Plan Rebalancing

While I know there is opinion that separating a 401(k) plan into two plans solely to avoid large plan/audit status may not be an acceptable reason to create a second plan, we did this for a client several years back.

In 2012 we spun off to a new plan those hired on or after 1/1/2011.  Those hired before 1/1/2011 remained in the existing plan.

We have tested the two plans together in all years (they are ADP/ACP tested plans with all of the same provisions).

We are now to the point where the second plan is reaching large plan status.  The client asked if we could split that plan into a third plan, but I told them I didn’t think that was a good idea.   Instead, we are exploring the idea of “rebalancing” the two existing plans, changing the plan eligibility from the 1/1/2011 hire date to a 1/1/2019 hire date.  In essence, we would be moving all those hired between 2011 and 2018 from the second plan to the first plan, which would reduce the count in the second plan thereby allowing it to grow again.

Has anyone ever done anything like this?  The recordkeeper for the plans (Empower) is saying they would simply do a plan to plan transfer (since it's one company) and so no black out notice would be needed, but I feel like it is a bit more involved than that.

Any thoughts/advice would be greatly appreciated.  Thanks in advance.

We actually had a situation years ago with a company that had 3 mirror plans for that reason.  When the “main” plan grew too much, a fourth mirror plan was created, and some participants were moved to the new plan… note that the company did have a real business criteria for which participants were moved.  

May I ask what the business criteria were?  Maybe I'm missing a viable opportunity to add the third plan...

Thank you.

I think the business criteria had to do with different divisions/departments within the company, but I wasn't involved with the details of what/how the company selected the different participants to move.

Opinions are split on whether the division needs to have any legitimate business purpose. In the most recent issue of the Journal of Pension Benefits, Larry Starr suggested splitting up the employee population by last name to avoid an audit.

1 hour ago, C. B. Zeller said:

Opinions are split on whether the division needs to have any legitimate business purpose. In the most recent issue of the Journal of Pension Benefits, Larry Starr suggested splitting up the employee population by last name to avoid an audit.

We have a current plan that is contemplating splitting a plan into two smaller plans by last name.  Nice to know that Larry Starr recently suggested as such.

At some point I would guess that the the cost of maintaining multiple plans has to approach the cost of maintaining one plan with an audit.  Another possible option is to combine the plans into one large plan and look at a PEP product.  PEPs maintain a single 5500 and single audit, the cost is spread among all plan participants.  There are pros and cons to be weighed with all three options. 

Thank you for the responses.  Splitting by last name seems risky to me as one or the other plan could become large quickly just by virtue of new hires' last names.  Any thoughts on what type of communication would be required to the participants (a new plan is not being created, just participants being moved between two existing plans)?  I thought perhaps a black out notice would be needed, but as suggested by the recordkeeper, if they can do a plan-to-plan transfer, then perhaps one is not required because the movement doesn't take the balances out of the market for more than 3 days?

6 hours ago, TRDriver said:

Thank you for the responses.  Splitting by last name seems risky to me as one or the other plan could become large quickly just by virtue of new hires' last names.  Any thoughts on what type of communication would be required to the participants (a new plan is not being created, just participants being moved between two existing plans)?  I thought perhaps a black out notice would be needed, but as suggested by the recordkeeper, if they can do a plan-to-plan transfer, then perhaps one is not required because the movement doesn't take the balances out of the market for more than 3 days?

Interesting... I don't know what kind of communication to participants were provided by the company.  In our case, Company 401k Plan was renamed to Company 401k Plan I (001) and the new plan was named Company 401k Plan II (002).  I don't recall any feedback from the company that they had questions from participants.