Retirement is Better with a Plan with Lucas Benson

Transcript of Podcast Episode 209

Hello, this is Bill Rainaldi with another edition of Security Mutual’s SML Planning Minute. In today’s episode, “Retirement is Better with a Plan” with special guest Lucas Benson.

Luke is a Vice President of Operations at Security Administrators Inc. Security Administrators was established in 1984 to provide third-party administrative and actuarial services to businesses of all types. Their clients range in size and diversity from individuals and professional service corporations to universities and manufacturing companies. In addition, Luke is an enrolled actuary, so you know he’s a smart guy.

So Luke, welcome to the program.

Lucas Benson:
Hi everybody. How are you doing today? How’s it going, Bill?

Bill Rainaldi:
Good.

Lucas Benson:
I could pass tests, but thanks for having me on.

Bill Rainaldi:
Great. So Luke, what exactly does Security Administrators do?

Lucas Benson:
Sure. We’re what’s called a TPA, a third-party administrator. If you’re familiar with retirement planning at all, you’ve also always heard of the three-legged stool of retirement, that being your pension plan, your 401(k) plan, and Social Security. There’s another three legged-stool in retirement, and those are the people that service your plan as a plan sponsor or an employer. So those people would be your financial advisor, who services the plan in regards to picking out different investment options, where to invest your portfolios, where to go, and they’re basically the quarterback of it all. Then there’s also the record keeper. This will be your American Funds, you’re Empower, the place where if you have a defined contribution plan, the participants log onto the website and the review their balances and all the funds are held there.

Well, there’s also a third-player in that game, the third leg of the stool, which is called the TPA, the third-party administrator. And we’re more behind the scenes. And what we do is we design the plan, we maintain the plan document, and we run all of the governmental administration tasks. That being, we file the form 5500s for the plan, we create the summary annual plan reports, we process distributions. And one of the most important tasks is we do all of the required government testing to make sure that the plan passes all the laws and myriad of regulations that go into maintaining a qualified plan.

Bill Rainaldi:
Okay, perfect. Luke, I see a lot of confusion among consumers out there about retirement plans. And for example, a lot of people, they hear this thing called a defined contribution plan, and they hear about this thing called a defined benefit plan, and they don’t really understand the differences between those types of plans. So how would you best describe the differences between those two?

Lucas Benson:
Sure. You basically just have to unpack the names. So defined contribution plan is going to be the thing that everybody’s familiar with nowadays. The 401(k) plan is a defined contribution plan. The profit sharing plan is defined contribution plan. Because your employer is just defining the contributions that go into the plan. So anything after your employer has put in the contributions is basically on you. So all of the investment choices, while they may be limited by the employer, by the plan provider, oftentimes the participants can make those investment choices. The gains and losses are all attributable to the balance that the participant has. So once the employer puts their money in, once they define that contribution, then the money that comes out of the plan eventually when you hit retirement age is entirely up to the plan participant in as much of as control as they have over the investments.

A defined benefit plan is the exact opposite. The employer’s not defining the contribution that goes into the plan, they’re defining the benefit that comes out of the plan. So these would be more synonymous with what people used to know 50 years ago, pension plans. So instead of saying the employer gives you $10,000 as profit sharing now, the employer’s saying, “Hey, you work here 30 years, I’m going to give you 60% of your compensation as an annuity when you retire.” Well, it sounds great, but the problem is remember, whereas the participant has all the control over and ends up with the results of all those gains and losses and the defined contribution plan, the employer is instead the one that is responsible for defining the benefit and funding that benefit at retirement. And so, that’s where pension plans have temporarily fallen out of place in regards to the employer no longer wants to take on that risk, or they didn’t use to. And we’re finding that pension plans, or at least a version of them, are making a roaring comeback.

Bill Rainaldi:
So generally speaking, with the defined contribution plan, the future retiree is the one who basically is taking the risk. Is that correct?

Lucas Benson:
That’s correct.

Bill Rainaldi:
Whereas with the defined benefit, it’s more on the employer, they’ve got to make that payment, so they have to figure out how to get from point A to point B.

Lucas Benson:
Exactly.

