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Selling Beyond the 401(k): Three Tandem Plan Types to Help Employers Meet Evolving Needs

Financial Advisor News | Winter 2023

Three Options Beyond the 401(k) to Help Clients and Grow BusinessDid you know 94% of employers offer a 401(k) plan? Perhaps that's not surprising—they are one of the most popular vehicles for retirement savings. Yet as businesses face market volatility and intense competition for talent, many of them could be good candidates for other, sophisticated retirement plan solutions. 

In a competitive financial advisory marketplace, you can't afford to wait for clients to ask about alternatives. Approach your small business clients now to explore their business, tax, and retirement planning needs—and proactively recommend options beyond their 401(k) plan. You'll build long-term relationships, produce happier clients, and fend off competitors, all while growing your bottom line.

There are many alternative plan types, but let’s look at three that could expand possibilities for your clients and prospects.

Cash balance plans

Cash balance plans, also known as hybrid plans, combine the high contribution limits of traditional defined benefit plans with the flexibility and portability of a 401(k) plan. Each eligible participant has an account that grows from both an employer contribution and a guaranteed interest credit.

Businesses that might be a good fit

  • Principals seeking a tax deduction of more than $66,000 in 2023 ($73,500 if age 50+) or are making more than $265,000 per year
  • Highly profitable
  • Family-owned or closely held
  • Professional services firms, such as CPAs, law firms, or medical groups
  • Older owners who need to catch up quickly on retirement savings
  • Looking for competitive advantages to attract talented employees

How can clients benefit?

  • Business owners can save significantly on corporate and personal taxes.
  • Many owners can double or even triple their pre-tax retirement savings.
  • It can make a firm’s retirement package much more appealing to future partners and employees.
  • Different contribution amounts can be specified for different participants or groups of employees.
  • Participants can roll over their cash balance accounts into an IRA or another qualified plan.

Employee Stock Ownership Plan (ESOP)

An ESOP gives employees an ownership stake in the company. The employer allocates a percentage of the company’s stock shares to each eligible employee. The distribution of shares can be based on the employee's pay scale, terms of service, or some other allocation.

Businesses that might be a good fit

  • Strong, stable cash flow and high profitability
  • Exploring an exit strategy but don’t want to sell to a competitor
  • Want to empower employees to think like owners vested in the company’s performance
  • Prefer to keep company stock in friendly hands

How can clients benefit?

  • An ESOP provides tax advantages for shareholders selling stock in a closely held C corporation.
  • An ESOP provides a market for thinly traded stock and allows employers to make dividends deductible at the corporate level.
  • These plans can enable business perpetuation when there is no buyer for a departing owner as well as liquidity for estates of business owners.
  • ESOPs can facilitate enhanced employee engagement, recruitment, and retention.

Nonqualified Deferred Compensation (NQDC) plans

NQDC plans are typically used by companies to actively retain and reward key employees, usually high-level leadership. There are four types of nonqualified plans:

  • Executive bonus plans
  • Group carve-out plans
  • Deferred-compensation plans
  • Split-dollar life insurance plans

Businesses that might be a good fit

  • Creating a performance-driven environment or a transition plan for successors
  • Prefer a bonus structure for key personnel that defers their taxes until retirement and potentially a lower tax bracket
  • Want to offer additional incentives and benefits not available with qualified plans

How can clients benefit?

  • Benefits are realized in the future or forfeited if certain conditions aren’t met, which creates longer-term employment commitments to the company.
  • Deferred assets remain a part of the company’s assets and can be used for business purposes.
  • These plans allow for more flexibility in participation eligibility because they are exempt from nondiscrimination and top-heavy testing rules.

How to get started

Not all employers are ideal candidates. To find potential matches, evaluate your client roster and identify characteristics that match those above. Then, begin probing with some simple lead-ins to spark further conversation:

"I've heard from clients they are struggling to attract and retain employees. If you're experiencing the same thing, I have some ideas to help."

"Your 401(k) plan has been successful in getting all employees to save. I'd like to tell you about other retirement plans that can help owners and high performers save even more."

"I noticed many people in your 401(k) plan are maxing out—that's great! Did you know there are other retirement plans that allow certain people to contribute even more than what they put in their 401(k) plan?"

"I have several ideas that could offer tax advantages beyond what your company’s 401(k) plan can provide."

Get there with Ascensus

You don't have to be an expert in retirement plans to offer these solutions to your clients. Ascensus' independence, flexibility, and consultative approach make it easy to sell and implement these plans. We're here to support you in growing your practice, and we’d be happy to review your client lists to assess the best plan types for them.

Contact your regional vice president if you need any assistance.
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