Question

Jason, a CFP® professional, has a corporate client whose only two shareholders, ages 57 and 61, have asked for assistance with selecting a corporate retirement plan. His clients have annual compensation from the corporation of $145,000 each. They employ a staff of nine, ages 21 to 40, with annual compensation of $18,000 to $55,000. The clients want a qualified plan that offers maximum benefits for themselves, minimum benefits for the employees, contribution flexibility, and low administrative costs. Which of the following retirement plans should Jason recommend?

1. SEP-IRA
2. SIMPLE IRA
3. 401(k) plan
4. Keogh plan

Answer 1

3. 401(k) plan

Jason should recommend a 401(k) plan because it provides maximum benefits for high-earning shareholders, allows for flexible contributions, and can be designed with vesting schedules that minimize benefits to short-term employees, meeting the clients' needs for a corporate retirement plan.

Step-by-step explanation:

Given the criteria specified by the two shareholders, Jason, a CFP® professional, should recommend a retirement plan that offers maximum benefits for the shareholders, minimal benefits for the employees, contribution flexibility, and low administrative costs. In this scenario, a 401(k) plan would seem appropriate due to its flexibility in contributions and benefit design that can favor higher paid employees (like the owners) more than a SIMPLE IRA or SEP-IRA might. Additionally, 401(k) plans can be designed with vesting schedules that may lead to lower overall contributions to employees who leave the company earlier, thus minimizing the amount allocated to the younger staff compared to the older shareholders. In contrast, a SIMPLE IRA requires a mandatory employer contribution that is either a match or a non-elective contribution to all eligible employees, and a SEP-IRA requires the same percentage contribution for all employees including the owners, which could result in higher costs for the staff included in the plan. Lastly, the Keogh plan could be expensive in terms of administrative costs and is not as widely used as 401(k) plans.