Targeting The Retirement Plan Market:An Overview for Financial Professionals

Who Want to Grow Their Retirement Plan Business

Prepared by Jerry KalishPresident, National Benefit

Services, Inc.© 2009, National Benefit Service, Inc.

Focus of This Presentation

How investment professionals can generate substantial income by helping business owners put more money in their pockets using retirement plans

This presentation is provided for general discussion purposes only and should not be considered tax or legal advice. Employers should always check with a qualified tax adviser to determine the application of the tax laws and rules to a specific situation.

But first a Word from our Compliance Department

About National Benefit Services

• Founded in 1978• Focus on use of qualified retirement

plans for:– Business owners who want to put

more money in their pockets– Employers who want to attract, retain,

and motivate their employees• Support investment professionals who

want to add unique value to their client relationships and substantially increase their incomes

How We Add Value to Client Relationships

Eliminate dangers• Violate fiduciary

rules• Suffer adverse tax

consequences• Lose credibility

with employees

Focus Opportunities

• Eliminate or delegate exposure

• Obtain significant tax benefits

• Attract, motivate and retain employees

How We Add Value to You

• High standard of support from local TPA

• Firm principal has over 30 years of experience

• Review existing plans• Resolution of ERISA

problems• In-house seminars• Alert to cross-selling

opportunities for you

• Assist with year end tax planning before end of year

• Professional case design including advanced tax planning

• Access to outside tax and ERISA counsel

• Expertise in fields less familiar to you

Common Producer Objections

• It’s hard to find prospects.• The business is too complicated.• I don’t want to look uninformed.• I’m too busy.• There’s no money in the business.

More Reasons Than Ever To Talk To Business Owners

• Greater emphasis of participant education and training

• Retirement planning critical to employees• Fiduciary liability• Downward pressure on fees• Demand for investment choice• Targeting benefits for owners, e.g., Roth• New law passed in August, 2006 continues to

enhance existing tax benefits for business owners and other HCEs

• Most plans need to be amended and restated for EGTRRA no later than April 30, 2010-opportunity to review plan

And if you don’t, someone else will.

HOT ISSUES TODAY!

Overview of the Retirement Plan Market

• Change in workforce demographics• New plans waiting to be started• Change in tax laws• Decline in service• Advisors disconnected

from affluent clients

Change in Work Force Demographics

• Declining number of employees• Aging workforce• Turnover• The “New Employee”• New business start-ups

The Aging Workforce:Getting Ready to Retire

• First wave of Baby Boomers turn 60 this year (3 million) who have liberalized retirement plan distribution and payment options under new law

• Direct rollover to Roth IRA• Hardship distribution available to spouse

or dependent• In-service distributions from DB at age 62• Rollover to IRA by non-spouse beneficiary

New Plans Waiting To Be Started: According to FreeERISA.com, there is an Invisible Market Place or 700,000 Prospects Without A Qualified Plan

• 65% have no plan• 35% have SEP or SIMPLE – may not be the

best plan• 2 to 99 employees• $500,000 to $5 million annual sales volume

Key To Small Plan Market: Show owners how they can put

away more money for themselves

Change In Tax Laws

Then• Reduced employer

contributions• Reduced benefit

limits• Complicated plan

administration

Now• Increased virtually

all employer contribution limits

• Increased virtually all benefit levels

• Less complicated plan administration

• Simplified rollover rules

Decline In Service

• Vendors exiting the market• Vendors outsourcing poorly• Changing service models• Current broker receiving

commissions without commensurate service

Or just bad service

Advisors Disconnected from Affluent Clients

• 88.6% say their biggest concern is losing their wealth, only 15.4% of advisors say only 20% of clients have this concern

• 49.2% say they are concerned about estate taxes, only 8.2% of advisors think this is important to clients

Source: Cultivating the Middle Class Millionaire, 2005, CEG Worldwide, 2005

Qualified Retirement Plan Benefits• Contributions can be made by the employer on a

tax deductible basis• Contributions can be made by the employee on a

tax deductible basis• Participant can borrow against his account• Funds can accumulate on a tax deferred basis• Tax can be minimized or deferred when benefits

are distributed• Participant’s account is protected against

creditors• Participant has non-forfeitable right to retirement

benefits • Life insurance can be bought through the plan on

a tax deductible basis

And they just keep getting better

• January 2006: Roth provision can be added to 401(k) plan

• Tax credit may be available to establish and maintain plan

• August 2006: New Pension Protection Act of 2006 adds significant tax benefits available to business owners and other Highly Compensated Employees

• Automatic enrollment effective in 2008 will add approximately 10 million new 401(k) participants

Estimated $1.8 trillion in new money over the next 20 years.

