The late Senator Everett Dirksen is credited with the line, "A billion here, a billion there, and soon you're talking about real money." Financial planners might substitute "million" for "billion" to get an insight into the store for small group relinquishment plans.
By itself, a relinquishment plan sponsored by a small business or a expert institution might be modest, with million or less in assets. By pursuing several plans, though, advisors may recognize that "real money" is attainable.
Irs Tax Table 2010
According to tables published this year by the U.S. Branch of Labor, assets of pension plans with fewer than 100 participants rose from billion in 1975 to 6 billion in 2005, a 15-fold increase. Defined gift plans (including profit-sharing and 401(k) plans) went from under million to almost 0 billion.
"Most small associates don't have relinquishment plans," says Dan Maul, president of relinquishment Planning company in Kirkland, Wash. "Many of them will setup plans in the future, so this could be a huge inherent store for planners. Generally, large providers of relinquishment plans have not been active in this area."
Small group plans can be indirectly profitable, too, if they furnish leads to private clients. Planners may find intangible rewards as well, as their staffers' morale improves through helping people who might not be their typical clients.
Tracking Targets
Just as financial planning clients may be asked about their goals, so planners might start their pursuit of the small plan store by setting objectives. Is the small plan store engaging on its own, or is it a important adjunct to planning for confident clients?
"We work with small business plans as a aid to clients who are business owners," says Kathy Stepp of Stepp & Rothwell, a financial planning and investment advisory firm in Overland Park, Kan. "Our clients pay us an each year retainer for full, planning. If they own a business, we will propose types of relinquishment plans for their associates and the investments that might be offered. That's part of our value-added service." The plan itself is not a client, though.
Other advisors target small business plans as clients. They may set their sights on singular types of small companies.
"Last year, we began marketing our services to expert practices in our area," says Cheryl Holland, president of Abacus Planning Group in Columbia, S.C. "So far, we have added six firms. We contacted these practices through people we know, but the principals of the firms have not been existing clients of ours." Holland says her targets have been expert practices with existing relinquishment plans with at least million in assets.
Chris Long, a financial planner in Chicago, focuses on someone else type of small plan: those of nonprofit organizations, especially public services agencies. "One of my clients is the menagerial director of such an agency," he says, "and I helped her set up a plan for her organization. I liked working with this group and I realized the need was huge, so I'm starting to store in that area." Long says he prefers to work with nonprofits, where a designated person (not the menagerial director) is in charge of finance and administration; generally, organizations with 25 or more employees will have such a specialist.
Making Connections
Long's sense with a nonprofit's menagerial director may be a typical example of how a planner can get started in the small plan market. A client who needs financial planning advice also desires help with setting up, reviewing or improving a business relinquishment plan.
A similar story is connected by Dan Galli, a planner in Norwell, Mass. "I was a trainer before I went into financial planning," he says, "so I started working with teachers. One trainer was married to a business owner, so I helped originate a relinquishment plan for his company."
Galli then went a step further: He signed up to teach courses about relinquishment planning, worker benefits and other subjects for the Cfp agenda at Northeastern University and now teaches them for the Kaplan/Bisys/Boston University characterize for the Cfp full, examination. "In order to teach the courses, I had to study about the varied types of relinquishment plans," he says. "Teaching has given me credibility in this area. Now, I get referrals from Cpas, attorneys and guarnatee agents."
Planners concerned in the small plan store may get prospects by referrals, marketing or tapping their existing client base. Faced with these prospects, planners should have an idea of just how much of a role they want to play in small business relinquishment plans. Typically, doing it all is impractical.
"Planners eyeing this store should make good friends with a Tpa," Maul says, referring to third-party administrators. Such firms, or someone else relinquishment plan provider, can handle recordkeeping and help see that plans comply with regulatory requirements, which have become more onerous since the Pension safety Act of 2006 (Ppa), Maul notes. He says that planners may need at least one Tpa to handle 401(k)s, plus someone else Tpa for other types of plans, such as simplified worker pension (Sep) and savings incentive match plan for employees (Simple) plans. Long points out that a Tpa might furnish a platform for choosing funds, handling recordkeeping, gift a website to participants, and performing tracking for nondiscrimination testing, an Irs provision that requires plans to offer substantive benefits for rank-and-file employees in order for the business to reap 401(k) tax benefits.
Ed Fulbright, a Cpa and financial planner in Durham, N.C., says that he recently began seeking small plan business by working with The Online 401(k), a San Francisco-based business that provides web-based relinquishment plans for small companies. "The services are full, and the fees are competitive," he says. "We're using The Online 401(k) for our own firm's relinquishment plan. The next step is to focus on our current client base, along with accounting clients, to see who would be interested."
Choosing a Plan
Clients and prospects may be concerned in sponsoring a relinquishment plan, but uncertain about choosing among all the available varieties. "Planners can help by discussing objectives with business owners and professionals," says Galli. "Some plans are best for those individuals who want to maximize contributions for themselves, while others can work well for those who want to furnish a real benefit to their employees."
