LPs and Money Purchase Plans

When it comes to technology, people cling on to some old technology because of their fondness for it either because it represents their youth or because they don’t want to change with the times.

I laugh how many new albums (I still like to use that term) are not only released in digital format, but CDs, and records. I have never been an audiophile and never will be, I’ll never understand why my father’s business partner had to travel to England to get a digital audio tape recorder (it was banned here for copyright issues). But I grew up as a child in the 1970’s and I hated records. They were too big, they were hard to play, and they scratched too easily. Same with VHS, give me Blu-Ray. My $2,000 ($2,000 in 1985 money) Apple IIe was no match for my $800 HP laptop.

When it comes to retirement plans, we do have one retirement plan for the single employer market that is sort of like a record or a VHS tape and that’s a money purchase plan. Money purchase plan is a defined contribution plan that is also a pension plan, so it has a specified contribution in the plan that has to be made every year. For multi-employer (union) plans or some governmental plans, money purchase plans are alive and well as they have replaced defined benefit plans. For single employers, money purchase plans were made obsolete in 2002 when the Internal Revenue Code was amended to increase the deductibility limits on profit sharing and 401(k) plans.

Prior to 2002, the limit on contributions that plan sponsors could deduct on their tax returns was 15% of compensation for profit sharing and 401(k) plans (which are profit sharing plans). That 15% limit did actually include salary deferrals (which made no sense since it was employee money). The deductibility limit for money purchase plans was 25% of compensation. So plan sponsors had a money purchase plan for the full 25% limit (or higher than 15%, whatever they could afford) or they had paired plans such as a money purchase plan for a 10% contribution of compensation and a 15% discretionary contribution under a profit sharing plan.

As soon as EGTRRA changed the limits in 2002 and allowed for 25% deduction limits (which no longer included salary deferrals), I remember merging the money purchase plan into the paired profit sharing plan or converting the stand alone money purchase plan into a profit sharing plan for our clients.

So the point is that unless the plan is designed to benefit union employees or because there is some contractually mandated money purchase plan contributions, I can’t find a reason why employers would keep them, especially if they sponsored both a money purchase and a profit sharing plan. Perhaps some plan sponsors have multiple plans to benefit different groups of employees (many law firms do that), but there is no reason why a money purchase plan shouldn’t be converted into a profit sharing plan.

I came across one plan sponsor with a money purchase, profit sharing, and 401(k) plan, all benefiting the same group of employees.  What was really apparent to me is that they had a third party administrator(TPA) who thought it was more economical for the TPA for the plan sponsor to have 3 plans, instead of just one.

So I would advise plan sponsors to look at money purchase plans that they may still have, as well as financial advisors to look at prospective clients that have. Perhaps there is a legitimate reason to still have a money purchase plan, but perhaps not.

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3 Responses to LPs and Money Purchase Plans

  1. There is still one class of clients that benefit from a MPPP. The doctor who earns a million dollars and spends 1 and 1/2. The MPPP forces him to save and if he is young, why have a DB plan.

  2. We still encourage 0% MPPs for employers who have funded their retirement, no longer want to make contributions, but want the ERISA protection. No “regular and recurring” contribution requirement.

  3. Ary, once again I find myself agreeing with your opinion regarding a set of client circumstances and the application of your legal and administrative service knowledge and experience with the issue.

    Although I do not read all your writings, I have noticed that you seem to blame and criticize the TPA industry for many of the problems, poor service and lack of expertise that may plagues the clients. Even in your article about the existence of an unneccessary Money Purchase Plan, you use an example that seems to say it is the TPA’s fault. Even if in this case, the TPA was culpable for the client having more plans in existence than necessary, a reader may think that such bad judgement (or conflict of interest consulting) only occurs by TPAs. But, I think that just isolating TPAs and some of their questionable practices does not fairly present an accurate picture for the reader. As you have agreed before, most of us who are in the business know that problems and errors in judgement occur by all the professions who are involved in our field.

    Because of your past experience working for a TPA and now by making your carreer as an ERISA attorney, I know that you bringing expertise and experience to your clients that is very valuable and rarely available. Your clients hopefully appreciate what a gem thay have by being able to have you as part of their professional team. However, having read some of the history of the TPA firm that you worked with and the challenges that they have had, I can’t help but wonder if your general opinion of TPAs was actually tainted by your exposure to a single TPA that may not have
    been representative of most other TPAs. Otherwise, why do you seem to generally have a low attitude towards most TPAs? And again, I find myself saying that we all know that there are both good and bad TPAs, good and bad Attorneys, good and bad CPAs, good and bad insurance men and even good and bad investment advisors. Do you really think any of these professions have a “lock” on the needed knowledge, expertise and service required by the clients? I personally do not think so. My opinion is that who is good and who is bad is more based on the individual person’s ability to deliver that which is necessary to create and keep a qualified plan running successfully, and it is less based on what specific profession they work in.

    Ary, why am I motivated to bring my thoughts about this subject to your attention? The reason is that I know that you are young and prolific and will therefore have a great influence on the future thinking in our industry. It is also my opinion that the industry will thrive in the future if we all are supportive of increasing the expertise and understanding of our field by all of the professions that are involved in the qualified retirement industry . Let’s try to be positive and supportive of all the professions and let’s all work together to increase the all our abilities. With effort like that, our industry will have the best chance to thrive for many years to come.

    Thank you for all you do and thank you for allowing me to post my comments.

    Sincerely,
    Glass Retirement Strategies, Inc.

    Herbie

    Herbert N. Glass, Certified Pension Consultant
    MBA, CFP, ChFC, CFG, CLU, LIC
    http://www.GlassRetirement.com

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