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Retirement plans that benefit business owners

By F. Gregory Holland, RFC®

Many business owners are not aware that the government will assist in helping them to implement a tax qualified retirement plan. These private pension plans not only provide significant tax-free accumulated funds until disbursed, but also enable the business to receive substantial tax benefits, while providing the business owner and its employees retirement benefits that can be used to supplement income received from other retirement benefit plans, as well as social security.

These pension plans are referred to as Cash Balance Plans, which are qualified by ERISA as a tax qualified defined benefit plan and must provide a predetermined accrual benefit at the time of the participant's retirement.

In general, these plans work well for a highly compensated business owner, its partners and other key personnel, who may be maximizing contributions to other tax qualified retirement plans, such as a 401(k) or profit sharing plan. Participants in Cash Balance Plans have an account that grows annually based on the contributions into the plan, as well as guaranteed interest crediting, unlike other retirement benefit plans, such as defined contribution plans, in which allocations to the account are contingent on underlying investment performance.

Because this type of retirement benefit plan must be actuarially certified annually, there may be added administrative costs, when compared to other plans, in order to ensure proper compliance with internal revenue code guidelines. Considering however that Cash Balance Plans may be offered in conjunction with other types of tax qualified retirement plans, and that there are significant potential tax advantages resulting from pre-tax contributions, as well as the deductibility of these contributions, any required administrative costs pale tremendously, given the advantages available to the business and its employees.

While Cash Balance Plans require the professional services of a third party administrator in order to determine appropriate funding levels, this type of retirement benefit plan works especially well with businesses that have consistent cash flows and profits, whose owners are looking for additional pre-tax contributions and added tax benefits for the business.

Plan Sponsors must pay close attention to the costs associated with their qualified plans

By F. Gregory Holland, RFC®

While defined contribution pension plans may provide some relieve from Plan Sponsor fiduciary liability, in that the investment allocations in these plans are participant directed, in too many instances, the fees associated with these plans are not transparent. Some providers and vendors tout low cost fees, when in fact the fees are literally hidden, as is the case with many qualified plans. Plans of this nature may have recordkeeping and other, buried administrative costs that are not clearly disclosed. Unfortunately in some cases, unnecessary services are packaged, bundled and made part of some qualified plan offerings, in an effort by providers and vendors to procure additional sources of revenue often at the expense of the plan's performance.

The problem with non-transparency of fees has become highly prevalent with respect to the 401(k) plan market place. An attributing factor is that by design, service provider plan offerings intentionally make the understanding of fees very difficult for most Employers, both large and small. Additionally, the offerings typically will favor profiting the financial service and plan provider, rather than enhancing the retirement income security of plan participants.

This issue becomes even more magnified, as competition for market share among providers intensifies. The truth of the matter is that very few Employers and Plan Sponsors completely understand all the costs and other important features associated with their qualified pension plans. Yet, it is imperative that Plan Sponsors and Employers follow and adhere to specific fiduciary responsibilities as it relates to qualified pension plan oversight.

Following three basic steps may assist Plan Sponsors with meeting common challenges faced with qualified pension plan oversight. One of the most critical steps that a Plan Sponsor should take is to make a commitment in understanding to the extent possible, the basic elements of their plan. If no initiative is taken to gain insight as to how the plan works, or for that matter how it is intended to work, then determining the more challenging aspects of the plan, such as fee structures may be extremely difficult to discern. Secondly, Plan Sponsors must insist on full and complete disclosure of all associated costs from the onset. This means that prior to engaging a service provider to handle the aspects of the plan; there should be complete and full disclosure of all fees inherent with administration, recordkeeping and investment management. Thirdly, efforts must be made to minimize any potential conflicts. Plan Sponsors should make all attempts to avoid taking into consideration the interests of a particular service provider or vendor. Often, this presents one of the greatest challenges faced by many Employers and Plans Sponsors, in that there may be a tendency to side with a particular vendor or provider due to a perceived benefit or other relationship. Care must be exercised under these circumstances. An effective method is for Plan Sponsors to insist that the service provider acknowledge their fiduciary responsibility as an ERISA Defined Fiduciary within their engagement agreement for service.

