“If the plan is being administered at a doctor’s office with
10 employees, three of whom are doctors, that 40% rule would allow the sponsor
to reward the three doctors plus a key employee,” Foster says. But the sponsor
also has the option of taking the money that would have been paid to that one
key employee and sharing it equally among the seven administrative support
staff. So, it is important to realize that cross-tested plans can be designed
with many different variables, which is why Foster believes it is critical for
advisers to partner with TPAs capable of making these analyses.
Plan design, particularly with respect to professional
services firms, “is a great differentiator for advisers,” he says.
Advisers serving professional services groups, each of which
is going to have its own dynamics, definitely need to work with a TPA capable
of competent, multifaceted plan design and administration, agrees Andrew
McIlhenny, executive vice president at Firstrust Financial Resources in
Philadelphia. “They need the flexibility to achieve their goals, not a
cookie-cutter plan,” he says.
Cash Balance Plans
Many professional services plans augment their 401(k) with a
cash balance defined benefit plan that maintains hypothetical participant
balances like a defined contribution plan. The fixed rate of return it earns
can vary from year to year. Merrill Lynch recommends cash balance plans to the
professional services retirement plans it advises, Barrett says. They give the
sponsor the ability to reward participants in the plan as they see fit, which
means that doctors can receive substantially more than the rank and file, he
says. “The cap is based on the actuarial tables, and the lawyers and doctors
can often contribute as much as $300,000 a year,” he says.
Cash balance plans can help highly compensated employees
considerably, agrees Chad Johansen, director of retirement ales at Plan Design
Consultants, Inc., a TPA in San Mateo, California. “A cash balance plan gives
an employer the opportunity to reward HCEs at a higher level than in a 401(k)
or profit-sharing plan,” he says. “In a cash balance plan, you have to cover
only 40% of the staff, so you can strategically pick what groups of employees
have contributions made to their accounts.”
However, the downside is that once a sponsor has a cash
balance plan in place, because it is a defined benefit plan, they need to fund
it every year.
Other options that advisers can recommend to professional
services firms include both a qualified 401(k) plan and a Roth 401(k) plan,
says Sherri Painter, director of product management at PNC Retirement Solutions
in Pittsburgh. “Those doing more than planning and thinking long term are more
inclined to use a Roth component so that they have tax-free money at
retirement,” Painter says. The Roth option sometimes takes the form on in-plan
Roth conversions, Peluse says.