Pensions- Small Employers Retirement Planning
Thomas E. Murphy
Cost effective and
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Some smaller employers cannot afford typical
DBP, and even difficult to sponsor a DCP.
Too many legal compliance issues
Too much administrative expense
But, what about HR issues?
Why not use the Individual Retirement
Account (IRA) as a tool to devise a more
efficient employer sponsored plan?
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Not ordinarily related to
How can employer use
Funded by individual
But, there are limits on
amounts that can be
contributed and on
earnings of owner
Very useful in
and early withdrawal
Roth IRA – after tax
Higher AGI limits
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IRA and Roth Application
$6000 (after age 49)
AGI - $53,000 (phased)
$5000; $6000 (age 50)
AGI: $101,000 (2010 –
Can participate in ER
Tax favored retirement
Good vehicle for 401(k)
or other “rollovers.”
In such cases, limits do
Subject to age 70.5
RMD, and age 59.5
early distribution rules.
See IRS Rules on IRAs
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employers with no
more than 100
Uses IRA as funding
investments of her
Limit on employee
Catch ups for over age
50 - $2500
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Subject to 415 Limits
*Savings Incentive Match for
Employees of Small Employers
Employer must match
100% up to 3% of
Or, if no match, the
employer must make a
2% of salary, non-
$5000 are eligible.
Cannot use SIMPLE if
there is another DCP or
DBP covering employees.
Elective deferrals and
must be made to a
SIMPLE IRA, or a 401(k).
Distributions subject to
Early Distribution (59.5)
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KEOGH Money Purchase Plan
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Employer (pre-tax) contributions only (after
1997). No employee income deferrals.
Contributions made to a SEP IRA
Maximum contributions (25%) w/ indexed cap -
$49,000 for 2010.
Investments self-directed; all employees covered
who make more than $550.
It is portable
Employer can elect not to contribute in a given
Testing is not a real issue. Why?
No catch ups
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What about the
The risk allocation?
Can be used by
more than 100
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“Let’s get rid of the longevity and investment
risk but still have it look like a DBP”
A Money Purchase Plan – a benefit is targeted
but not guaranteed.
Employer contributions expressed as a
percentage of pay are made to the fund.
Favorable tax treatment
Benefit is portable
Limits on contributions and other IRS rules
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A DBP or DCP (Ind.
401k) typically for
based on percentage
of earned income not
Age 59.5 and 70.5
Can have a Money
Purchase and Profit
Available to sole
Must cover all over
Contribution limits of
20% of business
income ($40 K)
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Age of workforce
Competition – degree of
Cost, margins, and price sensitivity of
product or service
Affecting behaviors of employees
Simplicity of administration.
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Migration from DBPs to DCPs
Will employees have sufficient income to
retire? What about investment risk?
Will they outlive their retirement income?
What impact does migration have on
employer HR succession strategy?
Use of early retirement incentives by
employers seeking to reduce labor force.
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See 5.1 at page 138 – Business Factors that
affect type of plan to choose.
Retirement Planning – see pages 143-146.
See Table 5.2 (Review of Pension Plan Design
Features) at page 149.
Safe Harbors: (1) Elective deferrals, employer
matches 100% up to 3% of salary, and 50% up
to 5% of salary. (2) Non-elective, company
contribution of 1% of salary, and 2% after 5
years of service. Maximums covered by §415.
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Move to jointly funded DBPs
Are DBPs inherently more efficient and cost
DBPs rely on the investment expertise of
professional money managers.
Should all benefits be distributed through an
annuity? (See: www.immediateannuities.com )
Should we simplify all the various DCP
approaches into one, retirement savings
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Are employers spending more on Safe Harbor
401(k)s? Would it be cheaper to simply offer a
Government “takeover” of 401(k) plans – or
mandated IRAs for all?
Life cycle/more secure investment funds or a
Hybrid 401(k) plans – evolve assets into
What’s a DBK – a 401(k) with 1% “floor plan” DBP.
During the recession - government temporary
rules on RMD, Safe Harbor, and Early
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for all DCPs?
What are the pros
What risks would
such a plan affect?
What new problems
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Can you go your own way alone?
Aggregation, investments, and savings
strategies will convert to disaggregation and
All the tax favored treatment will be
converted to taxable treatment.
Try to minimize the impact of taxable
treatment of distributions.
Life expectancy is a key element of the
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The Rule of 3 (or 4)!
should take into
consideration the rate
The amount needed is
not necessarily a
percentage of final
average pay – it relates
to your expected
Have a balanced
portfolio and keep it
Don’t “over stuff” your
Timing is important!
Consider roll-overs of
your 401(k) at
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Exploit the tax implications of withdrawals
Consider buying an annuity to resolve the
Use websites to calculate savings necessary
for your retirement and best disaggregation
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If you come up
short, you may
have to go back to
work, or delay
You may have to
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See the Blog The Book - Exercises
Will Baby Boomers
leave the market and
cause a slump in
What about IBM’s
401(k)? (Blog at page
Can we “benchmark”
and compare 401(k)s?
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At retirement age
65, would a 401(k)
relevant to answer
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“During those morning commutes, I secretly
agonized over whether I had enough money
socked away to be so casually employed. I
was worried about the Number . . . What are
the chances you will live out your days in
comfort? What happens if you don’t make it
to your Number?” Eisenberg, L., The Number
What’s your parents’ “number?” (Exercise No.
2 at page 150)
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