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Targeting The Retirement Plan Market:An Overview for Financial Professionals
Who Want to Grow Their Retirement Plan Business
Prepared by Jerry KalishPresident, National Benefit
Services, Inc.© 2009, National Benefit Service, Inc.
Focus of This Presentation
How investment professionals can generate substantial income by helping business owners put more money in their pockets using retirement plans
This presentation is provided for general discussion purposes only and should not be considered tax or legal advice. Employers should always check with a qualified tax adviser to determine the application of the tax laws and rules to a specific situation.
But first a Word from our Compliance Department
About National Benefit Services
• Founded in 1978• Focus on use of qualified retirement
plans for:– Business owners who want to put
more money in their pockets– Employers who want to attract, retain,
and motivate their employees• Support investment professionals who
want to add unique value to their client relationships and substantially increase their incomes
How We Add Value to Client Relationships
Eliminate dangers• Violate fiduciary
rules• Suffer adverse tax
consequences• Lose credibility
with employees
Focus Opportunities
• Eliminate or delegate exposure
• Obtain significant tax benefits
• Attract, motivate and retain employees
How We Add Value to You
• High standard of support from local TPA
• Firm principal has over 30 years of experience
• Review existing plans• Resolution of ERISA
problems• In-house seminars• Alert to cross-selling
opportunities for you
• Assist with year end tax planning before end of year
• Professional case design including advanced tax planning
• Access to outside tax and ERISA counsel
• Expertise in fields less familiar to you
Common Producer Objections
• It’s hard to find prospects.• The business is too complicated.• I don’t want to look uninformed.• I’m too busy.• There’s no money in the business.
More Reasons Than Ever To Talk To Business Owners
• Greater emphasis of participant education and training
• Retirement planning critical to employees• Fiduciary liability• Downward pressure on fees• Demand for investment choice• Targeting benefits for owners, e.g., Roth• New law passed in August, 2006 continues to
enhance existing tax benefits for business owners and other HCEs
• Most plans need to be amended and restated for EGTRRA no later than April 30, 2010-opportunity to review plan
And if you don’t, someone else will.
HOT ISSUES TODAY!
Overview of the Retirement Plan Market
• Change in workforce demographics• New plans waiting to be started• Change in tax laws• Decline in service• Advisors disconnected
from affluent clients
Change in Work Force Demographics
• Declining number of employees• Aging workforce• Turnover• The “New Employee”• New business start-ups
The Aging Workforce:Getting Ready to Retire
• First wave of Baby Boomers turn 60 this year (3 million) who have liberalized retirement plan distribution and payment options under new law
• Direct rollover to Roth IRA• Hardship distribution available to spouse
or dependent• In-service distributions from DB at age 62• Rollover to IRA by non-spouse beneficiary
New Plans Waiting To Be Started: According to FreeERISA.com, there is an Invisible Market Place or 700,000 Prospects Without A Qualified Plan
• 65% have no plan• 35% have SEP or SIMPLE – may not be the
best plan• 2 to 99 employees• $500,000 to $5 million annual sales volume
Key To Small Plan Market: Show owners how they can put
away more money for themselves
Change In Tax Laws
Then• Reduced employer
contributions• Reduced benefit
limits• Complicated plan
administration
Now• Increased virtually
all employer contribution limits
• Increased virtually all benefit levels
• Less complicated plan administration
• Simplified rollover rules
Decline In Service
• Vendors exiting the market• Vendors outsourcing poorly• Changing service models• Current broker receiving
commissions without commensurate service
Or just bad service
Advisors Disconnected from Affluent Clients
• 88.6% say their biggest concern is losing their wealth, only 15.4% of advisors say only 20% of clients have this concern
• 49.2% say they are concerned about estate taxes, only 8.2% of advisors think this is important to clients
Source: Cultivating the Middle Class Millionaire, 2005, CEG Worldwide, 2005
Qualified Retirement Plan Benefits• Contributions can be made by the employer on a
tax deductible basis• Contributions can be made by the employee on a
tax deductible basis• Participant can borrow against his account• Funds can accumulate on a tax deferred basis• Tax can be minimized or deferred when benefits
are distributed• Participant’s account is protected against
creditors• Participant has non-forfeitable right to retirement
benefits • Life insurance can be bought through the plan on
a tax deductible basis
And they just keep getting better
• January 2006: Roth provision can be added to 401(k) plan
• Tax credit may be available to establish and maintain plan
• August 2006: New Pension Protection Act of 2006 adds significant tax benefits available to business owners and other Highly Compensated Employees
• Automatic enrollment effective in 2008 will add approximately 10 million new 401(k) participants
Estimated $1.8 trillion in new money over the next 20 years.