Bill Rainaldi:
Okay, good. I know in your job, you deal with a lot of financial service professionals, but you also deal with some of the eventual clients. In other words, the people who are putting their money into these plans, and you deal with a lot of business owners. I just wonder if maybe you can talk about a few of the concerns people have when putting together one of these plans?

Lucas Benson:
Sure. There’s always going to be two main concerns. The first concern is complexity. There’s a lot of plans you can have where you just have a 401(k) plan and you do the same matching contribution every year. That could be 3% match on 100% a pay. And at the end of the day, that’s all you want and that’s great. And so, with plans like that, sometimes you don’t even need a TPA, you can just go to a payroll provider and they’d be happy to run that because there’s no complexity. But with complexity comes the ability to reach your goals. And so, for example, if you wanted a large tax deduction, then your plan is going to become more complex than just doing a 3% match. And that’s where you bring in a TPA. And so basically, one of the main objections that the client has is that, “This is all too complex, this is too hard. I don’t understand all of that.”

Well, that’s why you hire us. So the whole job of a good TPA, besides obviously doing the administrative work and all the testing and everything behind the scenes, is to make everything that is complex as easy to understand as possible. Well, it’s our job to know the rules so you don’t have to. There’s tons of regulations, there’s tons of laws, there’s tons of mathematical tests, and we’ll only tell you about those tests when it’s pertinent to your situation. For example, if your company has 200 employees and everybody has an equal share, you don’t ever need to know about a top heavy test. We’re going to run it, but we’re never going to discuss it with you because it’s not something that you are required to know or to weigh in on. So we’ll take all those complex things and drill down and just have the conversations with you that you need to have and you need to understand, so that you can have a very complex plan design without having to be involved in every minute detail of that design.

And one of those things is, for example, life insurance in a plan. Life insurance and a qualified plan is a fantastic idea. There’s no better way to both engage a tax deferral strategy, as well as protecting your loved ones, protecting your estate. But the rules behind life insurance in a qualified plan are very complex to the point that for a lot of TPAs, it’s even above their knowledge base. They won’t touch life insurance in a qualified plan. Well, we’re a TPA who’s a wholly owned subsidiary of an insurance company, so that’s what we do. So when you do have life insurance in a qualified plan, there’s this wonderful ability to mesh both tax deferrals, as well as the state planning strategy. And we have the ability and we know the rules, so we can help you with that. We could say, “All right, your goal is to have life insurance in a qualified plan. Let’s craft the plan that meets this exact goal.”

And so, when we craft that plan, we’ll go over it with you. We’ll say, “Okay. Once a year, you need to make a contribution of X.” We’ll make sure that that meets all the rules, that that contribution meets all the funding requirements. We’ll advise you when to make that contribution, how much to do it, who it goes into, where it goes, when to cut the check, and then we’ll give you your government filings at the end and just have you sign them and send them on its way. So we make the complex simple, and that’s our whole purpose.

Bill Rainaldi:
Got you. Yeah, I’m seeing a lot more life insurance inside of qualified plans, I think, than I ever did before, and there’s a lot of good reasons for that.

Lucas Benson:
There are. Life insurance in a qualified plan, it truly is the best of both worlds. A lot of our clients come to us because of tax deductions. It’s almost counterintuitive that you want to set up a retirement plan for your estate planning, you want to set up a retirement plan for your employees. But at the end of the day, a lot of what drives, especially in the small plan market, is going to be the tax deductibility that you get from any contributions to a qualified plan. So coupling that tax deduction goal along with the goal of adding the security and adding the estate planning to it makes just qualified plan life insurance just a win-win.

Bill Rainaldi:
Hmm, interesting. I wanted to move on and talk a little bit about business owners. I know you deal a lot with business owners, and I’m wondering about some of the concerns business owners when they have these types of plans set up as well.

Lucas Benson:
Sure. The one is always going to be what some people in the TPA world call efficiency. Efficiency would be the metric of, “I’m dropping $100,000 into my qualified plan every single year, and only $30,000 of that is going to me, or $20,000 of that is going to me. Why don’t I just might as well pay taxes on it?” And so, efficiency is a concern amongst a lot of business owners. So what you can do is that there are a myriad of different plan designs that you can focus in on. One of the most efficient being the cash balance 401(k) combo plan, which is a specific type of plan that actually combines a defined benefit and a defined contribution plan. And so, if you have a 401(k) cash balance combo plan, you can receive up to 90% efficiency sometimes, depending on the demographics of your employee base.

