Strengthen high-income client relationships with a Defined Benefit Plan partnership
“I don’t know how to set up this plan.”
Josh rubbed his temple. Two weeks ago, his tax professional informed him that he was eligible for one of the best-kept retirement secrets for high-income earners: a Defined Benefit Plan (DB Plan). Josh was eager to set up his own plan and start saving his money.
But the more he researched DB Plans and the calculations required for tax reporting, he realized he was in over his head. He wasn’t familiar with the formulas. And he certainly didn’t want to mess up his tax reporting — the IRS was already keeping tabs on him thanks to his high earnings. They were sure to penalize him if he failed to report his taxes accurately.
“Can you help me?” Josh asked his tax consultant. “Or, do you know someone who can help me?” Josh asked.
How would you answer that question?
The complexities of the Defined Benefit Plan
DB Plans are not your everyday retirement plan. They require specialized knowledge and continuous compliance with IRS regulations. These requirements are typically beyond a tax professional’s scope of expertise. To protect your high-income clients and ensure a DB Plan meets IRS regulations, it’s essential that you work with an actuary and third-party administrator (TPA).
Often, the actuary and TPA come from the same company; they might even be the same person. An actuary determines the mathematical formulas and provides a range of contributions for the DB Plan. Meanwhile, the TPA files the DB Plan for compliance with the IRS. It’s a maze of formulas, steps and regulations.
A DB Plan is similar to traditional investing options like a 401(k) or SEP-IRA in that it has a wide variety of investment options. This can be both gratifying and overwhelming for high-income earners.
Unlike a 401(k) or SEP-IRA, though, a DB Plan is much more complicated to report for taxes. Most people can easily determine their tax reports for a 401(k) or SEP-IRA, as they’re only reviewing taxes for a single year. The DB Plan, however, looks at multiple years (a DB Plan can extend up to 25 years). It requires complicated math formulas to determine how much a high-income earner must pay in taxes, and it must be recalculated every year.
Of course, a DB Plan does not legally require an actuary or TPA. Your client can file and report their taxes on their own, but referring a high-income client to a DB Plan specialist is highly recommended. Without a specialist’s guidance, your high-income client may struggle to put in the necessary amount of money.
The importance of trusted partnerships when recommending a DB Plan
When an actuary runs the numbers for a DB Plan, there is an assumed rate of return. It’s a fairly conservative number, but a deviation from that number becomes a problem.
A DB Plan is designed to provide a specific benefit upon retirement. So, contributions must be carefully calculated to meet this goal. If investment returns are volatile, then it can lead to significant fluctuations in required contributions.
Think about it this way. If a DB Plan experiences a year of poor returns, the client may need to make larger contributions to compensate. However, if the economy is struggling and your client’s business loses money, they might not have the cash to contribute to their DB Plan. This is problematic.
Partnering with a DB Plan specialist will help your client avoid this problem. And they will keep your client on a conservative track, ensuring consistency in your client’s returns.
Referring your client to DB Plan specialists also saves your client time. The DB Plan specialists:
- Determine your client’s situation
- Break down the important information into digestible terms for your client
- Handle the paperwork
- File the paperwork with the actuary
- Help the client set up their retirement account
- Invest the client’s money
A DB Plan specialist removes 90% of the work from your client’s plate.
Many tax professionals are understandably hesitant to refer high-income clients to outside professionals due to the risks involved. Referrals to an outsider means placing trust in their competency and reliability. It can feel like a gamble. But the alternative – managing a DB Plan without the necessary proficiency – can be far more dangerous for clients.
How to vet a potential partner
When vetting a potential partner, it’s important to assess their trustworthiness. You’re placing your high-income client in this partner’s hands. The partner must be reliable and competent. Here are three questions to consider when vetting a potential partner:
The question to ask: What issues have arisen from clients? How do you address these issues?
A trusted partner should have a proven track record in managing DB Plans. This includes years of experience and a portfolio of satisfied clients who can vouch for their services.
The question to ask: What is your process like? How will you keep me and my client informed?
Open communication is another important trait of a trustworthy partner. Your partner should maintain open lines of communication between you and the client. This includes regular updates, clear explanations of complex issues and prompt responses to queries.
The question to ask: Do you have client references whom I can engage with in order to see what their experience was like?
Trusted partners should stand by their work and be willing to provide references. They should have testimonials from other clients, and they should be open to allowing prospective clients to speak with current ones about their experiences.
The benefits of a trusted partnership with a DB Plan specialist
Your client expects you to be knowledgeable on all the options for their investments, including complex retirement savings like a DB Plan. If your client fits the criteria to benefit from a DB Plan but learns about this investment opportunity from someone other than you, then you’ve broken your client’s trust and there’s a strong possibility that they will leave. We have seen this play out with numerous clients.
By recommending a DB Plan to your high-income clients, even if they don’t pursue the plan, you improve your credibility. You’re proving to your high-income clients that you’re well-informed, provide high-value services and offer sophisticated planning for their investments.
But remember: The goal is to provide the best possible advice and services to your high-income clients. Sometimes, that means bringing in specialists who can handle the complicated details of a DB Plan.
For more information about Edge Financial Advisors and the Defined Benefit Plan, visit https://www.yourretirementaccelerator.com/. Or you may schedule a conversation to discuss your client’s needs at Calendly - James Alexander.