Help Clients Eliminate The Cap On Executive Retirement Savings
By Doug Campbell
If someone told you that there is a huge, mostly untapped market out there made up of some of the most desirable clients–small-to-medium-sized businesses and their top executives–who are a perfect fit for a product you can deliver, would it pique your interest?
Whats more, connecting with these lucrative clients offers the opportunity to cross-sell other high-end products and services like estate planning. This is a strategy deserving a closer look.
Retirement planning is a key concern for all employees. Surprisingly, top executives can actually be at a disadvantage because they are severely limited in what they can save in a tax-advantaged, defined-contribution plan. Qualified plans like 401(k) or IRAs are subject to a variety of IRS and ERISA restrictions that result in less than equitable treatment for highly compensated employees, because statutory limits cap the amount that can be contributed to the plan.
For this reason, employers are beginning to integrate a nonqualified supplemental retirement plan with their qualified 401(k) plan to create a benefit that will help key executives increase their retirement savings. This combination allows these employees to set aside additional pretax income for retirement that will grow tax deferred.
One of the most popular nonqualified options is known as the "401(k) Look-Alike plan using life insurance." As its name implies, the Look-Alike plan works much like a conventional qualified 401(k) plan. However, unlike a 401(k) plan, most Look-Alike plans are funded by a variable universal life (VUL) insurance policy that also insures the life of the executive. This results in several benefits to the executive and the company.
For example, there is no limit on the amount an executive can contribute to the Look-Alike plan or on company-paid matching contributions. The employees contributions are pre-tax so they reduce his or her current taxable income. Any early withdrawals are not subject to the 401(k) plan 10% early withdrawal penalty. And the additional variable investment options offered by the VUL give the executive added flexibility in meeting his or her financial goals.
From the companys standpoint, the eventual retirement benefit is tax deductible and, with proper design, these benefits can be paid using income tax-free withdrawals or loans from the VUL policy. Finally, a Look-Alike plan is a valuable benefit that the company can use to attract and retain the outstanding talent it needs to ensure the growth and long-term success of the business.