If enlarging the business owner's nest egg is a prime concern, defined benefit plans (traditional pension plans) may be a good choice. "We have seen an upsurge in defined benefit plans in the past few years," says Ron Paprocki, Ceo of Mediqus Asset Advisors, Chicago. "We work with physicians, and they seem to be more concerned in retiring, rather than working indefinitely, than they were in the past. Doctors may want to build up a large fund as speedily as possible, which you can do with a defined benefit (Db) plan."
In a Db plan, a large fund is important in order to furnish lifelong cash flow to pensioners. When a participant is a middle- aged, high-income expert or menagerial with relatively few years until his or her planned retirement, tax-deductible contributions can be impressive. "When you incorporate a defined benefit plan with a defined gift plan," Paprocki says, "a medical institution could put in 0,000, even 0,000, per partner physician this year."
With a defined gift plan alone, a extremely compensated participant can put in as much as ,000 this year, assuming he or she is at least age 50 by December 31-for younger folks, the ,000 cap applies. The most tasteless way to get to ,000 or ,000 is via a profit-sharing plan that includes a 401(k) provision. That way, rank-and-file employees can contribute to the plan.
"Aside from defined benefit plans, the small business plans we see are divided fairly evenly between 401(k)/profit-sharing combinations and straightforward Iras," Maul says. The maximum straightforward gift this year is ,500 to a high-earning employee, along with a required owner match and the 50-plus catch-up. Thus, groups with participants who'd like a larger gift this year may favor the profit-sharing/401(k).
For many companies, though, the straightforward Ira limits are sufficient. "Simple Iras may work well for associates such as restaurants, which have high turnover and low-paid employees," says Maul. Employers may exclude from a straightforward Ira employees who are thinkable, to earn less than ,000 during the current calendar year and have not earned at least ,000 in any of the preceding two years.
Joan Valenti, a planner with Lpl Financial in Farmington, Conn., says she also likes one-person 401(k) and Sep plans for small groups. So-called solo-K plans are for groups composed only of owners and their spouses; in some cases, tax-deferred contributions may be greater than they would be with other types of plans.
"Seps might be a good choice for associates in which most of the extremely paid employees are owners and house members," Valenti says. As the name suggests, a simplified worker pension (Sep) may need minimal paperwork, yet deductible contributions can go as high as ,000 per participant in 2008.
Safety First
Although Seps and Simples have their merits, 401(k) plans remain among the most beloved (and perhaps the most familiar) relinquishment plans for small groups. In the Ppa, Congress officially beloved automated enrollment for 401(k) plans. With an automated plan, all eligible employees are enrolled in a company's 401(k) plan unless they opt out. Typically, a confident portion of their pay-often 3%-is listed as a default contribution, while many employers offer a 25% or 50% match as a sweetener. Employees can growth or decrease their gift or leave the 401(k) plan altogether. "Almost no one makes a negative choice to opt out of automated enrollment," Long says. Thus, full, participation may be increased dramatically.
Planners have mixed reactions to putting a 401(k) on automatic. "I think you can make the case for automated enrollment, based on the likelihood of individuals who would typically not share being pulled into the plan," says Diahann Lassus of Lassus Wherley, a wealth management firm in New Providence, N.J. "The con side is that the small ration of pay typically used in automated plans doesn't furnish the level of savings that most folks in fact need. It's good to get more people into the recovery mode but we need to encourage those who do save to growth the ration of saving."
Damon Dyas, a planner with Ameriprise Financial Services in Southfield, Mich., points out someone else inherent flaw. "The owner may still need to go through testing of the plan," he says. That is, unless sufficient of the rank and file contribute sufficient of their pay to the plan, key executives may be itsybitsy in the whole they contribute. automated enrollment might help the plan pass the required tests so extremely compensated executives can maximize their contribution, but that's not automatically the case.
While automated enrollment has pros and cons, someone else 401(k) feature enjoys more full, acceptance. "Safe harbor is almost always included in 401(k) plans for small groups," Maul says. A safe harbor 401(k) meets Irs requirements through owner contributions or matches plus other features, and therefore does not have to feel discrimination testing. As a result, extremely compensated participants can maximize contributions, regardless of what the rest of the staff does.
Whether an owner wants automated enrollment or safe harbor (or both or neither) features for a 401(k), someone else relatively new choice is available: "A Roth 401(k) can add value," Stepp says. "It's the only way that some upper-income people can have a Roth list now."
Roth Iras and Roth 401(k)s accept after-tax contributions and promise wholly tax-free distributions in the future. Roth Iras have income limits that won't disappear until 2010, when any Ira will be convertible to a Roth Ira if the client pays the deferred income tax. There are no income limits for participants who want to contribute to a Roth 401(k) in 2008, and contributions can range up to ,500.
