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Pulling it All Together: The Design-Focused 401(k)

By Richard Phillips

The metaphor of a design-focused 401(k) easily lends itself to construction imagery, where each building block needs to be in the right place, in the right alignment, at the right time. But before we start laying bricks (if you’ll pardon the pun), it’s important to properly design a plan that will meet the business owner’s needs.

Plan elements such as Roth provisions and matching contributions, etc. are not what the elite 401(k) advisor defines as “plan design.” Plan design is also emphatically not about plan investments, though to most advisors, perhaps excusably, those two terms are so enmeshed as to be almost indistinguishable.

To the “quarterback advisor” however, the concept of plan design is more structural than optional features and investments. Like any good strategist, the good quarterback understands that plan design is in reality dictated by the answers to two very simple, yet fundamentally important questions:

1. Who gets included?

2. How much do they get?

Does it Work in the Real World?

All of the important design outcomes can be achieved in a real-world practice, bringing concrete, measurable financial benefit to plan sponsors and transforming their perception of a retirement plan consultant from a purveyor of an off-the-shelf commodity to a partner who adds real value to their financial goals.

Here’s a real-world outcome from my own practice to give readers a sense of what can be accomplished:

A client was making more than $400,000 a year, but due to participant deferral patterns in his plan he was able to defer only about $11,500 on his own behalf. Through some design changes to the plan, and the addition of a profit sharing component, the owner was able to defer and contribute the full $49,000 (2011 IRC 415 contribution limit), an increase of $37,500.

Even better, this increased contribution was fully financed through tax and other cost savings realized by the plan redesign.

Deferring vs. Investing

It’s important to reinforce that the results above had nothing to do with investment outcomes. Especially in the face of current market volatility, nearly quadrupling someone’s tax deferral has a much more profound impact on retirement outcomes than doubling investment returns (if such a thing is even doable).

Investment advisors who focus on investment returns are not always open to this insight, but one advisor, with whom we partner, has come to so fully understand the power of plan design that he won’t even discuss investments when he meets with a new prospect. Even though he will, of course, end up being paid for the assets under management!

New Opportunities

Several new regulations were enacted in 2012, including new disclosure regulations about service fees and fiduciary status that providers will need to provide plan sponsors, plan cost disclosures that plan sponsors are supposed to provide plan participants, and (just to ice the cake) a likely refinement of the fiduciary definition because hey, we haven’t had one of THOSE for 36 years, and it might be time we did.

The likely outcomes of all this regulatory noise will likely be twofold:

1. plan sponsors, especially in the small-plan space, will likely be somewhat unprepared and confused, and

2. they will need, want and be willing to pay for expert assistance in the face of the shifting regulatory landscape.

Advisors who are ready and able to step up to the plate and fulfill the quarterback role (I know, I’m mixing two sports metaphors) will have tremendous opportunities going forward to competitively position themselves in the eyes of prospects, and build wide and deep moats (you can never have too many metaphors) around existing clients. A client dialogue that focuses on creative plan design, and the resulting tax and other savings to owners, can provide you with the superior tactics you need to exploit these opportunities.

Richard Phillips, ERPA, CPC, QPA, QKA, serves on ASPPA’s Education & Examination Committee and is the vice-chair of the QPFC program. He can be reached at: [email protected].

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