Mining The Databases

• Free ERISA• 401(k) Exchange• Larkspur• Pension Planet

Data Base Mining:How To Target Prospects

• Substantial average account balance

• Substantial average contributions per participant

• Defined benefit plan sponsors without 401(k) plans

• Employers with target benefit plans

• 401(k) plans with poor participation

• Plan with poor overall investment performance

• Plans with limited investment options

• Weaker competition• Non-local broker• Balance forward

recordkeeping• Large number or high %

of HCEs• Few active participants

with significant assets• Specific industry groups• Convenient

geographical locations

The Ideal Retirement Plan

• Meets legal requirements• Makes economic sense• Provides contribution

flexibility• Adjusts to employer’s

demographic profile• Provides for members

working in the company• Has full service support

system

5 Quick Questions For Your

Prospect • How old is the owner?• How many employees?• How much would the owner like to

contribute and deduct each year?• Do the owner and spouse have any other

businesses?• Are there any leased employees?

How To Select and Design The Best Retirement Plan

• Determine employer objectives– Maximize contributions for

owners/HCEs– Attract, motivate, and retain

employees– Combination of both

• Consider employer’s position in the business cycle– Start-up– Fast growth– Stable growth– Transition

Retirement Plan Alternatives

• Defined contribution plans

• Defined benefit plans

Defined Contribution Plans• Profit Sharing Plan

– Discretionary Contribution– 25% of compensation deduction/$51,000 max allocation

• 401(k) Plan– $15,500 deferral in 2008– Additional $5,000 catch-up– Not included in deduction limit

• Money Purchase Pension Plan– Fixed contribution – Deductions/allocations same as profit sharing– Now history

• Target Benefit Pension Plan– Funded like defined benefit plan– Deductions/allocations same as profit sharing– Now history

Defined Benefit Plans

• Only qualified plan to provide guaranteed benefit• Fund for monthly benefit at retirement based on

compensation and years of service payable for lifetime of participant

• Maximum annual benefit of lesser of 100% of compensation or $185,000 at age 62 (2008 limit)

• 50% joint and survivor required if participant is married

• Plan may provide for lump sum equivalent• Tax deduction based on funding requirements

Types of Defined Benefit Pension Plans

Traditional Defined Benefit Pension

Plans• Actuarially funded• Subject to full funding

limitation rules• May be subject to

Pension Guaranty Benefit Corporation

412(i) Defined Benefit Pension Plans

• Special type of pension plan which if qualifies is exempt from complex funding rules

• Must be funded by insurance contracts

• Usually generates largest possible tax deduction

Life Insurance in Qualified Plans

• Profit Sharing Plans• Defined Benefit Pension

Plans• Exit Strategies for Life

Insurance

Life Insurance in Defined Benefit Pension Plan: Death Benefits Must Be “Incidental”• 100X Test: policy proceeds

cannot exceed 100 times the participant’s projected monthly benefit, or

• RR 74-307: “theoretical contributions” test in which premiums are limited to 2/3 of an actuarially calculated contribution if whole life is purchased or 1/3 of such contribution if any other form of insurance is purchased, e.g., variable universal life

Taxable Benefit of Life Insurance

• Current economic benefit value of life insurance must be included in participant’s income

• Taxable benefit calculated as follows:– Amount at risk is

calculated (death benefit minus cash surrender policy of policy)

– Imputed income is amount at risk multiplied by rate per $1,000 in Table 2001 (successor to P.S. 58 Table)

Limits on Life Insurance in Profit Sharing Plans:Death Benefits Must Be “Incidental”

• Whole Life– Cumulative premiums less

than 50% of cumulative contribution

• Variable Universals and Term– Cumulative premiums no

more than 25 of cumulative contribution

More Life Insurance Flexibility in Profit Sharing Plans

• Can purchase life insurance on:– Spouses– Business Partners– Parents– Grandchildren– Etc.

• Survivorship policies allowed

Exceptions To Incidental Death Benefit Rule for Profit Sharing Plans• 100% of account if

participated for at least 5 years

• 100% of assets in plan for at least two years

Rollovers Now Allowed From:

• Other qualified plans including 403(b) and 457

• Rollover IRAs• Regular IRAs• Spousal death benefits

New IRA Rollover Opportunities

• Available for loans• Not subject to 10% penalty if

withdrawn after age 55 if separation from employment

• Greater creditor protection• May be more, cost-effective

investment opportunities• Available for unlimited

purchase of insurance

1. The retirement plan marketplace is an ever expanding one

2. There are many opportunities to add value

3. Owners and HCEs are also prospects for other services

4. Life insurance can be an important element of qualified retirement plans – don’t forget non-qualified plans

What We Have Learned

Our clients for both of uscome from prospects who are

• Pre-interested: the prospect has a need or concern

• Pre-motivated: he or she wants to do something now

• Pre-qualified: there is a product or service available

• Pre-disposed: the prospect would like to do business with us

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This presentation is provided for general discussion purposes only and should not be considered tax or legal advice. Employers should always check with a qualified tax adviser to determine the application of the tax laws and rules to their specific situation.For information about our

services call:Jerry Kalish

National Benefit Services, Inc.

300 West Adams St. Suite 326

Chicago, IL 60606(312) 419-9080, Ext.3

jerry@nationalbenefit.comwww.retirementplanblog.com

And our attorney wants me to remind you again that