No matter what features are added to or excluded from a 401(k) plan, the issue of an owner match should be addressed. "I encourage a match," Long says. "I believe that it's best to match 25 cents or even 10 cents on the dollar, for 6% of pay, than to match 100% of 1% of pay. Extending the match gives employees an incentive to save more." While some employers will like the idea of motivating employees to save, others may need to be convinced that a match will pay off in recruiting workers or improving retention.
Investment Insights
Planners might not have to be experts in relinquishment plan design, although a confident knowledge is helpful in finding that a plan fits a singular group. On the other hand, advisors generally are thinkable, to play a key role in determining the investment options within the plan.
A planner can make his or her expertise apparent, starting with the first discussion. "Many employers are not aware of the breadth of issues complex in sponsoring a relinquishment plan," says Long. "I help them by establishment an investment course statement, which most small plans don't have. Such a statement can spell out a plan's reporting requirements, for example, as well as its intent to offer many asset classes and its aim to have investments with cheap fees."
If a plan is "pooled," meaning that tasteless investments are chosen for all participants, the planner can help make the choices. Alternatively, relinquishment plans may call for participants to plump from a list of investments. "A law firm might have 15 partners, all of whom want to self-direct their accounts," Holland says. Here, a financial consultant can help decide what options will appear on the menu.
"I prefer passive investments," says Christopher Van Slyke, managing director of Capital Financial Advisors, a financial advisory firm in La Jolla, Calif. "Most active managers don't beat the store averages, so it's difficult to illustrate the extra costs. Over a long time period, low-expense investments have a colossal advantage."
Long says small firms often have steep expenses in their 401(k) plans and thus chooses low-cost index funds for clients' plans. "They are unaware that high costs might cut an employee's relinquishment savings by 20% to 40% over a career."
As might be expected, other advisors favor along with a few actively managed investment choices. Galli says that his preference is to furnish participants with the occasion to pick among varied strategies or to mix and match. "If possible, I like to see a plan have several index funds and some good actively managed funds. There can be some target-date funds as well."
Target-date funds rebalance automatically and are designed to grow more conservative (fewer stocks, more bonds) as a definite relinquishment year approaches. "They may be good for participants who want a in fact hands-off advent to investing," Galli says. Target-date funds have been beloved by the U.S. Branch of Labor as a default choice in automated enrollment plans. Backed by this federal seal of approval, they are increasingly found in small group plans.
Face-to-Face
Some planners may be article to devise investment strategies for small group plans and monitor performance. "Other advisors also get complex in educating the participants about their investment choices," says Holland. "Before the Pension safety Act became law, we had limits on what we could say. Now we can come up with choices."
Holland says her firm's endeavor to attract expert institution relinquishment plans includes retention one-hour group meetings to illustrate the plan and half-hour meetings with private employees. "We are full, planners, so we get into issues beyond the plan investments," she says. Valenti and her company often handle participants' questions about the tax savings that stem from 401(k) contributions.
According to Holland, it's too soon to tell either her firm's small plan initiative will pay off financially. But some confident results are already apparent. "These meetings have energized our staff," she says. "They're excited to be branching out, working with people who might not generally be financial planning clients. That's especially true for the younger people at our firm, who may be advising workers their own age."
But the profit and business growth inherent is always there. extremely paid executives may become personal financial planning clients. What's more, opportunities among the rank and file shouldn't be ignored, agreeing to Galli. "An worker might have a high-earning spouse," he says, "or there may be person who inherited money." Helping participants with relinquishment plan investments might lead to more lucrative engagements.
Indeed, Valenti counts a dozen small group plans among her clients. "Over the years, I have gotten at least 100 private clients through these plans. Together, those clients and the relinquishment plans now list for about 25% of my practice."
Planned Payoff
Small group plan start-ups may not be profitable for advisors. "You're working with a lot of small deposits," Valenti says. "They can become profitable once they get up to about 0,000 in assets. If you take over an existing plan that size, you may make money right away." either or not the plan itself is a moneymaker, planners can benefit if their work benefits existing clients or helps to attract new ones.
Many planners charge a fee that's a ration of the assets in the plan. Others may receive commissions for products. Long takes a third approach: "I charge a flat fee, plus a fee that's based on the whole of employees in the plan," he says. His fee for a million plan with 50 employees might range from ,000 to ,000 a year, depending on the services he provides.
"As you add more small relinquishment plans, the more profitable this business can be," Long continues. "There are more similarities between small relinquishment plans than between private client situations, so you can automate some of the things you do and rely on your staff to execute. You'll benefit from economies of scale."
What's more, the prospects for growth are bright. "Business owners and professionals are more responsive now than in past," Valenti says. "They know they're responsible for their own retirement; they're not counting as much on public Security." The Ppa may help planners build this business. "Many people, along with employers and their attorneys, have become more aware of fiduciary issues since the act was passed," says Van Slyke. "Small associates want to work with a real consultant instead of a salesperson. Indeed, determined executed relinquishment plans can help planners find big profits in small places.
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