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dollars a year inside an insurance policy with guaranteed
principal protection, Serfas says.
The money grows against a market index, although
the gains may be capped, perhaps at 10%, Serfas says. The
balance will increase, tax deferred, and if the withdrawals are
in the form of a policy loan, they can also be income-tax-free,
he says. There are no limits on how much may be contributed
to the policy each year or how much may be withdrawn, he
says. Among his clients, the employers contribute between
$60,000 and $3 million a year to such insurance policies for
their executives.
A proponent of insurance policies, Serfas says he also
recommends fixed-income annuities to his professional
services clients. " My clients don't want to lose money, and
annuities give you full principal protection, " he says. " 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.
" Many of my clients previously had financial advisers
who told them to put every single dollar into the market, " he
continues, " but I believe they need a combination of marketbased
and insurance-based products.
Insurance products
give you guarantees and sustainability of income, while
market-based products keep up with inflation and allow you
to pursue other opportunities. "
Defined benefit (DB) plans can also make sense for professional
groups, says Josh Sailar, an investment adviser with
Miracle Mile Advisors in Los Angeles. " This is especially
true when you have highly compensated older leaders and
younger, lower-compensated individuals among the rank and
file, " Sailar says. " Defined benefit plans can be an extremely
powerful way for professional services executives to save
adequately for their retirement. Net of taxes, [they are] a
great way for a company to extract value from its cash flow,
retain employees and attract employees. "
Sailar also believes that, with the help of their advisers,
professional services executives are better positioned to
manage the investments in a DB plan profitably, and he says
he likes such plans because they " can provide an exponentially
greater benefit than a DC [defined contribution] plan. "
Lori Shannon, a partner with Barnes & Thornburg in
Chicago,
For those professional services firms that consider crosstested
or defined benefit plans too complicated, there are
always nonqualified deferred compensation (NQDC) plans,
Shannon says. The employer may decide to whom to offer
the NQDC plan, she says. While the IRS has no restrictions
on how much money a nonqualified plan participant may
set aside, some plans have a contribution limit.
Some employers find NQDC plans give highly compensated
employees an additional incentive to remain with the
company, says John Dulay, a financial adviser with Raymond
James & Associates in Chicago.
However, the assets in the NQDC plan are general assets
of the company and are subject to the employers' creditors,
Shannon points out.
Moreover, according to Chad Johansen, director of retirement
sales at Plan Design Consultants Inc., a third-party
administrator in San Mateo, California, while a company
gets a tax deduction for its funding of its 401(k) and profitsharing
plans every year, with an NQDC plan the deduction
comes only when a participant takes his money.
Aside from helping professional services companies
design a robust retirement plan, Kathawa recommends that
advisers suggest their professional services clients take out
disability and key person insurance.
MassMutual's Foster agrees, noting that working with a
sponsor on all of its benefits can help strengthen the retirement
plan. For instance, by offering employees accidental
and disability insurance, the sponsor can help prevent
leakage from the 401(k), he says.
Kathawa has also found that advisers have an advantage
when offering wealth management services to the professionals
" because people want to keep things simple and
have one person manage their accounts. "
According to Sailar, many of his professional services
clients ask him to manage their entire savings, not just their
retirement accounts. " When you have a pass-through entity,
the line between where business ends and the personal
begins is porous, " he says. " They appreciate our approach
because we do planning on both sides of the fence, and it is
personal. " -Lee Barney
is equally enthusiastic about recommending DB KEY TAKEAWAYS
plans to professional services firms. Many of her law firm
clients couple a DC plan with a DB plan to maximize tax
deferrals. " Even though DB plans can be very expensive and
perhaps not the right choice for larger employers, for smaller
professional groups with younger rank-and-file employees,
DB plans can be structured to provide greater benefits for
key employees-typically $100,000 or more in tax-deferred
contributions each year-and 5% to 8% of compensation for
the rank and file, " Shannon says.
In addition, the sponsor has the right to decide whom
to include in the DB plan without the IRS considering that
discriminatory. For example, " associates or juniors may not
be eligible, " she says.
* Before working with a professional services firm to
design an effective retirement plan, it is imperative
that an adviser know the demographics of the HCEs
and whom the owners want to benefit the most.
* The first logical step is to make the 401(k) plan a safe
harbor plan, so it is possible for the HCEs to maximize
their contributions.
* Other options include cross-tested plans, cash balance
plans, nonqualified deferred compensation plans,
defined benefit plans, executive bonus insurance
policies, annuities, solo 401(k)s and SEP IRAs.
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