Keys To 412(i) Plan: Focus On Target Market And Plan Details These plans are for conservative clients, not financial thrill seekers
By Amy C. Bryant
For the right client, 412(i) plans are an outstanding technique.
At the most basic level, they are simple and readily understood. However, dive below the surface and an advisor could drown in the qualified plan rules. The following summarizes some of the larger, more relevant issues that advisors who work in this market will face.
By definition, the 412(i) is simply a qualified defined benefit (DB) plan funded exclusively with fixed annuities and, in some cases, life insurance.
This exclusive funding mechanism is an exception to the general funding requirements under Internal Revenue Code Section 412. This is possible because the guarantees in the contracts drive the more relevant features of a plan, such as contribution amounts. The result is that retirement benefits are guaranteed and market risk is shifted to the insurance carrier.
There is a flip side to this proverbial coin, however. This is that the market average for guarantees is only 2% to 4%.
Given this low market average, it seems fairly obvious that 412(i) plans are for a target market. These are for conservative clients, not financial thrill seekers. Only the faint of heart should apply.
In addition to being conservative, the ideal candidate is a baby boomer who is better served by defined benefit plans that cater to clients with a short accumulation period.
Finally, the ideal candidate owns a small business. In fact, the best 412(i) client is the independent contractor with no employees or one young, underpaid assistant. The planning thrust is to keep the total cost of the plan down to a workable level for the client.