2011 - The year to plan for the unknown

2010 was a year that most businesses and business owners found themselves paralyzed because they had no idea what was coming. There is still quite a bit of uncertainty out there, but business can ill afford to continue to be paralyzed by that. So, what is known about the retirement plan industry and what should businesses do to plan for it?

Benjamin Franklin noted that "in this world nothing can said to be certain, except death and taxes." At this time in our country this seems more true than many times in history. The good news is that you can use a retirement plan to help plan for both of these certainties.

Death - Unfortunately you cannot avoid death. However, with a well-funded retirement plan along with life insurance, you can ensure you will be able to leave those assets to your loved ones helping them get through the expenses related to your death as well as provide them with some security. If you cheat death long enough you can then use those assets to provide yourself with a comfortable retirement.

Taxes - It appears as though the there will be an increased tax burden in future years as the U.S. Government looks to get its financial house in order. How does one plan for this? Create and use ways to shield some of your income from these taxes. If you have a retirement plan look for ways to allow yourself to put more into this account on a pre-tax basis. As a business owner, you are probably not an expert on the rules and regulations that govern these plans. That is why there are experts out there that can assist you in this endeavor. First, let's get the doom and gloom out of the way; then look at ways to avoid them.

The IRS has stepped up monitoring retirement plans. They believe that many 401(k) Plans are administered incorrectly and an additional source of revenue will be to audit these plans and look for errors that they can use to leverage excise taxes and penalties on the plan sponsors. Also to this end the DOL hired more than 1,000 additional agents in 2010 with the sole purpose of auditing retirement plans.

The only way to combat this is to ensure your plan is administered within the laws and is still set up to benefit you to the extent you need it to. Make sure your TPA firm has been administering your plan correctly over the years and will continue to do so. You can do this by having you plan reviewed by an independent consultant. This will give you peace of mind that if your plan IS picked for an audit you will not be fined, penalized, or worse you plan disqualified.

If you do not currently have a 401(k) plan and you are a business owner or are self-employed you can partner with a TPA firm and/or consultant to help you set up a plan that meets your goals while still operates within the law. Be wary of any TPA firm or consultant that appears to be trying to sell you something rather than looking out for your best interests.

If you follow this simple advice you should be well prepared to keep your plan working the way it is supposed to into perpetuity.

Self Employed 401(k) Plans – Are the benefits worth the cost?

There are a lot of companies selling 401(k) plans for owner only companies. There are a number of additional benefits to a 401(k) over an IRA, but are these benefits worth the additional cost and responsibility of a qualified retirement plan? The definitive answer is maybe. I know this doesn’t sound very definitive, but the answer does truly vary based upon your goals, and the nature of your business.
First we should look at the Individual 401(k) plan and what IS required. I’ve seen some plans out there that set up the plan and let you contribute what you want within the limits each year and that is it. These plans do require administration. They must be monitored to ensure they are run within the confines of the law and the plan document. As well as file the required forms once they become necessary. Contrary to some marketing these plans are not the same as an IRA, even though they do require less than a 401(k) plan that also covers non-owner employees.
Next you need to look at your goals. I’ve seen many Individual 401(k) plans in which the owner of the company is not contributing more than the IRA limits. You should make sure the additional requirements are worth the additional benefit.
Finally, you should look at the nature of your business. Are you going to hire employees anytime soon? If you are going to hire employees will they become eligible? Are you prepared for the additional cost if they do become eligible?
Simply put, if an Individual 401(k) Plan is well thought out, appropriate for the company, and correctly designed it can be well worth the trouble, but if it doesn’t fit or is poorly designed and administered it can be more of a burden then a benefit. If you are unsure, save yourself the hassle and potential for trouble and contact a consultant that can review your goals, needs, and business in order to objectively tell you if it is a good fit for you. Keep in mind you’ll want someone that is not in the process of selling you a plan to perform this review.

401(k) Fees - Is Your "Free" 401(k) Going to Cost You More Than You Can Imagine?

