micro scope | PLANADVISER November/December 2016

Working With Professional Services Firms

By Lee Barney | November/December 2016

“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.