Retirement Plan Funding Dynamics: How Retirement Plan Variables Affect Funding Outcomes

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Retirement Plan Funding DynamicsHow Retirement
Plan Variables Affect Funding Outcomes

• Jack Lawless, CPA, APMPension Strategies, LLC
• DFW FPA Platinum Sponsor

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Objectives

• Identify the variables that play a roll in
  funding options when looking at a Qualified
  Retirement Plan.
• Explore how those different variables affect the
  available funding for both Defined Contribution
  and Defined Benefit Plans.
• Look at strategies to optimize the future outcome
  by correctly managing the current variables.

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What are the Variables in Play?

• Age of the participant.
• Compensation
• Compensation by definition consists of the earned
  income paid to a participant in a given year.
• Investment Return
• Asset accumulation results from plan
  contributions as well as investment return.
• Participant Demographics - census management.

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Why is it important to pay attention to the
variables?

• It will help identify what type of plan best
  suits your clients needs.
• It can help better leverage plan benefits toward
  the business owner.
• It will help defer some taxes and eliminate
  others.

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Variable One AGE

• Most commonly thought about variable when looking
  at the best retirement plan option available to
  meet future retirement income desired.
• The effect of Age on a Defined Contribution plan
  Maximum salary deferral is limited to 17,500
  until age 50, and then a catch-up contribution
  of 5,500 available (total of 23,000) age 50.
  Profit Sharing contributions may be age weighted
  to favor older participants.
• The effect of Age on a Defined Benefit Plan
• Maximum contribution amounts and maximum lump
  sum amounts increase with age as the participant
  gets closer to retirement. Once a participant
  reaches age 65, the contribution limits and lump
  sum limits begin to decrease.

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A look at the AGE effect
                 
Name Gp Salary Def Deferral PS Cont DB Cont ER Cont Tot Cont
Age 25 1 210,000 8.33 17,500 12,600 41,000 53,600 71,100
Age 30 1 210,000 8.33 17,500 12,600 53,000 65,600 83,100
Age 35 1 210,000 8.33 17,500 12,600 68,000 80,600 98,100
Age 40 1 210,000 8.33 17,500 12,600 88,000 100,600 118,100
Age 45 1 210,000 8.33 17,500 12,600 132,000 144,600 162,100
Age 50 1 210,000 10.95 23,000 12,600 162,000 174,600 197,600
Age 55 1 210,000 10.95 23,000 12,600 197,000 209,600 232,600
Age 60 1 210,000 10.95 23,000 12,600 199,000 211,600 234,600
Age 65 1 260,000 8.85 23,000 15,600 223,000 238,600 261,600
Age 70 1 260,000 8.85 23,000 15,600 188,000 203,600 226,600
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Variable Two Compensation

• Current maximum compensation allowed 260,000
• How compensation affects available funding in a
  Defined Contribution Plan
• Profit Sharing Contribution is based off of 25
  of compensation, up to a total DC contribution
  allowed of 52,000.
• Once Compensation is above 138,000, participant
  has reached maximum contribution limit of 52,000
  (or 57,500 if over age 50), between the maximum
  deferral and profit sharing contributions.
• How compensation affects available funding in a
  Defined Benefit Plan
• Defined Benefit Plans use current, high average,
  or final average compensation.
• Defined Benefit compensation maximum when
  calculating a lump sum is 210,000 at retirement
  age 62.

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Variable Three Return

• Asset accumulation results from two sources
• Contributions made into the plan.
• Rate of Return on investments.
• In a Defined Contribution Plan, the rate of
  return on investments plays no part in the
  calculation of the contributions allowed.
• High growth rate investments do better in a
  Defined Contribution Plan.
• In a Defined Benefit Plan, these two sources work
  hand in hand As the rate of return increases,
  the contribution requirements will decrease.
  Likewise, if there is a negative rate of return
  (loss), the contribution for the next year will
  increase, in order to make up a portion of the
  investment loss.
• Very conservative investments work best in a
  Defined Benefit Plan.

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Variable FOUR Company Demographics

• There are different allocation methods available
  in Defined Contribution plans, which are chosen
  depending on age and salary history of the
  employees at a company.
• Depending on company demographics, an employer
  may chose to have a cross-tested Defined Benefit
  Plan or go with a Cash Balance option.
• Also, part-time (otherwise excludable) employees,
  may be used to help balance testing requirements
  in either a Defined Benefit or Defined
  Contribution plan.

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Rewards of a little investigative work
Design with Owner and Employee Design with Owner and Employee Design with Owner and Employee Design with Owner and Employee
Employee Name Salary 401(k) Contribution Safe Harbor Contribution Profit Sharing Contribution Defined Benefit Contribution Total Contribution
Owner- Age 53 150,000 23,000 - 1,000 94,594 118,594
Employee- Age 48 65,000 - 1,950 9,845 9,107 20,902
Totals 215,000 23,000 1,950 10,845 103,701 139,496
Design with Owner, Employee, and Stepson Design with Owner, Employee, and Stepson Design with Owner, Employee, and Stepson Design with Owner, Employee, and Stepson
Employee Name Salary 401(k) Contribution Safe Harbor Contribution Profit Sharing Contribution Defined Benefit Contribution Total Contribution
Owner- Age 53 150,000 23,000 - 1,000 94,594 118,594
Employee- Age 48 65,000 - 1,950 2,080 2,277 6,307
Stepson- Age 19 8,000 - 240 256 48 544
Totals 223,000 23,000 2,190 3,336 96,919 125,445

Total Contribution Total Contribution 139,496 125,445
to Owner and family to Owner and family 85 95
to Others   15 5
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Lets take a look.

• Pension Strategies, LLC
• Mallory Young
• Senior Pension Consultant
• [phone] Ext. 334
• myoung_at_pensionstrategies.com
• www.pensionstrategies.com
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