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The process of designing the “right” retirement plan for a business can be divided into three broad steps:
1. Gather the relevant information
2. Identify employer goals and objectives
3. Choose plan features that promote the employer
Employers have various reasons for wanting a retirement plan as well as many concerns about sponsoring one. Most of the objections, while valid on the surface, can be mitigated and reduced if not eliminated by a skillfully trained benefit specialist. I am again making a distinction between a salesperson and a trained specialist. Most smaller plans (fewer than 500 participants) never have a chance to meet with these type of specialists. I’m hoping my article will give you incentive enough to start seeking out this type of advice and adviser.
Pension plans can not meet everyone’s objective but here’s a list of some common things a pension plan can and should do:
1. Help employees with retirement savings
2. Tax deferral for owners and other highly compensated employees
3. Help recruit, reward, retain and retire employees
4. Encourage productivity
5. Discourage collective bargaining
6. Maximize employer contribution flexibility
Let’s talk about one of the above common objectives, “encourage productivity.”
This goal is usually achieved by incorporating a “profit sharing” (PS) pension plan. A PS plan is not required to make contributions out of profit only, bust most plans are designed to do so. The PS element provides extra, bonus compensation to participating employees when the business does well, and that acts as an incentive. The business can decide that if we have no profits, we have no contributions. The definition of a profit is not what you think. This type of plan is by far the most flexible of the many available plans.
In my last article I wrote about 401(k) pension plans. This is just one type of pension plan among a long list of potential plans to consider. This is where identifying employer goals and objectives become critical. Some businesses should not incorporate a 401(k) plan. Other pension plans may promote the employer’s objectives more efficiently and at a lower cost. This is precisely why you need a planning coach versus a sales approach. If you’re selling only 401(k) plans, every retirement objective will end up with a 401(k) plan as the solution. Try not to start out with a solution before the need is correctly analyzed.
Most of the data we have now on individual 401(k) performance indicates that most investors have failed in funding their retirement needs. Some of the balance lies with the investor and some is centered on the lack of adequate skill in managing complex investments. Too many people think you can manage an investment portfolio with the same skill that it takes to drive a car. Nothing is automatic in the investment world except for failure. Managing any portfolio, no matter the asset size, is very hard work and requires skills that most people have not developed.
Even some professional managers who manage public mutual funds have embarrassing performance records. There are exceptions, but too many pension plans are filled with mediocre choices. Those exceptionally skilled managers are not running ads in the newspaper for investors or paying high commissions to brokers for referrals. This too is a very difficult but necessary analysis. This is such a critical issue that the DOL requires that no less than annually plan sponsors review their investment selections for adequacy and performance.
Retirement planning is a critical part of everyone’s financial planning. Choosing the right type of pension plan, or plans, is a critical part of the process. Seek out a competent trained adviser to get this decision right.
For more information regarding business retirement planning and pension plan selection please visit the Hargrave & Associates, LLC website at http://www.Hargrave-Lyons.com
Stanley Hargrave is an owner/partner of Hargrave & Associates,LLC, a wealth management firm located in Riverside,CA. He is a Certified Financial Planner (CFP) and an adjunct faculty member with the University of California, Riverside and Depaul University. He holds a masters degree in financial planning-wealth management and has over 30 years of experience in his field. Please visit the Hargrave & Associate, LLC website for more business and wealth management information http://www.Hargrave-Lyons.com