Professional services firms are not typically served by
retirement plan specialists, says Phil Fiore, CEO of Procyon
Partners, also in Shelton, Connecticut. “If the adviser suggests
a redesign, it can help the owners put away significantly
more money for their retirement, and truly be life changing
for someone making $1 million to $2 million a year, as that
person will need considerably more than what a 401(k) plan
will allow” him to save, Fiore says.
The amount that a highly compensated employee (HCE)
will need in order to replace the recommended 75% to 80%
of his income in retirement is substantial, says Chris Foster,
managing director at Procyon, and this is what advisers
must keep in mind when suggesting various approaches to a
professional services firm.
Safe Harbor Plans
Typically, the first place to start is to offer a safe harbor
401(k) plan so that the HCEs can maximize their contributions, Ouellette says. The Internal Revenue Service
(IRS) currently allows those under age 50 to contribute
up to $18,000 a year in their 401(k) and those 50 and over
to save an additional $6,000 a year, for a total of $24,000.
However, for them to do so, the plan must pass discrimination testing, which can be achieved by making it a safe
harbor plan through three options. The first is to give a
safe harbor match of at least 4% of salary to participants.
The second is to donate a 3% or more nonelective contribution to all eligible employees, and the third is to donate
a 3.5% or more qualified-automatic-contribution-arrange-ment match in tandem with automatic enrollment.
Another way that a plan sponsor can pass the discrimination testing is to limit those able to maximize their 401(k)
contributions, Ouellette says. For instance, the employer can
make this option available to only those earning a certain
amount of money, perhaps $120,000 or more a year, so that
fewer people are maxing out their 401(k) deferral and the
plan is more likely to pass the testing, she says.
A further common approach advisers take with profes-
sional services firms is to pair a 401(k) plan with a profit-
sharing plan, which permits a participant to contribute up
to $60,000 a year, says Foster of MassMutual. Many advisers
also suggest a cross-tested, or new comparability, plan,
he says. This is a type of profit-sharing plan that permits
the sponsor to divide employees into different groups
and project what a current contribution would amount
to at each group’s retirement age, he says. Thus, younger
employees with a longer investment horizon would receive
less than older employees closer to retirement, he explains.
The maximum that may be contributed is $54,000, and
the minimum that the sponsor must give to the non-HCE
workers is either 5% of pay or one-third of the amount allo-
cated to the most highly compensated worker, Foster says.
The contributions to non-HCEs are quite generous, when
compared with the typical company matches a sponsor
makes to a 401(k), making cross-tested plans a “win-win”
for HCEs and non-HCEs alike, he says.
Cash Balance Plans
Cross-tested plans also may be paired with cash balance plans
to give the sponsor more flexibility with respect to who it
wants to benefit the most, Foster says. If the sponsor contributes an additional 2.5% to non-HCEs in the cross-tested plan,
for a total contribution of 7.5%, the company earns the right
to exclude 40% of its work force or 50 employees from the
cash balance plan, whichever is less.
How much a participant may contribute to a cash balance
plan depends on the person’s age, according to The Retirement Plan Company LLC, of Brentwood, Tennessee. For
a 50-year-old, it is $143,000. This jumps to $235,000 for a
60-year-old and to $243,000 for a 65-year-old. Thus, these
cash balance plans permit far more sizeable contributions
than cross-tested plans.
Ray Kathawa, vice president of practice development at
M&O Marketing in Southfield, Michigan, recommends two
further plan options for professional services firms: solo
401(k)s and simplified employee pension (SEP) individual
retirement accounts (IRAs). The solo 401(k) allows the business owner to contribute the IRS limit of $18,000—or $24,000
for those 50 and older—plus 25% of compensation, and the
SEP IRA permits contributions of 25% or compensation or
$54,000, whichever is less, Kathawa says.
Yet, while these contributions may seem sizeable, for
someone earning multiple millions a year, they may still
be falling short, says Jake Serfas, lead financial strategist
at O’Dell, Winkfield, Roseman & Shipp (OWRS) in Washington, D.C. He, therefore, recommends an executive bonus
plan based on Section 162 of the IRS tax code. This allows
a company to give its HCEs a bonus of up to several million
“To determine how much they should contribute
to an annuity, I ask my clients what percentage
of their portfolio they want to make safe and how
much of a paycheck they want to derive from
[that]. I then calculate what is the least amount
of money that should go toward the annuity.”