Now
Many employers wait until annual testing is completed to think about plan design. By then, some of the best solutions may no longer be available for that plan year.
Certain amendments must be adopted before the first day of the plan year. Other changes require advance participant notices and sufficient time to coordinate with the recordkeeper and payroll provider. A new safe harbor matching formula, for example, generally requires action before the year begins.
Adding automatic enrollment also requires more than a simple amendment. The employer must make decisions about contribution rates, automatic increases, investments, participant notices, and payroll implementation. Even when a change is legally permitted after the year begins, waiting may reduce the available options or make implementation more difficult.
A passing test tells us that the plan complied with the law. It does not necessarily tell us that the plan is accomplishing what the employer wants.
Before another plan year begins, take time to review the film. Look at your most recent testing results not simply to confirm that the plan passed, but to understand what those results may be telling you about its design.
Your plan may have won this year. Reviewing the film can help make sure it is prepared for the next one.
If you are unsure whether your current plan design still fits your company’s objectives, contact your Plan Manager. Thoughtful plan design takes time, and the best time to begin the conversation is before the new plan year starts.