The retirement plan industry has for years been operated with no standard way that fees are charged, collected, or even reported. Because of this, it has become very difficult to evaluate an arrangement and the fees that are being paid for it.

In order to get as close as possible to an "apples to apples" comparison of fees we have to first look at the different types of fees that can be charged.

1. Plan Administration Fees - These are fees for providing plan administration services for the plan. This covers compliance and reporting issues as well as statements and participant services.
2. Individual Service Fees - These are fees for things like loans, or distributions. They are charge to the participant using specific services that are offered for a fee.
3. Investment Fees - These are fees that go to the investment management companies and financial advisors. These pay for the management of the investments in the plan and the advisor that helps you and your participants decide where to invest. The fees to the investment management company are usually in the form of expense ratios in the mutual fund companies/insurance companies. The fees to the financial advisor can come directly from the plan, the business, or the mutual fund company in exchange for selling their funds.

All three of these fees have to be paid in some fashion. The Individual Service Fees are generally pretty straightforward. They are generally spelled out in terms of "$75 per distribution" so they do not warrant much discussion here.

The Plan Administration Fees and Investment Fees tend to intermingle more often for the purposes of marketing. By saying, "Your Plan Administration is free," it makes a plan sponsor see a good deal. The problem is these arrangement generally hid much higher fees for investment management than is necessary. Generally one would pay much more in this situation than they would pay in a situation in which each fee is spelled out.

The question is, "Does any of this really make a difference?" Just recently General Dynamics realized it does matter when their free plan cause d fees o their participants that were unfair. They recently settled a class-action lawsuit filed by their participants for $15.15 million dollars. This says nothing about what it also cost them in terms of employee satisfaction. When a group of employees are suing their company I can't imagine they have great employee longevity.

So what should you do about it? Review your plan to find out how much your plan is paying for all these services. If your plan is paying an unreasonable amount (usually more than 1.5-2%) you should check into if you can get a more appropriate deal. If you don't know how to review the fees in total you should consult a professional. When choosing a professional you should be careful that it is one that is entirely independent and has no vested interest in the fees you plan pays and from where. You must find an outside consultant that is not currently related to your plan.

401(k) Compliance and Reporting - Is Your TPA Firm Accurate and What Does it Matter?

A recent IRS study found that 401(k) Plans are the most "most non-compliant plan type in the retirement plan universe." Since 401(k) plans have become the most common employer provided retirement plan, "it is important to the future of the private retirement system these plans maintain the highest level of compliance possible."

To this end, the IRS has stepped up their review of 401(k) plans. Most employers enlist the services of a Third Party Administrator (TPA) firm to keep their plans in compliance. Because of this, they believe they are protected in the case of an error because the TPA firm provides the service to them. Is this the case?

The IRS an Department of Labor maintain that the plan sponsor is responsible to ensure compliance. As such, any fines or penalties are assessed on the plan sponsor for any non-compliance of the plan. Also if the plan loses it's tax qualified status it is the tax problem for the plan sponsor and employees and not the TPA Firm.

One would next think that a plan sponsor would be able to make a claim against the TPA Firm in the above situation. Throughout the industry the vast majority of engagement agreements that TPA firms have their clients sign include a provision indicating that the plan sponsor has the responsibility to check the reports provided for accuracy. This essentially serves to limit the responsibility of the TPA firm under the guise of "our contract indicates it is your responsibility to check that."

So now that it is established that it is the plan sponsors responsibility, how can they know if their TPA firm is performing things correctly? The quick answer is check their work. You may wonder why even pay them if you have to redo all the work they did. I would not suggest checking everything they do, but I would suggest taking the three to five most recent plan years and check them to make sure they have been done correctly. If you do no have the knowledge to check all the compliance ramifications of your plan for the past few years, hire an independent consultant. If the consultant comes in and rechecks everything and finds no problems you have bought yourself some piece of mind. If they find a problem they can assist you in fixing the problem and should also be able to help you work with your TPA firm to pay a portion of the fees.

If you determine you cannot trust your TPA any further the consultant should also be able to assist you in finding a new TPA firm.