Your clients understand that it’s the people working in it that make a company great. They want to attract and retain top talent, and one of the best ways to do that is by offering a retirement plan. Many small- to medium-size business owners say that a retirement plan is the most important benefit they can offer their employees after health insurance. They see it as a way to stand out and be more competitive. (1)
With the vast majority of Americans’ retirement savings in employer-sponsored plans (2), it is more important than ever to not only offer a plan but to offer one that truly meets the needs of the participants. Retirement plans are not one-size-fits-all. With the great variety of plan options available, how can you help your clients design the best plan for their employees and themselves?
Start With The End Goal In Mind
When crafting a retirement plan, you have to start with the end goal in mind. In order to do so, you have to first establish your end goal. Does your business owner client want to lower their taxable income and save for retirement quickly? Or do they want to attract and retain key employees? Those two scenarios would require very different retirement plans.
You will better understand what your clients are trying to accomplish with their retirement plan after talking through their motivations with them. If they are unsure, ask penetrating questions to help them uncover their reasons and clarify their goals. Once you have established their goal, you will be able to craft a plan specifically designed to achieve it.
Review All Of Your Options
A 401(k) plan may be the most popular employer-sponsored retirement plan out there today (3), but it isn’t the only option. There are cash balance plans, combo plans, defined benefit plans and a number of other options. Don't simply default to a 401(k) plan for your clients.
You should consider the pros and cons of each type of plan and how they align with your client’s goals before making any recommendations. Your clients trust you to do what is best for them and not just go with a simple or obvious choice. After a comprehensive analysis, you may find that one of the lesser used plan options best addresses your client’s needs. Here are some of the benefits of various plan options that you might want to consider:
Defined Benefit Pension Plans
Many large companies have been moving away from defined benefit pension plans for the last several decades, but they can still be a great option for small companies, especially owner-only companies. They allow owners to defer the most income of any kind of plan and the pension is protected from bankruptcy creditors under ERISA.
The popular 401(k) plan is cheaper to administer than a defined benefit pension plan. The current contribution limit is $18,000, but when combined with a profit sharing plan, up to $54,000 more can be contributed, with catch-up contributions allowed for older participants. Profit sharing plans are a nice addition to 401(k)s because they do not have minimums and contributions do not have to be consistent from year to year, allowing more margin for owners during leaner years.
Defined Benefit/Defined Contribution Combination Plans
There are a number of benefits of hybrid plans, depending on the type. These plans allow owners to defer more income than typical defined contribution plans, which is great for those getting a late start. Some allow for a defined benefit plan for the owners and a defined contribution plan for employees, reducing costs for the owner. Also, the pension assets are protected in bankruptcy under ERISA.
Cash Balance Plans
Cash balance plans are appealing because they combine the high contribution limits of traditional defined benefit plans with the portability and flexibility of 401(k) plans. Depending on age and compensation, the annual contribution to a CBP could be more than 4 times the maximum allowed with a 401(k) and profit sharing plan. Also, they are generally considered less risky cost-wise for plan sponsors.
Partner With An Experienced Third Party Administrator
Did you know that a business owner earning over $100,000 may be able to defer over $200,000 per year with a defined benefit plan? (4) Many financial advisors don’t have the specialized knowledge to be aware of such opportunities, so they work with third-party administrators (TPAs) who specialize in retirement plans.
A good TPA not only knows the details of all of the options available to your clients, but they are experts when it comes to the tedious intricacies of ERISA. There is no need for you to become a specialist, an experienced TPA can help you create a retirement plan for your client within ERISA guidelines that packs a powerful punch.
If you want to make sure you are designing the best possible retirement plan for your clients, email me today at firstname.lastname@example.org. We can partner together to fashion the best possible plan for the business owners that you work with. Let me handle the details and you can breathe easy knowing that you have both increased client satisfaction and met your fiduciary duty.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.