This week I've been working on a simple way to view the differences in retirement plan options. So here we see a comparison of various 401(k) plans to SIMPLE and IRA options. *Note: I have compared the most commonly used plans here, and again, retirement plans are not limited to these options.

If you'd like to view the document in PDF format, click below.

​Sometimes business owners, benefit coordinators, and office managers tell me “Our investment advice is free.” Unfortunately, they don’t understand how expense ratios and advisor fees work.

For the sake of brevity, I’m going to discuss the share classes in mutual funds and ETFs, which are the core of most 401(k) plans today.
 
So, what exactly are share classes? And how do they effect your bottom line?
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To put it simply, the share classes in a mutual fund are just a way for brokers, advisors, and clearing houses to hide their fees. Let’s look at just how many share classes one mutual fund can have:

Yep- that’s the exact same mutual fund with 17 different share classes!

From this list, you can see that the R6 and F3 share class have the lowest gross expense ratios. You can also see a direct correlation between lower expense ratio and higher returns.

So why are there so many different share classes? Because there are fees added to each class that pay the mutual fund company, marketers, brokers, and advisors who charge commission. Further, the difference between A, B, and C shares of mutual funds are simply when the commission is paid to the advisor or broker.

We see that an R6 share class would be most beneficial in a 401(k) plan as the 529 classes are only permissible in 529 plans. The R6 is almost half the cost of your standard A share, yet most business owners and managers don’t know they exist, and certainly don’t demand them from their plan advisor.

When I sit down with a plan administrator and explain this they commonly reply, “well why hasn’t my current plan advisor offered these more cost-efficient share classes?”. Honestly, because that’s how your advisor is getting paid.
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If you don’t see R shares in your 401(k) or other retirement plan, it’s time to review your plan. To find out how much money has been leaking from your retirement by something as simple as a share class- and how to reverse that leakage, contact us today.

On Thanksgiving eve I'm not writing an article to help you navigate your 401(k) or other retirement plan.

I just want to say thanks. Thanks for stopping by and reading our blog. Thanks for your business throughout the year. And thank you for your time, most importantly.

Let's all be thankful we are able to provide a beneficial retirement plan for ourselves, families, and employees. Not all are fortunate enough to be able to say that- you've come a long way!

Of course, our thanks doesn't stop there, but for the context of this blog- we are thankful!

I encourage you to comment what you're thankful for below. Have a wonderful Thanksgiving everyone, we'll be back next week with insight into your 401(k) and other retirement plans.

Are you a business owner who’s spent your life investing in your business rather than your retirement?

What if I told you that you can put away $200,000 plus in pre-tax dollars to catch up on retirement savings? And at the same time, lower your taxable income by that same amount in the current year?
 
If you’re an older business owner, you can do just that…
 
How does a Cash Balance Plan work?

A cash balance plan is a hybrid of a pension plan and 401(k). Like a pension plan, the cash balance plan is a defined-benefit. This means that unlike a 401(k), participants are guaranteed benefits using a computation that involves employment tenure and salary history among other factors- regardless of rates of return earned in the portfolio.
Contributions made to the plan are based on how much is needed to fund those benefits, which are defined using the previously described formula. Typically, cash balance plans are funded by a certain dollar amount or a percentage of an employee’s salary. Plus, an interest credit rate which is fixed or can be tied to the 30-Year Treasury rate.
Participants in cash balance plans have “hypothetical” account balances and projections as to what their defined benefit will be at retirement. Once retired, plan participants can cash out their vested portions via a life annuity or a lump sum payment.
For any employer who employs at least one other individual, offering a 401(k) plan as well is necessary to ensure non-discrimination testing meets IRS requirements.
 
How do business owners benefit from the Cash Balance Plan?
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1) Catching Up on Retirement Savings
Business owners/partners/highly compensated employees can realize contributions higher than $55,000/$61,000 per year 401(k) plan limits.

Because maximum annual contributions are based on age, the older a participant is, the higher contribution limits are because they have less time to meet the required “hypothetical” account balance needed to fund the defined benefit at retirement.

Some owners can contribute AND deduct over $220,000 in 2018

PLUS, an employer should offer a 401(k) plan at the same time. For older business owners, this means another $60,000 of retirement savings contributions and reduced taxable income!
 
2) HUGE Tax Savings
Contributions directly reduce an employer’s ordinary income, dollar-for-dollar. Investment income is tax deferred until funds are distributed by the plan.

