Qualified Retirement Plan
Sponsor Questions
Selecting a Plan
Need a Change?
Types of Plans

There are three basic questions that must be answered when considering the implementation of a retirement plan. Shall we install a qualified retirement plan? What type of plan would best meet our objectives? How and when shall we put the plan into effect? Pacific Retirement Plans will evaluate the objectives of the plan sponsor and design a plan to best fulfill the needs of the employer.

A Qualified Retirement Plan is one of the last tax shelters available therefore the owner and employees can use the plan as part their overall tax planning strategy. The recent increase in limits permit plan participants to contribute more pre-tax earnings and/or compensation to the plan rather than paying more taxes.

No matter how the plan is structured, the contributions to the plan should be coordinated with the overall compensation and benefit package for all employees. A "smart" employee will consider both their compensation and overall benefit package when evaluating employment opportunities.

If an employer wishes to "maximize" this benefit by providing an employer contribution, they may choose to reduce other employee compensation and "communicate" the tax benefit of retirement savings to their employees.

If an employer wishes to give their employees more freedom to contribute from their overall income to a plan, they may choose to sponsor a 401(k) plan with little or no employer contribution and increase other employee compensation. (i.e. provide 401(k) as another benefit to attract employees) This may necessitate more investment choices, participant direction, communication and investment education for the participants.

The employer must consider how to comply with the following requirements for all plans:

Selecting Plan Options
Communication with participants
Reporting to the Department of Labor and IRS
Compliance Testing & allocation
Selecting Investment Options

When selecting a qualified retirement plan, the employer must consider the available options and how they best serve their needs. Following is a brief explanation of some of the considerations:

The employer is interested in providing a retirement plan but does not want to provide an employer contribution.

A stand alone 401(k) plan will typically have various mutual fund options available to plan participants. Segregated accounts, daily valuations and the ability for participants to move among the various investment alternatives are popular with stand alone 401(k) plans.

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The employer is interested in providing a retirement plan with an employer contribution.

A 401(k) plan with a discretionary matching contribution tends to be a cost-effective way for employers to contribute to the plan. The matching contribution is provided only to participants that contribute to the 401(k) plan.

The matching formula can be customized to meet the employers needs and limit its liability. If the employer is considering a generous employer contribution, a plan with a discretionary profit sharing contribution may be the best alternative. The allocation formula may be customized to meet the employers needs.

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The employer is interested in a retirement plan that maximizes the principal's contribution.

A comparability or age-weighted profit sharing allocation formula can be used to maximize the benefit for the principals of the company. This type of plan generally works for a firm if the principals are generally older than the remainder of the workforce.

Generally a pooled investment account with an actively managed portfolio may provide the best alternative for this approach. Since the principals seek to maximize their contributions to the plan, they tend to have a greater share of the assets in the plan.

The employer may choose to provide different investment alternatives for profit sharing contributions and 401(k) contributions. (i.e. provide a pooled investment account for profit sharing contributions and segregated accounts for 401(k) contributions)

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The employer is interested in a plan that does not have a limit on the amount of contribution to the plan

For a defined benefit plan, there is no percentage or dollar limit on the amount of the contribution that is deductible, if the benefits are considered non-discriminatory.

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Does the employer have to use only one broker or custodian?

The rules governing qualified retirement plans do not require that a plan sponsor select one brokerage or maintain a specific custodian's retirement program. The plan sponsor is responsible to evaluate the suitability of the investment choices and the performance of the plan and if necessary, make prudent changes to the investments available under the plan.

The plan administrator may choose to change or modify the investments available under that plan at any time. However, the plan may be bound by contracts by and between the plan and the brokerage or custodian.

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Who is going to pay for the plan expenses?

Typically, plan expenses are paid by the employer pursuant to an up-front fee schedule based upon the type of plan and the number of participants in the plan. Plan expenses are deductible by the employer if the employer pays them directly.

The plan may have participants pay the expenses. Under this arrangement, the annual administration fees are passed onto the participants through higher mutual fund expenses. Higher mutual fund expenses result in lower mutual fund performance (i.e. returns) for all plan participants, including principals.

Annual fees included as mutual fund expenses usually result in 0.35%-0.50% higher mutual fund expense ratios. Therefore, a plan with $1 million in assets will pay the brokerage $3,500-$5,000 in higher mutual fund expenses to compensate for lower annual administration fees.

For more information: Evaluating Fees

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The plan must be established using a Written Plan Document, which defines the plan's provisions.

The plan must then be communicated to the participants by providing a Summary Plan Description to the participants, which explains most of the plan's provisions to the participants.

Additionally, a plan allowing participants to choose their own investment options must fully explain the available investment options.

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The value of the participant's account must be reported to the participant at least annually.

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The plan must be tested annually for compliance with federal regulations. If the plan fails any of the numerous compliance tests, corrections must be made within time specified by law. If the plan provides an employer contribution, the allocation of the contribution must be properly calculated based upon the formula in the plan document, current census data and tested for non-discrimination.

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The plan must file an annual return with the Department of Labor. Other reporting requirements to the Internal Revenue Service exist.

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The plan sponsor is responsible for choosing the plan's investment options. Typically this is done by hiring a brokerage, mutual fund company or independent investment representative to assist the plan sponsor.

The plan may provide for a pooled investment approach in which participants share a portion of the pooled account. Pooled investments typically have professional investment representatives actively managing the assets.

Also, the plan may provide participant direction. The plan sponsor may select a fixed number of investment options from which plan participants can choose.

Pacific Retirement Plans will work with any brokerage, mutual fund company or independent investment representative selected by the plan sponsor. PRP can assist the employer in establishing a plan with daily valuation, multiple fund families, brokerage option, Internet and 800-number access.

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Homepage selecting investment options reporting to the dept. of labor and irs\ compliance testing record keeping communication with participants selecting plan options