Pension Plans

Retirement and the Business Professional

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Don’t Put All Your Eggs in One Basket

Many entrepreneurs who start or purchase a business do so for a number of reasons, both emotional and financial. Social status, the freedom to be your own boss and the potential for a high income are a few of the reasons commonly cited. For some, business ownership is also seen as a primary way to pay for retirement. If everything goes as planned, the business owner works hard and, over time, the business grows and becomes more valuable. When the owner reaches a certain age the business is sold, with the proceeds from the sale funding the retirement years.

The Realities of Business OwnershipUsing the business as the sole means of achieving financial independence amounts to placing a bet that the owner will be able to sell at the right time, the right price and under the right terms. There are several reasons why this may not happen:
Business failure: Despite good intentions and hard work, businesses do fail. In1998, for example, there were 155,141 new business started in the United States; inthe same year, 71,857 businesses failed.1

Timing of the sale: Selling a business is a complex, often time-consumingprocedure. The actual process of finding a buyer, negotiating the deal, arrangingfinancing and finally closing the sale may extend over months or even years.
Proceeds: Depending on market conditions, the amount realized may not be enoughto pay for retirement. Income taxes will inevitably consume some of the proceeds.The owner may have to accept installment payments, rather than a lump sum.
“I am the business:” The value of a business may depend largely on the skillsand /or customer relationships of a particular owner.
Diversification to Reduce RiskA business owner who seeks to reduce risk will view his or her business as one asset among many. In addition to the business, a diversified portfolio could include the following.
Qualified retirement plans: Business income is used to fund employer-sponsoredqualified plans with a current deduction for contributions and tax-deferred growth.
Nonqualified plans: Nonqualified deferred compensation plans are often used toreward selected employees and serve to supplement qualified retirement plans.
General investment portfolio: A business owner can develop a general investmentportfolio, outside of the framework of the business.1 Source: Statistical Abstract of the United States, 2001. See Section 15, “Business Enterprise”, report No. 737, Business Starts and Employment Associated with Start: 1990-1999.Designing the Best Plan for You Presented by:
Qualified Retirement Plans

Qualified retirement plans are Congressionally approved retirement plans, which have major tax benefits.
The employer’s contributions can be deducted for income tax purposes.
The earnings on the plan’s investments accumulate on a tax-deferred basis.
When the funds are distributed at retirement age, they may be eligible for favorabletax treatment.
Taxpayers may be in a lower income tax bracket after retirement.
Two Principal Types of PlansQualified retirement plans can generally be classified as either defined benefit or defined contribution plans.
Defined benefit plans define the benefit amount each participant will receive at retirement age and then estimate how much must be contributed each year to accumulate the necessary future fund. Interest rates, ages of participants, etc., will have an effect on the calculation. An actuary generally determines the amount of the contribution. The investment risk rests on the employer.Defined contribution plans generally put a percentage of current salaries into the plan each year. The amount at retirement will depend on the investment return and number of years until a participant retires. The investment risk rests on the participant
.
Plan Type
Contributions
Retirement
Benefits
Investment Risk
Defined benefit
Vary
Fixed
Employer
Defined contribution
Pension– Fixed Profit sharing – Vary
Vary
Employee

What Is the Best Type of Plan?

There is no best type of plan. The choice of what type of plan to use is an individual one. The answer depends on factors such as employer goals and available cash flow.
1. Those born before 1936 may be able to elect 10-year averaging or capital gains treatment; these strategies are not available to those born after 1935. 2. Note that some plans have features of both types. Designing the Best Plan for You

Qualified Retirement Plans

Defined Benefit Plans The employer contributes an actuarially-determined amount sufficient to pay each participant a fixed or defined benefit at his or her retirement. Methods of defining the benefit may be based on a flat percentage of compensation, a percentage which increaseswith years of service, a percentage which changes at certain compensation levels, etc. This type of plan generally favors older employees, because more of the employer’s contributions must go into his or her account to make certain that there will be enough to pay the promised (or defined) benefit at retirement age.

Defined Contribution PlansThere are several variations of defined contribution plan’s, some of the variations include the following.
Money purchase pension: The employer contributes a specified percentage of the participating employee’s salary each year. Whatever that fund grows to is what the retiring employee receives.
Target benefit pension plan: The target benefit plan has elements of both the defined benefit and defined contribution plans. The benefits are determined as if the plan were a defined benefit plan, while the defined contribution plan annual contribution percentage and dollar amount limitations apply to the actual contributions.
Traditional profit sharing plan: Similar to the money purchase pension, except that contributions do not need to be a specific percentage and they do not need to be made every year, as long as they are substantial and recurring.
Age-weighted money purchase and profit sharing plans: Money purchase and profit sharing plans in which employer contributions are allocated to provide an assumed equivalent retirement benefit at normal retirement age.
Cross-tested or super-integrated money purchase and profit sharing plans: These plans establish groups of participants to which are allocated specified allocation percentages. They must satisfy very complicated discriminatory requirements under Reg. 1.401(a)(4).
Stock bonus plan: Similar to the traditional profit sharing plan. The plan may, but is not required to, invest primarily in the employer’s stock.
ESOP - Employee stock ownership plan: Like a stock bonus plan, to which the employer can contribute company stock instead of cash. The plan must be primarily invested in company stock.

Qualified Retirement Plans

IRC Sec. 401(k) plan: Also called a cash or deferred plan, this plan is any stock bonus plan or profit sharing plan which meets certain participation requirements of IRC Sec. 401(k). An employee can agree to a salary reduction or to defer a bonuswhich he or she has coming.
SIMPLE plans: SIMPLE stands for savings incentive match plan for employees. SIMPLE plans can be in either an IRA format or a 401(k) format.
SEP: This stands for simplified employee plan. An SEP is a group of individual IRAs established for employees to which the employer and employees may contribute more than an individual employee could contribute to a traditional IRA or Roth IRA.

Agency Marketing Services helps you to obtain the information necessary to make the right decision for your company’s pension plan.

Our plans are designed to meet the needs of the business owner over the life of the plan. This means affordable and easy administration combined with plan flexibility to meet changing business conditions. Comparability plans that favor the business owner and key executives allowing for higher limits on contributions by classes of employees than a standard plan. Flexibility in multiple investment options coupled with ease of online computer administration for the employer and employee.

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