micro scope | PLANADVISER November/December 2016

Working With Professional Services Firms

By Lee Barney | November/December 2016

Paula Calimafde, a partner with Paley Rothman in Washington, D.C. agrees: “Many of these professionals will receive no funds for retirement other than what they inside a retirement plan. As a general rule, professionals will not have stock options, non-qualified deferred compensation plans or even be able to sell their business when they choose to retire, so the plan is critical to their retirement security.”

Maximizing 401(k) Contributions
The first building block of professionals’ retirement plans is a safe harbor 401(k) plan so that the plan complies with nondiscrimination testing and HCEs can reach the Internal Revenue Service individual maximum annual contribution limit of $18,000 plus $6,000 in catch-up contributions for those age 50 and older.

Physicians and lawyers typically work 80 hours a week or more, and for this reason, Merrill Lynch uses auto features paired with goals-based investment portfolios such as target-date funds (TDFs) for the professional 401(k) plans it services, says Chris Barrett, assistant vice president with the firm in Farmington Hills, Michigan. “The first thing we want to do is make it automatic, tax efficient and easy,” he says. “These professionals want to offload as much as they can, so we also relieve them of the 3(16) administrative responsibilities to a third-party administrator.”

Cross-Tested Profit-Sharing Plans
The next option that advisers typically recommend for professional services first is cross-tested profit-sharing plans. These permit $53,000 a year in combined employee and employer contributions for those under the age of 50 and $59,000 a year for those 50 and older, and these significant pre-tax numbers are “very intriguing” to professionals, says Dan Peluse, director of retirement plan services at Wintrust Wealth Management in Chicago.

Cross testing combines profit-sharing contributions with defined contribution plans and allows the sponsor to consider the value of their contributions at retirement, as opposed to in the year they are being made, thereby raising the amount they can contribute to older participants, Heider notes.

Cross-tested plans are also governed by a “50/40” rule, Foster says. “In order for the professional to get the maximum $53,000 contribution, the plan needs to contribute 5% to all employees,” he says. “But if it contributes an additional 2.5%, the sponsor has the option of giving the profits to either 50 employees or 40% of the staff, whichever is less.” And the sponsor gets to select who the recipients will be, he says. For small professional firms of 10 or 12 employees, that 40% option is very appealing because they can give those profits to the partners or the owners, he says.