Insights
Wealth Management
Worry-free retirement
How a qualified plan can outperform other retirement strategies
Interviewed by Matt McClellan
R
etirement plans were confusing even
before the market’s downturn depleted
many Americans’ 401(k) plans. Choosing the right qualified plan may be one of the
most important decisions you make in your
working life.
“Like everybody else, business owners
come to a point where they are either unwilling or unable to work as hard as they did at
their peak,” says Bill Coffey, senior pension
consultant with Peachtree Planning Corp.
“Making provisions for that eventuality during a business’s profitable years is part of the
life cycle that begins with acquiring the skills
to create that business.”
Smart Business learned more from Coffey
about how a properly structured qualified
plan can become a strong foundation for you
and your employees’ retirement.
Why should business owners consider qualified plans?
Starting in the 1980s, defined benefit plans,
which provide a monthly benefit at retirement, were decreasing in use due to a combination of poor tax law and corporate costcutting as the work force aged and funding
became prohibitive. Defined benefit plans
were replaced by salary deferral plans with
investment decisions made directly by plan
participants, often with little input from
knowledgeable advisers.
While almost everyone has been affected
at the end of a decade during which the markets made negligible returns, those with successful businesses face the most dramatic
drop in income upon retirement. To provide
a lifetime income of $1,000 per month at age
65 currently costs $138,000.
A positive is that allowable contributions
to qualified plans, including defined benefit
plans, have increased dramatically throughout the decade. The available increased benefits and contributions make these plans very
desirable from a tax viewpoint.
What are some advantages of qualified plans?
The tax incentives that allow current deductibility of contributions and tax deferral on any earnings of retirement funds
result in greater accumulations than could
be achieved otherwise. Another important
aspect is the fact that retirement plans in
general cannot be attached by creditors.
High-quality prospective employees will
also want to see a qualified plan among the
Some businesses may also find their needs
better met with a nonqualified plan, particularly where the objectives are to reward or
retain a few key individuals.
What incentives are there to
choose traditional qualified plans
over SIMPLE IRA plans?
Bill Coffey
Senior pension consultant
Peachtree Planning Corp.
benefits offered by an employer.
What do business owners need to do to
ensure that their plans are in compliance with the IRS code and ERISA?
They need to realize that a qualified plan is
not an investment vehicle. It is a trust to hold
assets allocated for the retirement of employees of the business, including the owner.
If you start there and get the structure right
by establishing a plan with individuals with
expertise in the field, then you will be on the
right track. The accountants should work in
unison with the plan providers to make sure
the plan is set up properly and that all filings
are made in a timely manner.
Do qualified plans make sense for everyone?
In general, yes, but it is possible to have too
much money allocated to qualified plans. We
have to remember that the tax advantages
outlined above are offset by the fact that
all income taken from the plans is subject
to ordinary income tax. Ideally, we want to
deduct at a higher tax rate and receive at
a lower rate. Decisions on the funding of a
qualified plan should be made in the context
of a participant’s total financial plan with current and future taxation, including potential
estate taxes, warranting particular scrutiny.
I am not a fan of SIMPLE plans, because
the contribution limits are too low and it is
likely that anyone who found the deduction
sufficient would be better off funding a Roth
IRA. In addition, the adoption of a SIMPLE
plan prohibits the establishment of any other
plan for a business.
Safe harbor 401(k) plans are a much wiser
choice for a profitable small business, but
even making the maximum deposits to a
profit sharing/401(k) plan ($49,000 to $54,000
in 2010) won’t replace income for an owner
of a profitable business or a well-paid executive. However, for 2010 the benefit limitation
for defined benefit plans is $195,000 for ages
62 through 65. This is the maximum annual
benefit you can fund with the required deposits depending on current age in addition
to interest rate and annuity purchase rate assumptions. Defined benefit plans are valued
each year and participants have a clear picture of how their projected income at retirement is growing.
What are some common mistakes business
owners can make regarding their retirement plans, and how can they be avoided?
The most common mistakes are made at
plan inception. Businesses often adopt a plan
without understanding the fundamentals of
the particular plan with respect to funding
obligations and other issues, including vesting requirements. Poor investment strategies
are also common. Striving to make high returns can lead to market losses, which can
negate the value of the tax deduction and
deferral when funds are subsequently taxed
on retirement distribution.
Again, it is very important to have the right
person or firm advise you on plan structure.
Too often a preoccupation with investment
choices takes precedent over plan design.
It is best to make sure the plan will provide
the desired benefits and be well-received and
communicated to the employees. A clear understanding of administrative expenses and
BILL COFFEY is a senior pension consultant with Peachtree Planning Corp. Reach him at [email protected] or
(404) 260-1641.
Insights Wealth Management is brought to you by Peachtree Planning Corporation
© 2010 Smart Business Network Inc. Reprinted from the February 2010 issue of Smart Business Atlanta.
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