Mining The Databases
• Free ERISA• 401(k) Exchange• Larkspur• Pension Planet
Data Base Mining:How To Target Prospects
• Substantial average account balance
• Substantial average contributions per participant
• Defined benefit plan sponsors without 401(k) plans
• Employers with target benefit plans
• 401(k) plans with poor participation
• Plan with poor overall investment performance
• Plans with limited investment options
• Weaker competition• Non-local broker• Balance forward
recordkeeping• Large number or high %
of HCEs• Few active participants
with significant assets• Specific industry groups• Convenient
geographical locations
The Ideal Retirement Plan
• Meets legal requirements• Makes economic sense• Provides contribution
flexibility• Adjusts to employer’s
demographic profile• Provides for members
working in the company• Has full service support
system
5 Quick Questions For Your
Prospect • How old is the owner?• How many employees?• How much would the owner like to
contribute and deduct each year?• Do the owner and spouse have any other
businesses?• Are there any leased employees?
How To Select and Design The Best Retirement Plan
• Determine employer objectives– Maximize contributions for
owners/HCEs– Attract, motivate, and retain
employees– Combination of both
• Consider employer’s position in the business cycle– Start-up– Fast growth– Stable growth– Transition
Retirement Plan Alternatives
• Defined contribution plans
• Defined benefit plans
Defined Contribution Plans• Profit Sharing Plan
– Discretionary Contribution– 25% of compensation deduction/$51,000 max allocation
• 401(k) Plan– $15,500 deferral in 2008– Additional $5,000 catch-up– Not included in deduction limit
• Money Purchase Pension Plan– Fixed contribution – Deductions/allocations same as profit sharing– Now history
• Target Benefit Pension Plan– Funded like defined benefit plan– Deductions/allocations same as profit sharing– Now history
Defined Benefit Plans
• Only qualified plan to provide guaranteed benefit• Fund for monthly benefit at retirement based on
compensation and years of service payable for lifetime of participant
• Maximum annual benefit of lesser of 100% of compensation or $185,000 at age 62 (2008 limit)
• 50% joint and survivor required if participant is married
• Plan may provide for lump sum equivalent• Tax deduction based on funding requirements
Types of Defined Benefit Pension Plans
Traditional Defined Benefit Pension
Plans• Actuarially funded• Subject to full funding
limitation rules• May be subject to
Pension Guaranty Benefit Corporation
412(i) Defined Benefit Pension Plans
• Special type of pension plan which if qualifies is exempt from complex funding rules
• Must be funded by insurance contracts
• Usually generates largest possible tax deduction
Life Insurance in Qualified Plans
• Profit Sharing Plans• Defined Benefit Pension
Plans• Exit Strategies for Life
Insurance
Life Insurance in Defined Benefit Pension Plan: Death Benefits Must Be “Incidental”• 100X Test: policy proceeds
cannot exceed 100 times the participant’s projected monthly benefit, or
• RR 74-307: “theoretical contributions” test in which premiums are limited to 2/3 of an actuarially calculated contribution if whole life is purchased or 1/3 of such contribution if any other form of insurance is purchased, e.g., variable universal life
Taxable Benefit of Life Insurance
• Current economic benefit value of life insurance must be included in participant’s income
• Taxable benefit calculated as follows:– Amount at risk is
calculated (death benefit minus cash surrender policy of policy)
– Imputed income is amount at risk multiplied by rate per $1,000 in Table 2001 (successor to P.S. 58 Table)
Limits on Life Insurance in Profit Sharing Plans:Death Benefits Must Be “Incidental”
• Whole Life– Cumulative premiums less
than 50% of cumulative contribution
• Variable Universals and Term– Cumulative premiums no
more than 25 of cumulative contribution
More Life Insurance Flexibility in Profit Sharing Plans
• Can purchase life insurance on:– Spouses– Business Partners– Parents– Grandchildren– Etc.
• Survivorship policies allowed
Exceptions To Incidental Death Benefit Rule for Profit Sharing Plans• 100% of account if
participated for at least 5 years
• 100% of assets in plan for at least two years
Rollovers Now Allowed From:
• Other qualified plans including 403(b) and 457
• Rollover IRAs• Regular IRAs• Spousal death benefits
New IRA Rollover Opportunities
• Available for loans• Not subject to 10% penalty if
withdrawn after age 55 if separation from employment
• Greater creditor protection• May be more, cost-effective
investment opportunities• Available for unlimited
purchase of insurance
1. The retirement plan marketplace is an ever expanding one
2. There are many opportunities to add value
3. Owners and HCEs are also prospects for other services
4. Life insurance can be an important element of qualified retirement plans – don’t forget non-qualified plans
What We Have Learned
Our clients for both of uscome from prospects who are
• Pre-interested: the prospect has a need or concern
• Pre-motivated: he or she wants to do something now
• Pre-qualified: there is a product or service available
• Pre-disposed: the prospect would like to do business with us
Subscribe to our Blogwww.retirementplanblog.com
This presentation is provided for general discussion purposes only and should not be considered tax or legal advice. Employers should always check with a qualified tax adviser to determine the application of the tax laws and rules to their specific situation.For information about our
services call:Jerry Kalish
National Benefit Services, Inc.
300 West Adams St. Suite 326
Chicago, IL 60606(312) 419-9080, Ext.3
And our attorney wants me to remind you again that