Working with professional services firms, such as law
offices, doctors’ offices, engineering companies or certified public accountants
(CPA), on their retirement plan compels advisers to first address the owners’
and partners’ considerations, rather than those of the rank-and-file. These
highly compensated employees (HCEs) earning $250,000 or more a year are first
and foremost concerned about reducing their tax liabilities since they are in
high tax brackets.
Thus, advisers need explain why it makes more economic sense
for them to create a retirement plan rather than distribute profits among the
partners, says Gregory Kasten, founder and CEO of Unified Trust Company in
Lexington, Kentucky. “A retirement plan at a manufacturing or software company,
where the owners are in the minority, is going to be designed to be successful
for the general workforce,” Kasten says. “At a law firm or doctor’s office, the
retirement plan is going to be driven by what the owners want rather than what
the rank-and-file wants.”
Advisers need to illustrate to these professionals that
rather than pay substantial taxes on profits, it often makes far greater
economic sense for them personally to create a cross-tested 401(k) retirement
plan paired with a cash balance plan, and then to make the secondary argument
that it benefits their employees as well, he says. “They need to be shown why
offering a retirement plan is in their best interest and educated about how
much more they will need to save for retirement than their administration
staff,” Kasten says.
Many CPA and law offices impose mandatory retirement as
early as age 60, which makes it all the more imperative for these professionals
to plan for their retirement well ahead of time, notes Joe Heider, president of
Cirrus Wealth Management in Cleveland.
Advisers should partner with a third-party administrator
(TPA) who can illustrate the tax benefits of offering a retirement plan rather
than simply sharing profits, says Tom Foster, national spokesperson with
MassMutual Retirement Services in Enfield, Connecticut.
In addition, advisers should make the argument that having a
retirement plan forces the principals to save, and it might come as a surprise,
but high earners are very poor savers when left to their own devices, Kasten
adds. “I have counseled hundreds of doctors who have reached retirement, and
for 80% of them, the only money they have is what is in their retirement plan.
The forced savings aspect of a retirement plan is hugely consequential,” he