Retire Lady

Adopting a Fiduciary Retirement Plan - A Win-Win for Employers and Employees

Retire Lady

“Killing two birds with one stone” is a very popular, although slightly violent, idiomatic expression of efficiency. Whether it is being able to accomplish more with less or solving multiple societal needs at the same time, it allows us to progress and innovate further than we already have as a species. For example, the invention (or really the enhancement) of the assembly line by Henry Ford not only allowed the mass distribution of automobiles to consumers, but it also introduced a new model of operation that many manufacturers replicated, thus allowing U.S. citizens to cover more ground in less time and increased the economic output for our country.

In a like manner, qualified retirement plans have been able to meet the needs of two very distinct groups of people: the small business owners and employees. Many small business owners have had to forego years of savings in order to build their business from the ground up. This includes professional practices such as doctors, lawyers, and dentists who have taken on large amounts of debt in order to do what they love to do. Unfortunately, just like most employees, small business owners can’t work their entire lives and although there are a few different options for self-employed individuals, we believe that qualified retirement plans, like a 401(k), make the most sense for most businesses. This is not to say that a SEP IRA, SIMPLE IRA, etc. cannot be better options for some business owners, but most business owners who have employees would be better off going with a qualified plan.

A great place to start thinking about what kind of retirement plan a business owner should adopt is the Internal Revenue Service. They provide incentives through the Tax Code for investors to start saving for retirement so that it doesn’t become a cost borne by society as a whole (just look at our current public pension and Social Security situation). For the most part, business owners are allowed to contribute up to $53,000 whether it is in a SEP IRA or a 401(k) with a profit sharing feature. This bodes very well against traditional alternatives such as a Traditional IRA or Roth IRA, which only allows for $5,500 annual contribution limit ($6,500 for those who are 50 and older). Where it starts to get interesting is when a business owner has employees. In a SEP IRA, the percentage contribution to the business owner and to all employees must be the same. For example, if a business owner would like to contribute 15% of their earned income to a SEP IRA, they must make a 15% contribution to each employee based on their wages/salary. This can become very expensive very quickly. A 401(k) allows for more flexibility in terms of what the business must give to each employee, but has significant drawbacks that usually deter many business owners from adopting a 401(k) plan like the annual administrative work, fiduciary requirements, investment selection and monitoring, and overall cost. We will address these issues a little later on since we believe the benefit of adopting a plan outweighs these issues, especially when you have the right plan advisor.

Looking at retirement plans from an employee’s perspective also provides some valuable insight. A recent study published by EBRI (The Employee Benefits Research Institute), recently found that having an established retirement plan plays a key role in how confident Americans feel about retirement. According to their 2015 Retirement Confidence Survey, retirement confidence for those employees who do have a plan has doubled in the last two years whereas the retirement confidence for individuals without a retirement plan has stayed the same. Although the survey does not give key reasons for this increase in confidence, one could postulate that it could be due to the great performance in the stock market over the last couple of years as well as the recent increased attention given to the topic of retirement readiness. Many business owners feel that their employees are very valuable and would like to help them prepare for retirement. By adopting a 401(k), employees have the ability to save up to $18,000 per year ($24,000 for those who are 50 years of age or older), which gives them the best option for preparing for retirement.

As mentioned before, many business owners may feel hesitant about adopting a 401(k) plan since there is a tremendous amount of liability that comes with it as well as overall costs. This is where we believe the tide is changing in terms of the feasibility of adopting a plan. By partnering with an independent fiduciary who will assume a 3(38) advisory role for the plan, the business owner has almost mitigated as much liability as possible. A 3(38) investment manager is a fancy term for an advisor who will assume fiduciary responsibility for the investment decisions made. This does not relieve all fiduciary responsibility on the part of the business owner, but it relieves the biggest part. There also needs to be processes in place to ensure that administrative duties, service providers, and even systems to increase employees’ retirement readiness are periodically reviewed and revised if necessary.

IFA’s Retirement Plan Services is one example of a solution for business owners. First, we will assume the 3(38) investment manager status on the plan and assume the liability for the investment decisions for the plan. We will also include a quarterly performance monitoring report for the business owner’s review. Second, we will partner with leading service providers in the areas of administration, compliance, and recordkeeping to ensure that each retirement plan is always functioning well and in compliance with federal regulations. Third, we can customize a plan to ensure it is a best fit for each particular business, since not all are the same. At the end of day, the business owner will have a cost-effective plan where all of the bases are covered in terms of potential fiduciary liability. As the advisor, we will periodically review the plan with the business owner and go over all plan documents to ensure that everyone is happy.

Over the last few years, there have been many developments and innovations in the retirement plan space that now make them more affordable and more accessible. Business owners now have the ability to save a lot more than before without having the break the bank in terms of employee benefits. It is not a universal solution for business owners but it does address the need of the vast majority. The benefit to employees is insurmountable. By having the ability to save for retirement, employees can now address what has become an epidemic for the Baby Boomer generation, thus relieving the government (and therefore all of us collectively) from the burden of retirement and making it a win for everybody. Should you have any questions in regards on how to get started, feel free to call us at 888-643-3133, or visit www.ifa.com/retirement-plans.