Podcast Center
Video Center
Webcasts
Resource Center
Events
February 05, 2004 at 07:00 PM
By
How does an advisor break into the 412(i) defined benefit retirement plan market?
By promising wealthy business owners that they will have to commit to contributing hundreds of thousands of dollars a year, every year, until they retire.
Carriers that have announced plans to start or expand 412(i) programs in the past year include units of companies such as Citigroup Inc., New York; Lincoln National Corp., Fort Wayne, Ind.; New York Life Insurance Company, New York; and Principal Financial Group Inc., Des Moines, Iowa.
Ray Anker, president of CJA and Associates Inc., Chicago, an actuarial consulting firm, says his firm helped employers and their benefits advisors set up almost 100 of the super-expensive plans in 2003.
“We had a great year,” Anker reports. “Were seeing new companies coming into [the market] almost every day.”
Insurers aim most small business retirement plans at owners who may be more or less comfortable.
But then there are the golden few: The doctors with great reputations and patients who pay in cash. The lawyers who make rain. The real estate brokers who generate the same torrential flow of profits in good times and bad.
Those owners like the promise of getting guaranteed pension benefits, and they like the high funding requirements.
Section 412(i) of the Internal Revenue Code is short. It simply lets business owners use insurance policies with level annual premium payments to fund defined benefit retirement plans.
Congress included the section in the Employee Retirement Income Security Act in 1974 so that businesses could offer insured pension plans without having to comply with the complicated funding and administration rules that apply to ordinary defined benefit plans, according to an analysis by Louis Kravitz & Associates Inc., Encino, Calif.
In practice, the most common plan funding vehicles are traditional whole life insurance policies and deferred fixed annuities. The current maximum annual benefit level is $160,000.
Because the insurers that write the life policies and annuities are guaranteeing the returns, the returns tend to be at or near the statutory minimums.
To a business owner who spent the 1990s hearing about 30% annual returns on 401(k) plan stock funds, a 1.5% interest rate might look dismal.
But the low rate means that the Internal Revenue Service will let plan sponsors contribute large sums to come up with the desired benefit levels.
If Jane Moneymaker, the fictional, 50-year-old owner of a fictional interior design firm with 3 world-famous employees, wants to make sure that she and her employees receive $160,000 in annual pension benefits at retirement, she might have to agree to contribute hundreds of thousands of dollars each year to pay for the annuities and life insurance used to generate the benefits.
Owners who fail to make their payments face stiff penalties, but the reward for business owners who are confident they can come up with the contributions each year is that they can deduct a huge amount of contributions from their taxable income, experts say.
In some cases, Anker says, an owner who can deduct only $40,000 in contributions to an ordinary retirement plan might be able to deduct $300,000 in contributions to a 412(i) plan.
Frank Mucciardi, a corporate vice president at New York Life, emphasizes the intrinsic value of offering wealthy small business owners guaranteed pension benefits for themselves and their employees. “It takes a burden off the shoulders of the client,” he says.
