micro scope | PLANADVISER November/December 2016

Working With Professional Services Firms

Executives’ objectives outplay those of the rank and file


By Lee Barney | November/December 2016
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Art by Katherine Streeter

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 says.