When I was a 28-year-old CFO in the jewelry industry, I knew little about the industry. What I recognized is teamwork is important to quickly becoming an expert. I had to rely on experts. I formed my mission statement that year: “Working together to promote people, progress, and productivity.©”
It’s all about the team, and the experts within the team. The better the team, the better the outcome.
Today in the financial planning industry, our team’s client mission is “Working together to achieve financial success through understanding, education, and action.©”
Managing 401(k) plans is our focus, and this involves a lot of teamwork between us, the CPA, the plan provider/recordkeeper and the third-party administrator. And if we don’t listen intently to the client, we won’t know what and how to properly deliver education necessary for the client to make proper decisions. So, there are actually five key partners.
The power of the team
It’s not enough to simply assemble a team of professionals; this must be done thoughtfully in order to run a successful 401(k) practice. One of my favorite 401(k) wholesalers said his best performing financial representative surprisingly had little knowledge around 401(k) plans. The advisor just formed good friendships and sold plans quite effectively in partnership with his wholesaler. While I didn’t get into the finer details of the advisor’s AUM, more likely than not the advisor’s lack of knowledge prevented him from maximizing AUM in each plan he managed.
A plan that is set up incorrectly will not drive results and its business model may feel like it’s being run by a glorified ERISA servicing rep rather than a 401(k)-plan advisor.
In what is evolving to a post commission world and a fiduciary level of service, it is important to examine the team members who lead to success and reduce your regulatory risks.
The third-party administrator
If you have been in the business for a long time, you will have worked with different third-party administrators. A good relationship with at least two TPAs will help you build your practice in unexpected ways. A TPA is a bedrock for your practice and should be thought of as one of the consistent partners in your business.
For both new and experienced advisors, working with a TPA professional who enjoys the opportunities around the delicate intricacies of the law can help you transform your retirement plan practice. In the 401(k) business, there is usually an option to give the client a choice around a bundled plan (TPA as the recordkeeper) or an unbundled plan (you select your independent TPA).
Including a defined-benefit cash-balance plan a long side a 401(k) plan can be a great option for some small businesses. You’ll want to point out the tax benefits they may get, especially from their out-of-pocket costs, if they implement one. However, very few plan providers offer a fully bundled service that includes cash-balance plans. If your business clients have more than 15 employees, it’s more likely a TPA will offer a cash-balance option and you’ll want to share the concepts in this article with its representatives.
Certified Public Accountant
CPAs will be a vital resource for two reasons. First, the CPA prepares your client’s tax returns and is an important key member of the business owner’s advisory team. Anything to do with money will cross the CPA’s desk at some point in time. Second, with your expertise in 401(k) plans, you can help the CPA figure out how to keep your mutual client from paying too much in taxes.
CPAs who counsel small business clients generally assist them with finding potential tax deductions through SIMPLE IRA plans or Simplified Employee Pension Plans (SEPs). These types of plans are popular among small businesses because they have low costs and need little in the way of plan administration. As a result, many CPAs have limited knowledge about setting up 401(k)/profit-sharing plans correctly, and little-to-no knowledge about establishing and running cash balance plans.
A cash balance plan is one of the only ways for a CPA to address client complaints of paying too much in taxes after the tax year has closed. Retirement plans rarely come across the CPA’s desk in the request for proposal (RFP) process. I rarely see a SIMPLE IRA or SEP providing more value than a 401(k) plan to a client.
In fact, from my experience, SEP plans tend to create liabilities and obligations for a business owner due to a misunderstanding of the plan as set forth under the regulations. Some business owners mistakenly believe that a SEP is only for the business owner and not for the employees. And that is often how busines owners run SEPs — until they are audited. The CPA who helped set up a SEP for a business owner who has employees may also face liability if there is no documentation that shows the CPA professionally advised the client to set up SEPs for employees.
Our experience is CPAs have a good amount of knowledge around traditional defined benefit plans. Familiarizing yourself with how the opportunities of cash-balance plans could make you a vital go-to resource for tax professionals, including those who practice financial planning. There are perhaps 20,000 or more CPAs who practice financial planning. However, most CPA financial planners currently do not teach clients about retirement-plan options and the opportunities of the various layers of the retirement plan cake.
In my opinion, CPA-certified financial planners and all financial planners should strive to obtain a greater understanding of the retirement-plan opportunities available to the 6.1 million small business owners across America.
The plan provider/recordkeeper
In larger plans, these two functions can be separated. In most plans, however, the plan provider and recordkeeper are bundled in one package. Your choices typically come from the insurance, investment or trust-company industries. You know them as Fidelity, Vanguard, American Funds, Transamerica, John Hancock, Empower, Voya, American Trust and many others.
By developing relationships with a select few plan providers/recordkeepers, you can leverage resources at the organizations. On a preliminary basis, the plan provider is a great resource to help you construct plans with your prospect. They can also provide you with benchmarking and other data reports that you can use to help you grow your business.
Typically, your client, the plan sponsor, is named as the trustee on the plan document and shoulders most of the fiduciary responsibilities under the plan. When businesses are large enough, an investment committee may handle the fiduciary aspects of the company’s ERISA plans. In that case, members of the committee will be named as the trustee and bear the fiduciary responsibilities.
It is important to remind your client that fiduciary responsibilities mean personal liabilities, so they will want to have strong plan oversight in place.
A more rewarding career
Coordinating the retirement-plan team is key to addressing what is in your client’s best interest. For example, working with the third-party administrator on complex issues can help generate better client service. If you integrate your clients’ CPAs into the process, you’ll build credibility and good will among accountants. And helping your clients integrate a retirement-plan reward system for their key employees will also allow you to better serve your client and their stakeholders.
Along the way, you will also develop new relationships, intellectual capital and referral sources who can help grow your practice. Furthermore, you will potentially have a more rewarding career because implementing successful retirement plans will help you increase assets under management.
Most important, putting in place plans that motivate employers to make meaningful contributions, and motivate employees in low-income diverse communities to save for retirement will fundamentally transform retirement readiness in America and help change lives for the better.
Leonard C. Wright, CPA/PFS, CGMA, AIF, CFP, CLU, ChFC is the past chair of the Member Retirement Plan Committee at the Association of International Certified Professional Accountants (AICPA). His mission is to create clarity around the opportunities ERISA plans can provide to business owners, key employees and all plan participants who help them grow their businesses. He has clients across the U.S. His team’s mission statement is “Working together to achieve financial success through understanding, education, and action.”