When your company sponsors a qualified retirement plan, you must comply with complex rules established by the IRS and the Department of Labor. Ignore the rules and your firm could face costly penalties from federal regulators — and plan participants might sue you for mishandling trust assets.
This is no time to be a do-it-yourselfer. You need the help of a skilled professional who knows the requirements and can help you stay in compliance. Here’s why.
Under the so-called “prudent investor” guidelines, a company owner is considered a “fiduciary.” You must look at the plan’s entire portfolio and take appropriate risks in search of suitable rewards. This generally means that proven stocks and high-grade bonds should be the foundation of your retirement plan.
Real estate investments can be included, too, although you will have to cope with valuation and liquidity issues. You can speculate with perhaps 10% of the plan’s portfolio, as long as you document that there’s a decent chance that your long shot will pay off.
However, investing all of a fund’s money in Treasuries or Certificates of Deposit won’t keep you out of trouble either. Those investment vehicles have underperformed equities in virtually every extended period. There have been court cases that involved employees suing their retirement plans because they earned low returns when the stock market was way up.
If your plan earns, say, 5% per year in low-risk investments while the major stock market averages go up 20%, you could be forced to pay all — or part — of the differential to employees.
Of course, you should hold some money in T-bills or money funds so you can quickly convert it to cash for distributions. The older your employees and the closer your obligation to paying distributions, the greater your need for ready cash.
One way to avoid some of the liability: Set up a SEP or 401(k) plan that allows employees to make their own portfolio decisions. Under this option, a skilled professional or mutual fund company helps set up the program and staff members make their investment choices from a list of mutual funds. We have several team members who have earned their Advanced Defined Contribution Plan certificates. Fill out the form below to learn more.
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.