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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.

The 412(i) plan rules also appeal to business owners who are afraid of court judgments and other legal proceedings, says Jay Adkisson, a Newport Beach, Calif., asset-protection consultant.

When Adkissons clients consider 412(i) plans, they “are not really looking for an investment return as much as they are in shielding assets in an ERISA plan,” he says.

A few financial planners have been marketing 412(i) plans for years, but more began looking at the plans around 2000 and 2001, when stock market turmoil revived interest in the promise of guaranteed returns.

In 2002, “there was a lot of talk, but there wasnt much action until 2003,” Anker says.

Now, plenty of insurers are dipping their toes in.

New York Life, for example, is starting by aiming its 412(i) program mainly at business owners who are at least 50 and have 5 or fewer employees.

“Were taking it very slowly, to make sure everythings done the right way,” Mucciardi says.

CJA reaches out to agents with seminars and Web seminars.

The ideal candidates for selling 412(i) plans are advisors who understand defined benefit pension products and know how to talk to wealthy business owners, Anker says.

“It has to be an agent who is comfortable asking a client to write a $300,000 check,” Anker says.

New York Life screens the compliance records of agents who want to sell the plans and makes them demonstrate their understanding of the product by passing an online exam, Mucciardi says.

One challenge facing sellers of 412(i) plans is the result of past efforts by some advisors to sell especially aggressive plans.

In some cases, sellers came up with programs that boosted contribution requirements to $1 million or more each year without doing much to maximize the participants pension benefits.

The IRS is supposed to release a ruling on 412(i) practices in the next few months.

In general, “if it looks too good to be true, it probably is,” Adkisson says.

But Adkisson, who has testified in Congress on tax issues, says business owners who are making sincere efforts to offer guaranteed pension benefits in a reasonably efficient manner probably will be safe.

Adkisson recommends that an advisor who wants to help a business owner use a 412(i) plan in a conservative manner start by including all employees in the 412(i) plan, rather than trying to carve out a small “company within a company” to reduce the pension contribution burden.

Advisors also should discourage owners from funding plans entirely with life insurance, rather than a more efficient mix of life insurance and annuities, and they should discourage owners from agreeing to make excessively large contributions, Adkisson says.

When an owner tries to stuff in $1 million in contributions a year, “that gets to be very aggressive,” Adkisson says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 6, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.