Choices, Choices, Choices

SEPs, however, cost almost nothing to establish and maintain–just $10 per year if administered through a mutual fund company. And, apart from filing an IRS Form 5305-SEP to start the plans, employers generally don't need to complete any IRS or Department of Labor reports.

Ken Steele, a senior financial planner at MetLife, New York, N.Y., says SEP IRAs are fine for firms that see no need to skew retirement benefits to key employees. But he finds that a decreasing number of his clients fall into this category.

"The SEP plan is the epitome of what's good for the goose is good for the gander and the gosling," he says. "Everyone gets the same percentage of whatever.

"I have clients for whom I established a SEP plan years ago because it was so easy," he adds. "But now, as their companies are doing better and making more money, I tell them, 'If you do the math, you'll see that last year you wrote a check for $50,000 into the SEP. Of that amount, you got 40% and everyone else got 60%. Do you see anything wrong with that picture?' And of course they do."

The better options, Steele and others insist, are 401(k) plans with profit-sharing features. These include the solo 401(k) for sole proprietors and the safe harbor 401(k) plan for firms with multiple employees.

These plans allow employers a greater tax deduction–and hence larger retirement benefit–than do their SEP and SIMPLE counterparts. Participants can borrow against the plans. And they can use retirement plan cash accumulations to buy permanent life insurance, typically universal life policies.

For 2005, owners can make salary annual deferrals of $14,000 and if they're aged 50 or older, catch-up contributions of $4,000. Adding in the maximum employer contribution of $25,000 yields a total contribution of $43,000.

"We expect to see exponential growth in demand for these plans over the next two to three years," says George Kozol, a senior vice president of marketing at Security Mutual Life Insurance Company of New York, Binghamton, N.Y. "They're a bit more complicated than alternatives in terms of plan design, but they're more effective for the business owner or self-employed individual."

Kozol adds that approximately 1,000 of Security Mutual's independent producers are marketing solo and safe harbor 401(k) plans under the company's "micro(k)" and "Dash 401(k)" labels. Premium dollars garnered from sales of the product, he estimates, are up 100% for each of the last two years.

Security Mutual's experience regarding the solo 401(k) is mirrored industrywide. Chris Brown, who tracks solo 401(k)s for Financial Research Corp., a Boston-based consulting firm, says entrepreneurs have poured about $2.8 billion into these plans since their launch in 2002. That is expected to jump to $5 billion by year-end 2005.

Another qualified retirement plan with a life insurance component, the 412(i) defined benefit plan, also has received much buzz in recent years–but not all of it positive. The plan, which affords employers very large pre-tax contributions and tax deductions, has come under heightened IRS scrutiny because of much publicized abuses (e.g., policy owners who received distributions of cash values at low tax cost because of artificially inflated surrender charges).

Kitces believes the scandals will depress sales of life insurance policies inside of qualified plans. But he notes that as long as prospective buyers acquire the policies as an incidental benefit to the plans–a legitimate use under IRC rules–then they should have no reason to fear a government audit.

Advisors, for their part, can help ensure they remain in good standing with clients and federal regulators by limiting counsel to their areas of expertise and, when necessary, referring clients to another professional.

Rockwell learned this the hard way. One of the "scariest moments" in his career, he says, occurred when he offered a client tax advice concerning a SEP plan that, unbeknownst to Rockwell, was improperly funded because participants had not conformed to certain family attribution rules of ERISA law.

"One lesson I can impart to advisors: never give tax advice," he says. "It's so easy to try to be helpful. But unless you're doing someone's taxes, you don't know what can pop up."

Advisors also need to be mindful of complications that can arise when plan participants, particularly top-tier executives, insist on parity in retirement benefits. Neil McCarthy a financial planner at McCarthy & Associates, Roswell, Ga., cites a 401(k) profit-sharing plan for a law firm that required much fine-tuning. The reason: concerns that one of the partners might derive an unfair advantage because the firm also employed his wife.

Designing the plan right, however, is generally a smaller challenge than two others that advisors all too often confront: getting quality time with clients, and motivating them to implement the recommended plan.

For Rockwell, an effective technique is to send prospects a postcard, the message of which puts a twist on an old educational slogan from a TV ad: The card reads, 'a tax break is a terrible thing to waste.'

"I use that a lot," says Rockwell. "Once you've wasted your tax break, you can't get it back. If you wait an extra 5 years to buy into a plan, you might end up paying an extra $100,000 to Uncle Sam."

Adds Kitces: "What's always a high-value conversation for clients is showing them what taxes they won't pay this year because they worked with me. That's certainly a tangible benefit."