The best plan design is the one that works for you. As your business or life circumstances change, then too should your retirement program.
A retirement program provides more than an accumulation of money. For the small business person, a retirement program provides for diversification of investments away from the small business. The program provides for the propensity to walk away from the business at some point, whether voluntarily or involuntarily.
A funded retirement plan allows for stability, having a substantial nest egg to carry us through our retirement years without the fear of running out of money.
The design of a plan has to fit the company’s persona. A plan can be established to provide an equity like security for key individuals without providing stock. A different type of plan can be used to have the employees share in their retirement costs. Other programs can be established to allow the owners to “catch-up” on their retirement savings now that their life investments of the business, the children or home have been completed.
We help you in determining the best plan design that will fit your circumstance. We use your employee group and your desired goals to design a program that can fit your profile. We walk you through the alternatives carefully, to help you understand the differences of the programs and why our recommendation makes sense for you.
Understanding the Type of Plan that Best Fits Your Business: The need for funding flexibility plays a big role in the type of plan used. Pension plans, either defined benefit or defined contribution plans, have required funding each year. They often allow for greater contributions however, the trade-off is that contributions may be required in good years and bad. Many options are available, but more planning is required.
There are qualified retirement plans and IRA derivative retirement plans. The qualified retirement plans must meet stringent requirements to maintain their qualified status before the IRS in order to receive the favorable tax treatment of tax deductions for contributions and expenses, tax deferral of the earnings, and possible tax credits for new plans.
Qualified plan assets are normally protected under the bankruptcy laws, which can provide a level of additional security to the owners and their family.
IRA Derivative Retirement Plans:
There are several variations of IRA programs:
- Employer Sponsored IRA programs
- Simplified Employee Pension Plans (SEPP’s).
The employer sponsored IRA program and SIMPLE’s provide for employees to save on their own behalf. SIMPLE’s and SEPP’s must cover part time employees. All three do not have the same fiduciary due diligence and responsibility required under the qualified retirement plans.
Qualified Retirement Plans:
There are two types of qualified retirement plans:
- Defined Benefit Plans
- Defined Contribution Plans
As the names imply, one defines the benefits you receive at retirement and the other defines the contribution that will be made on your behalf each year.
- Defined Benefit Plans:
- A defined benefit plan is guaranteed by the plan sponsor to provide the benefits promised. For example, the plan defined the benefit to a participant as 50% of the final three year average compensation. Some plan sponsors would like to reward longevity more than pay, so a plan can be established to provide a benefit of 2% of final three year average compensation times the number of years of service limited to 30 years. However the benefit is developed, behind the scenes, an actuary is needed to develop the necessary reserves to fund that benefit for a participant’s remaining lifetime in retirement.
- Contributions for older, higher paid individuals can be significant in any year. They could be as high as $275,000 for a single individual depending upon the circumstances.
- Defined Contribution Plans:
- A defined contribution plan is considered an individual account plan. The ultimate benefits provided are based upon the accumulation of the contributions and earnings within the account. The plan sponsor is responsible to make the current year’s contribution once earned or declared, but has no further obligation to fund the plan if proper planning is put in place. A defined contribution plan can be invested in pooled accounts whereby the participants share in the gains or losses of the entire pool based upon their share, or in individually directed accounts where the participants are responsible for the investment decisions within a pool of investment alternatives.
- There are many types of defined contribution plans:
- Profit sharing plans
- Profit sharing plans with a 401(K) feature
- Money purchase plans
- The allocation of the contributions can be defined differently too. They can be a specific percentage of pay where each participant receives the same percentage, such as 5%. This weights the contribution based upon compensation. The contribution can be age weighted so older participants receive a greater amount. They can be point allocated where the contributions are allocated based upon some point system that is developed by using a designated amount of points per $1,000 of compensation and a designated number of points based upon years of service.
- The contributions can also be allocated with each person in their own “rate group” as long as ultimately, the bright line discrimination tests provided in the regulations are met annually.
Process: In order to maintain reasonable costs and expectations, each plan should also carefully consider the process for record keeping, reporting and investing.
We begin by collecting the census data to develop a demographic study of your group (click here to obtain a census request form). If you have an existing plan, providing the items on the enclosed checklist (click here to obtain the checklist) allows us to see where you are today and help migrate you to a plan that provides a better solution for your company.
We provide vendor reviews, with a comparative analysis of features, fees, and expenses.
We operate independently and provide unbiased advice. The products we provide are through our independent broker dealer, Cetera Advisors LLC.