What it means
When a company offers a retirement plan, the company is normally the plan sponsor. It chooses the type of plan, writes or adopts the plan document, selects the providers who will manage the money and decides how much it will contribute.
Unions and associations that set up plans for their members can also be sponsors. The sponsor has duties that go beyond setting up the plan.
It must act in the interests of the members when choosing and monitoring service providers, and it must make sure contributions are paid on time and in the right amounts. In many countries these duties are fiduciary (a legal duty to put members' interests first), and breaches can lead to personal liability for the people involved.
Sponsors usually decide the features that make a plan attractive. These include who is eligible, whether the employer matches contributions, how long a worker must stay before the employer's money belongs to them (called vesting), and which investment options are offered.
Each choice changes the cost to the business and the value to staff. The plan sponsor is different from other parties.
The plan administrator runs the plan from day to day, the trustee or custodian holds the assets, the investment manager picks the investments and the participants are the members. In small companies, the owner may hold the sponsor role and several of the others at once.
For finance teams, the sponsor role means budgeting for employer contributions, administration fees and the cost of audits or filings. In a defined benefit plan, which promises a set pension, the sponsor also bears the risk that the plan will not have enough money and must fill the gap.
In a defined contribution plan, the risk of investment results usually falls on the member. Sponsors can change or end plans, but they must follow the plan rules and the law.
Reducing benefits already earned is usually restricted, while future changes can often be made with notice. Companies should review their plan each year for cost, fairness and compliance.
In practice
Real-world examples.
Example
A manufacturing company with 300 employees decides to start a retirement savings plan. The board approves the plan, picks a provider and agrees to match 3% of pay. The company is the plan sponsor and signs the plan documents.
Example
A trade union sets up a pension plan for its members who work for many small employers. The union appoints trustees and an administrator. As plan sponsor, it reviews the costs and the investment options every year.
Example
A software start-up hires a firm to run its retirement plan, but the founder remains responsible for choosing and monitoring that firm. She compares the fees against two other providers once a year. She keeps notes of the reasons for her decision.
Formula
Calculation
Employer match = employee contribution (up to the matching limit) x match rate
A plan sponsor offers a match of 50% on employee contributions up to 6% of salary. An employee earns $80,000 and contributes 6%, which is $80,000 x 6% = $4,800. The employer match is $4,800 x 50% = $2,400.
The total paid into the employee's account for the year is $4,800 + $2,400 = $7,200. If the sponsor has 100 employees who all earn $80,000 and contribute 6%, its annual match cost is 100 x $2,400 = $240,000.Case study
Seen in the real world.
Hollowbrook Furniture is a fictional furniture maker, and this story is illustrative. The owner started a retirement plan for 60 employees with an employer match of 4% of pay, but never reviewed the provider's fees.
Three years later, an adviser showed that the plan was charging 1.2% of assets a year, while similar plans charged about 0.5%. On $6,000,000 of plan assets, the difference of 0.7% was 0.7% x $6,000,000 = $42,000 a year that came out of members' accounts.
The owner, as plan sponsor, moved to a lower-cost provider and began a yearly review that was recorded in writing. The members' savings grew faster, and the company reduced its legal risk. The illustrative lesson is that the sponsor remains responsible for oversight even when it hires professionals.
Watch out
Common mistakes.
- Believing that hiring a provider removes the sponsor's responsibility for choosing and monitoring that provider.
- Ignoring plan fees, which reduce members' returns and can create legal risk.
- Making plan changes without following the plan document and giving members proper notice.
Questions
People also ask.
Is the plan sponsor the same as the plan administrator?
Not always, because the sponsor creates the plan, while the administrator runs it, although the employer often holds both roles.
Does a sponsor have to contribute to the plan?
Not always, since some plans rely on employee contributions alone, but many sponsors choose to match to attract staff.
Can a sponsor end a plan?
Generally yes, but it must follow legal rules, protect benefits already earned and give notice.
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