If you’re an older business owner and you contribute $100,000 into your plan, you will not be taxed on that $100,000 in the current year. As you can imagine, this can lower your tax bracket today, while also lowering future taxes as you withdraw during retirement at a lower income level.
 
Disadvantages

1) Owner Liability
Owners take all responsibility for plan performance and adequacy. However, cash balance plans are covered under the Pension Benefit Guarantee Corporation

2) Cost
Cash balance plans are costlier than a 401(k) plan or SIMPLE plan, but the ability to put away hundreds of thousands into retirement while seeing bracket lowering tax savings at the same time far outweigh any extra setup, administration, or management costs.

3) Business Income Stream
A steady stream of business profit is necessary to afford to maintain a cash balance plan. So those who cannot rely on certain levels of profit should avoid these plan types.

4) Number of Employees
The more employees your business has the more expensive it will be for you to run a cash balance plan, but remember, your taxable income is reduced by the contribution amounts.
 
Who Should Implement a Cash Balance Plan?
Small business owners who:

• Make over $200,000/ year
• Have few employees OR
• Employ low wage earners
• Have steady, predictable profit
• Are older and need major catching up in retirement savings
• Are straddling tax brackets

 
 
If you share these characteristics and want to hear more about how a cash balance plan can help you catch up on retirement and lower your taxable income, contact us for more information

CHARLESTON, SC---  Choosing the best suited retirement plan for your small business can seem like a daunting task. However, by first determining what you want to accomplish by implementing a retirement plan we can then filter out the characteristics of your business to determine the best plan for you.
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Today, I’m going to go through a few of the main retirement plans and discuss what type of business owner should use each plan, and why.
 
SEP IRA- Simplified Employee Pension
 
# of Employees: 1 (owner) and maybe spouse

Deferrals/Contributions:  $54,000 or 25% of income (whichever is less)

Features:

• Easiest plan to setup
• Contributions are made by the business
  • Contributions are a business expense
  • Therefore, your taxable is lowered by the amount the business contributes to the plan
• For 1099 Employees, your taxable income is lowered dollar for dollar by contributions
• VERY flexible employer contributions
  • As self-employment income fluctuates, so can the contributions
  • Can even be $0 if necessary, no requirements for minimum contributions
  • Can be established up until your income tax filing deadline

 
Great for:

• 1099 Employees
• Business owners that are the only employee
• High earners
• Young owners

Negatives:

• No Loans
• No Roth Option
• No catchup contributions

 
 
 
 
 
Solo 401(k)

# of Employees: This is a 401k for business owners, spouses in the business and partners only; Non-related employees cannot participate

Deferrals/Contributions:  Up to $18,500 in employee salary deferrals; $55,000 max from employee deferrals and employer contributions; $6,000 catchup for 50+ year-olds

Features:

• Loans allowed
• Roth Option
• Catchup contributions allowed
• Employer contributions are deductible on the employer’s federal income tax return
• Plan Fees paid by the employer and NOT out of plan assets are deductible on the employer's federal income tax return
• No discrimination testing

 
Negatives:

• More difficult to setup than SEP IRA
  • Some IRS filing requirements when balance reaches $150,000
• Does not offer non-spouse/partner participation
• Less Flexible than SEP IRA regarding contributions
  • Must abide by plan document in terms of matching employer contributions

 
Great For:

• Husband/Wife small business
• LLCs & LLPs
• Older business owners
• Lower salary earners
• Owners wanting to save big in their retirement plan

 
 
 
SIMPLE IRA- Savings Incentive Match Program for Employees
 
# of Employees: 2-100, who earn at least $5,000/year
 
Deferrals/Contributions:

• $12,500 contribution; $3,000 catchup for 50+ years old.

• Employers must typically match dollar-for-dollar up to 3% OR 2% of employee’s total salary
• Employers can also match less than above limits, but that match must be at least 1% for no more than 2 out of 5 years

 
Features:

• All deferrals and contributions are immediately 100% vested
• Can deduct 100% of employer contributions
• Higher contribution limits than Traditional/Roth IRA
• No discrimination testing necessary
• Must establish between January 1 and October 1
• No age limits for participation
• No cap on elective employer contributions

 
Negatives:

• No loans
• All deferrals and contributions are immediately 100% vested
  • If your business experiences high employee turnover
• Contribution/deferral limits less than SEP & 401(k) plans
• Not allowed to maintain other retirement plan for those who are not eligible for the plan

 
Great For:

• Small businesses with high earners
• Younger employees in a small business
• Businesses with fluctuating profit
• Keeping costs down/simple administration

 
 
 
SIMPLE 401(k)

