Pension Trends   Volume IV, No. 3, August 2003   printer friendly

In this issue...

Helping Your Client Choose the "Right" Plan

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We spend a lot of time working with advisors to design the “right” retirement plan for their clients. For most small businesses, a qualified retirement plan is principally a means for the business owner to defer otherwise taxable income while contributing at an affordable level towards the financial security of the employees.

The other principle consideration we see is the need for flexibility. No business, small or large, likes to add fixed overhead. A retirement plan that is flexible enough to allow for larger contributions in profitable years and smaller contributions in less profitable years is everyone’s first choice.

So, in most instances, the “right” retirement plan has 1) a substantial tax-deferred contribution for the business owner(s), 2) an acceptable level of contribution for the employees, and 3) enough flexibility to vary the annual contribution commensurate with profits. It should surprise no one that there is not a single “right” retirement plan for every situation. Often, the business owner must choose between a plan that optimizes goals 1 and 2 and a plan that optimizes goal 3.

Here on a scale of 1 to 5 (5 being the highest rating) is a comparison of the relative likelihood a type of retirement plan is going to satisfy each of the three primary goals discussed above.

If you would have evaluated the plans differently than I did, you are in good company. I asked other consultants in our office to do their own evaluations. While we were generally consistent, there were some areas of marked difference of opinion. It was also pointed out that there are many factors that could influence the outcome. For example, is the business an S-corporation from which the owner draws little direct compensation? Is the 401(k) plan a safe harbor design? A client could combine a 401(k) plan with a defined benefit plan. A client could offset the benefits in a defined benefit plan with employer-paid benefits from a profit sharing plan.

All of this illustrates the key point: there is no one “right” retirement plan, but there are bad retirement plan designs and plan designs that don’t work as well to accomplish the goals of the small business owner. The way we find the best retirement plan for a small business owner is a three-step process:

1.  Listen to the client; learn his/her goals.
2.  Prepare an actuarial study comparing contributions and benefits for various plan designs.
3.  Present the results to the client and the client’s advisors for further refinement.

We would like to help you and your client design the retirement plan that best accomplishes your client’s goals. Initial consultations are free and a typical actuarial study to design the best plan might cost $300 to $1,000 (sometimes more, sometimes less). The typical benefit to the business owner from having us optimize the plan is likely to be ten times that amount every year. It is time and money well spent.

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This newsletter has been published in order to share general information with our professional contacts. The information presented in this newsletter should not be relied upon without first seeking the advice of a CPA, Attorney or other benefit professional.