Retirement Plans Should Be Tailored Like Suits

Too many retirement plan sponsors leave money on the table by just selecting a financial advisor and setting up a plan vanilla 401(k) or SIMPLE IRA or SEP without consulting an ERISA Attorney and the consultants at a third party administration firm (TPA).

Retirement plan are like a suit. I wear a 40 short and when I get the suit from Jos. A. Bank (cheap plug) after I order it on the Internet (great bargains, second cheap plug), I have to get it tailored so I can get a proper fit.

The same can be said about retirement plans. While so many advisors take the cookie cutter approach to their clients’ retirement plan needs and use a straight 401(k) plan with a prototype document, so many clients leave money on the table by not getting the right retirement plan and specifications to fit their retirement plan needs.

There are so many different retirement plan designs like unit credit defined benefit, new comparability, safe harbor 401(k), automatic enrollment, cash balance, floor offset, that an advisor would be foolish not to consult with an ERISA attorney and retirement plan specialist from the TPA.

As I stated in the past, I had a new client who asked me whether he could have a retirement plan that would save him more than the $49,000 he could save from his SEP. As an attorney, he received a $500,000 fee. With his age (75) and income plus no employees, it was a no brainer that a defined benefit plan would get him more bang for the buck. Needless to say, the $200,000+ he contributed to the defined benefit plan that first year was a lot more than $49,000.

I had another client that I have had for 8 years because I simply added a safe harbor matching  plan design to a client’s 401(k) plan that the payroll provider claiming to be a TPA forgot to bring up. Under my design, the owner was able to maximize her salary deferral limit instead of returning $10,500 of her then $12,000 deferral limit since the plan failed ADP (actual deferral percentage) testing and the payroll provider forgot to also mention that a corrective QNEC (qualified non-elective contribution) contribution would only cost the company $7,000. Thinking only within the box cost that payroll provider, a client and provided me with a client that has survived 8 years and 3 different firms with me.

Every client has different needs and different business arrangements, so the one size fits all approach doesn’t work because the cookie cutter approach doesn’t work as no two cookies (plan sponsors are the same).

So retirement plans should be tailored likes suits, just avoid the seersucker suit in January.

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8 Responses to Retirement Plans Should Be Tailored Like Suits

  1. Jon Chambers says:

    While I’m generally fully in agreement with your conclusions about the need for customization of retirement plan design, I’m not convinced that the source of the customization necessarily needs to be an ERISA attorney or a TPA consultant. There are many qualified benefits consultants that are not affiliated with a TPA. For larger plan sponsors, bundled service providers often include consulting services. And (at the risk of sounding self-serving), certain registered investment advisors (including my firm) are quite familiar with a broad range of plan design options, and understand the pros and cons of decisions such as safe harbor designs for ADP and ACP testing. I’d broaden the recommendation to “get competent advice”, and not limit by describing the title or affiliation of the individual providing the advice.

    • admin says:

      Great points. Glad your firm understands plan design options because the industry is littered with brokers and RIAs that have no concept of retirement plans and that’s OK, as long as they seek advice from the ones that do.

  2. I applauded your article. After 25 years in the retirement industry, several years of industry training, thousands of days and nights studying ERISA and reading the tax code, not to mention instructions on forms, thousands of calculations performed to design plans, and training of my staff, I have witnessed some insurance agents, brokers, RIAs, CPAs and even payroll companies install SEPs, SIMPLEs and other qualified plans without proper design. A two hour seminar does not make anyone qualified on plan design. Also, a census report and software that generates alternatives is not plan design. I have come across some plan desings that forgot about IRCS 318, not to metion 414. Hey, I know an attorney that makes a living fixing problems created by some companies. Everyone thinks that 401(k) plans are a commodity. They forgot that 401(k) is an Internal Revenue Code Section, as is 401(a), 415, 410(b), 414, 404, 401(a)(4), 401(a)(17), I can go on and on but I presume some readers won’t know what I am referring to. Try telling a cookie cutter vendor that upon restatement (since they can’t administer custom plans, they force their clients to restate their document), their plan violated 411(d)(6). Unfortunately for some plan sponsors, the customer service representative just finished training and is not too familiar with the law. Oh yes, IRS submission… what is that? Again, it is incumbent upon us pension professionals to continue doing what we do best and in your case, I would embrace our competitors. They maybe your future source of revenue. Eventually your practice could expand to EPCRS. All you have to do is speak to some CPAs that audit large plans.

    Thanks again and keep it going…

    PS. Sorry we can’t do business together. We employ an ERISA attorney with 30 years experience…

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  4. Karen Roberts says:

    I have to agree with Jon. There are plenty of non-TPA/attorney firms that are qualified to provide benefit advice, even some of us RIAs. We take our fiduciary role seriously, and that includes not only the investments, but also ensuring that the plan meets the goals of the employer, while remaining in compliance with regulations.

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