Same as SIMPLE IRA Except:

• Employers CAN establish a separate retirement plan for employees not eligible for the SIMPLE 401k
• Must be 21 years old to participate in plan
• Loans are allowed
• Employee contributions are capped at $255,000 salary

 
Great For:

• Small businesses with salaries under $255,000
• Owners who want to prevent those under 21 from participating
• Those wanting to simplify the 401(k) establishment process
• Businesses with fluctuating profit
• Keeping costs down/simple administration

 
 
Traditional 401(k)
 
# of Employees: Not Applicable

Deferrals/Contributions:

• Up to $18,500 in employee salary deferrals
• $55,000 max from employee deferrals and employer contributions
  • Can match employee salary % or their contributions up to the limits
• $6,000 catchup for 50+ year-olds

 
Features:

• Employer contributions are deductible on the employer’s federal income tax return
• Plan Fees paid by the employer and NOT out of plan assets are deductible on the employer's federal income tax return
• Vesting schedules can serve as motivation for employee loyalty
• Loans allowed
• Roth options allowed

 
 
Negatives:

• Discrimination testing is required
• Difficult to setup without professional assistance
• Less flexibility with regards to contributions
• Limit of $275,000 salary to determine contribution percentage

 
 
Great For:

• Employers with more than 10 employees
• Owners looking to motivate employee loyalty through vesting schedules
  • Or reduce administration headache if employee turnover is high
• Owners looking to save big in their retirement plans

 
 
Safe Harbor 401(k)
 
Same as Traditional 401(k) Except:

• All deferrals and contributions are immediately 100% vested
• No discrimination testing is required
• Employer Matching Contributions
  • 100% of first 3%, 50% for next 3%, not to exceed 5%
  • OR
  • Non-elective 3% of compensation; to each employees’ account

• Makes a Traditional 401(k) simpler to administer

 
 
 
So, there’s a simple breakdown of many of the popular retirement plans that small businesses utilize. Of course, there are many other rules and regulation I did not cover to keep things concise and less cumbersome to read. Further, there are other retirement plans out there that may be best suited for your unique business. If you’re still not sure which plan would best fit your business, give us a call, fill out a contact form, or email us to schedule a free consultation to determine the best move for you.
 
Low Fee 401k
843-901-7778
Info@lowfee401k.com
www.lowfee401k.com

Here in Charleston, SC when I speak with physicians regarding their 401(k) plans they are often in one of two camps. First, they tell me they review their plan every year, with their current plan provider. While this is great and should be done, to get a true review of the plan you should look to an outside advisor or plan facilitator to take an unbiased look at the plan. Why would your current provider want to show you more cost efficient and better structured options than the one they’re getting paid handsomely to provide you right now?
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Second, plan providers “just don’t have time” to review their plan; with most not having reviewed their plan within the last 3 years. I get it- when running a practice there’s never enough time to do anything other than run said practice, but if you ask for help you can have this chore done for you- free of charge.

Yes, if you “don’t have time” to review your plan all you need to do is make a few phone calls to plan providers and they will do everything for you, just for a chance to win your business.  While it might take someone with little knowledge of a 401(k) plan weeks or months to analyze- a professional can go through your plan, find out exactly what you’re actually paying, make sure your fund selection is up to par, evaluate your Third Party Administrator, and ensure your fidelity bond is sufficient in a matter of days.

Once the current plan is evaluated then a comparison is provided for the plan sponsor. This will likely include an evaluation of current plan costs vs. what may be achieved using alternative providers. This cost breakdown should include what participants are paying for the funds they use, the TPA expenses, and what the advisor is getting paid to provide plan advise, participant education, and investment selection and monitoring.

An analysis of current investment menu and the type of shares offered will typically be done. Often, I see a fund menu that doesn’t provide key asset classes that are required to construct a truly diversified portfolio within the 401(k) plan. Another common problem is the presence of mutual funds with high expense ratios that are just unnecessary (if you don’t get clean shares with no 12b-1 and third party service fees, please call me immediately). Finally, these plans often omit index funds altogether, leaving the plan sponsor vulnerable to IRS and DOL  ERISA scrutiny.

So how often should you review your plan? At least every three to five years is necessary to abide by ERISA standards and avoid any regulatory headache. If you don’t have time to review the plan yourself, reach out to someone who knows the ins and outs of 401(k) plans and have them do it for you. Even if no better alternative is found, file away the proposal to use as a paper trail show that you’re fulfilling your fiduciary duty of providing the best plan option for your employees.