And so, you can go from a 401(k) plan with deferrals where you’re just getting 10% or 15% of the contributions of $100,000 to having a cash balance 401(k) combo plan where you’re putting $400,000 in tax deductible every single year, and you’re capturing 90% of that money.

So, a lot of it goes back to plan design. And for people who don’t know about all the plan design options out there who just stay with their payroll provider, who just have their 401(k) that has a basic match, they don’t look at it as a tax deduction vehicle or a vehicle to save for their own retirement because it’s just not efficient. However, if efficiency matters, we can absolutely create plan designs that will meet all of your needs and do so in a very efficient manner.

Another one, obviously, I touched on the tax deduction strategy. There’s also the idea of that, “Okay. Yeah, great. You’re saving me on my taxes now, even if the plan is 90% efficient, all that money that goes in has to come out eventually. I’m saving taxes now, but I’m going to have to pay this income tax as a retirement.”

Bill Rainaldi:
That’s something we talk about all the time on this program.

Lucas Benson:
Yep. You’re absolutely right. You do. But here’s the thing, and this is especially pertinent when it comes to small business owners, when it comes to professional employees, a doctor, a lawyer who has their own firm. Oftentimes, their only retirement strategy is going to be to sell their client list when they’re done. A doctor has another doctor come in and take over, or a manufacturing company that’s owned by one person ends up just selling the manufacturing company.

Well, what a qualified plan does, and what an efficient qualified plan does is over the course of 10, 15, 20 years, you’re able to extract money from your business before you sell it to use down the road. And the double bonus of this is that mostly you’re going to be doing this extraction when you’re in your 40s, when you’re in your 50s, when you’re in your early, mid, late 60s. And so, those are the times when you’re going to be in the highest tax bracket anyway. So while you’re having these deductions, those deductions are going to be taking you down, sometimes even out of the highest tax bracket. And when you’re in retirement, most likely, you’re not going to be in that high tax bracket anymore anyway. So you end up on a net case, saving more as far as taxes are concerned, even if you end up paying for it later because you’ll be in a lower bracket, as well as doubling up on the money that you’re able to extract from your business in a tax-deferred environment.

Bill Rainaldi:
Oh, fantastic. The other thing that crossed my mind while you were speaking, Luke, is the fact that for an employer, for a small business, a well-designed plan might also help them attract and retain good employees as well, wouldn’t it?

Lucas Benson:
Right. It’s always a fun conversation to have when the employer says, “Okay, I don’t know if this sits right with me. I’ve had this plan, and like you said, it’s going to be 90% efficient. I want to reward my employees too.” Well, the IRS has all sorts of rules, like I attributed to early in this interview and all sorts of mathematical tests that we have to do. So for example, if you were to have a 401(k) plan with just a basic 3% match, that means that in the retirement plan, your employees are going to get 3% of compensation towards their retirement. If you were to go with that 95% efficient cash balance plan, all of a sudden now, they’re going to get a cash balance accrual, meaning a defined benefit accrual of say, $1,000 a year on a cash basis. And they’re also going to get something like 6% or 7% in the 401(k) plan towards their retirement.

So it ends up being that while you are putting away large chunks in a very efficient manner, you’re also doing way better for your employees. And so, if your employees one day decide to shop around and say, “Okay, I’ll go to a competitor, what do you offer?” “Well, we have a 3% match.” “Oh, I’m getting 7.5% at my current job. That’s pretty good.” so you’re going to see increased employee retention with a better plan. So at the end of the day, the only person losing this whole arrangement is the IRS, and I don’t think anybody’s going to shed a tear about that one.

Bill Rainaldi:
I know I won’t, that’s for sure. Well, Luke, listen, I think this has been a great topic to discuss, and I’m so happy you were able to join us today, so thanks for coming.

Lucas Benson:
Well, thanks for having me on, Bill. I really appreciate it.

Bill Rainaldi:
All right, Take care. Bye-bye.

Lucas Benson:
You too. Bye.

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