Besides exercising care, skill and prudence, Plan Sponsors are obligated to follow plan provisions as written. They must operate the plan solely for the interest of plan participants, while investing retirement funds to reduce risk of loss, exclusively for the purpose of providing benefits. All this must be done on a reasonably cost effective basis. Under ERISA, Plan Sponsors and Employers can be held personally liable if they violate duties of loyalty, prudence, diversification or adherence to documents governing plan assets. If Employers and Plan Sponsors completely understand their responsibilities relative to qualified pension plan oversight, they can circumvent possible legal issues and effectively minimize any unnecessary costs associated with their plans that could otherwise impact the account values of plan participants as well as the overall investment performance of the assets held within the plan.

Adding a charitable strategy to your planning may provide added tax benefits

By F. Gregory Holland, RFC®

It's no secret that the proliferation of giving among Americans is on the rise. Average typical giving among the U.S. goes to religious organizations, human services, environmental causes, as well as colleges and universities. In 2006, Americans gave more than $295 billion dollars to charity. (Source: Giving USA Foundation TM/ Giving USA 2006) These figures are expected to increase, as estimated charitable giving is projected to grow to $316 billion dollars in 2017 based on historical figures from 2003. (Sources: Global Business Network original research; Giving USA; Foundation Center; National Public Radio; Chronicle of Philanthropy; Independent Sector; Center for Voting and Democracy; U.S. Department of Labor; U.S. Department of State; OMB Watch; The Washington Post; USA Today; The Boston Globe; Havens and Schervish, Boston College Center on Wealth and Philanthropy; Waldemar Nielsen, The Golden Donors)

Making the decision to incorporate a strategy of giving can help attribute to enhancing one's own financial plan while fulfilling lifetime goals that may include involvement with civic, religious or educational organizations, continuing a family legacy, or simply contributing for the greater good of one's local community. Additionally, many find the practice of giving to be rewarding, as it may promote a personal sense of benevolence. From a planning perspective, giving makes complete sense for those who have accumulated wealth. For these individuals, the ability to transfer this wealth either to their heirs or to a selected charity of their choice is a better alternative than to have their wealth consumed by taxation. Furthermore, utilizing this type of strategy can not only provide some valuable tax benefits, but can also provide greater ability for one to control their accumulated assets.

A charitable strategy need not be exclusively for high net-worth individuals. Anyone who has determined that they have a rationale for giving, and an amount that they desire to give, can develop a strategy. In addition to meeting one's own personal goals, charitable contributions may enable one to reduce current income through tax deductions. A competent professional advisor such as an Attorney, Accountant, Trust Management Firm or Investment Advisory Firm can help evaluate one's circumstances and facilitate clarifying important goals.

It's common for many seeking a giving solution to establish a Donor Advised Charitable Fund. These funds operate much like a private foundation. Individuals can contribute assets, such as cash or other appreciated long-term capital gain property such as investment company shares or stocks to the fund and receive a deduction for the fair market value of the security on the date of the transfer. By giving an appreciated asset to a non-profit organization, a donor may be able to receive a substantial tax deduction, while at the same time eliminate capital gains taxes that could be triggered if the asset were sold.

Once an investment is received by a Donor Advised Charitable Fund, it is liquidated and placed into one or more pooled investment accounts selected by the donor. The donor can then use these funds to make cash gifts to one or more charitable organizations. The gifts can be made all at one time in the same year or over several years. When a donor wants to make a donation to a charity, they can simply forward the necessary information regarding the gift to the sponsoring organization. Upon verifying the charity's IRS tax-exempt status, a check is forwarded directly to the charity, indicating that the funds are from the donor's account. There are several well known Donor Advised Charitable Funds including, Schwab Charitable Fund for Giving, Vanguard Charitable Endowment Program, and Fidelity's Charitable Gift Fund. Each program differs in terms of administrative fees and balance minimums. Some have minimum contribution amounts to charity as low as $250.00. Most programs have unlimited free grants annually.