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Rick Barrera, guest speaker at NAPEO's
1998 Sales and marketing Conference, stated, "In the information
age, exceptions are the rule!" He further stated, "You should
not alter your system to offer customized products; rather
the system should be designed to deliver customized products."
| Your 401(k) plan can be a pinnacle
point of a "marketing wedge" to penetrate both
vertically and horizontally into your selected clients
markets. |
The greatest competitive advantage
belongs to the PEO that meets its clients' requests. Allowing
each client to select a customized 401(k) plan structure increases
your competitive advantage.
To provide the necessary level
of plan design flexibility to your clients, choose the plan
structure with the greatest flexibility inherent in its design.
Let's quickly review the plan structures available to your PEO.
Single
Employer Plan
In this plan structure,
there is only one plan sponsor: the PE0. All of your clients
and employees are combined into one plan All eligible employees,
including those who do not participate by saving in the plan,
are included in the discrimination tests. This allows little
to no 401 (k) participation by the highly compensated employees/owners.
In addition, it provides for no customization of individual
client 401 (k) plan design.
Worksite-Tested
Single Employer Plan
This type of plan is also sponsored solely by the PEO. The plan
document allows customized benefit formulas for each client
Discrimination and other relevant compliance testing are performed
on a worksite basis. This plan design allows the client a customized
401 (k) plan structure based upon their specific objectives
and specifications . However, there is no specific code authority
for this type of plan format, and has the greatest plan disqualification
risk.
Single
Multiple Employer Plan
In this plan structure, the PEO
establishes a base plan
document. The plan is co-adopted and co-sponsored by each client
who wishes to offer the plan. Under existing law, this plan
structure is considered the safest approach for the establishment
of' a PEO
qualified 401 (k) plan. The dilemma of whether the PEO or the
client should be the sponsor of the qualified 401 (k) plan is
solved by mutual sponsorship. In addition, there are specific
provisions under section 413(c) of the Internal Revenue Code
that provide authority for worksite discrimination, coverage,
and compliance testing. This plan design provides each client
the ability to select customized benefit formulas and plan structures.
Multiple Multiple Employer
Plans
This plan structure is similar
to the single multiple employer plan except the PEO establishes
a separate 401(k) plan document with each client. This provides
insulation for each client from defects in plan operation of
the other clients. It could also provide additional flexibility
for the client beyond the constraints of the base plan document
in the single multiple employer plan structure. The disadvantage
is the additional administrative and legal expenses associated
with this plan structure. As a 401 (k) plan record keeper and
administrator, the worksite-tested single employer plan structure
would be my preference. However, of the various plan environments
available to achieve the objectives of capturing and retaining
clients, the worksite-tested single employer plan contains the
greatest risk of plan disqualification. I believe the single
multiple employer plan and the multiple multiple employer plan
provide the safest plan compliance structure in the current
tax environment. There are four
dimensions to the 401 (k) plan that maximize client attraction
to your PEO. They are plan design, effective administration,
appropriate investment program, and effective communication.
Plan
Design
Expert consultation should
be provided to assist your clients in the customization of their
401 (k) plan. In order to optimize your potential client's interest,
provide a plan design presentation that maximizes the highly
compensated employee/owner contribution at their current expense
or minimizes their current expense based on their current contribution.
Effective
Administration
Required compliance review
should be ongoing with each contribution.
Appropriate
Investment Vehicle Multiple investment selections
with top performing mutual funds and pension money managers
in individual allocated accounts provide for excellent accuracy
in an ERISA 404(c) compliant format. Investment results should
be reported daily, allowing participants to check their account
balance and make transfers on any day. An additional investment
product enhancement to attract and retain clients is reimbursement
of the deferred sales charges for the client's current investment
product if they select the PEO. This also eliminates a primary
obstacle to client's transferring their assets to your plan.
When combined with a product design that requires no penalty
if the client elects to leave the plan, a dramatic increase
in client interest in your 401 (k) plan will occur.
Effective Communication
To maximize your clients'
satisfaction, provide toll-free numbers to access your participant's
investment accounts and your record keeper. Train your sales
force to understand the benefits of your 401 (k) plan so they
can effectively communicate them to interested prospects. In
addition, choose a national distribution system to provide local
marketing support to your client's customized 401(k) plan. These
trained individuals assist your sales force in client capture
and enrollment of your client's 401(k) plans. In order for a
401 (k) to be a value-added benefit to the PEO, it must attract
clients. The primary objective in identifying and developing
all four dimensions is to capture clients. In order to provide
any level of plan design flexibility to your clients, you must
choose the plan structure tool that provides the greatest opportunity
of choice. Offering customized benefit structures to your client
maximizes your competitive position in the industry. To
operate a worksite-tested plan, your 401 (k) provider must be
able to accept your payroll and census data in an aggregate
format and then convert that data to client-specific groups.
The client specific data is then processed using the client-specific
benefit formulas and plan provisions. Plan design elements include
vesting schedules, eligibility requirements, 401(k) contributions,
matching contributions, profit-sharing contributions, integration
with social security, and other provisions. Each client's 401(k)
plan is tested for discrimination, coverage, and other compliance
issues on an individual basis. This allows maximum flexibility
and highly compensated employee/owner participation. The ability
to create a customized plan structure will attract clients to
your PEO. If you currently use a single employer plan structure
and want to convert to a worksite-tested plan structure, here
are some basic steps to make a smooth transition.
1. Establish
Your New Plan Structure
Work with your attorney
and qualified plan administrator to establish a worksite tested
plan appropriate for your PEO.
2. Notify
Your Clients Regarding the New Plan Structure
Provide a positive announcement
regarding the increased flexibility of your new 401 (k) plan.
This can be a very effective marketing piece to your existing
clients explaining the additional benefits that are now available
to them.
3. Establish
New Plan Effective Date
Choose this date based upon your client logistics, i.e., number
of clients, geographical location, client cooperation, etc.
4. Cease
Contributions to the Single Employer Plan
This date should be far enough in the future to allow the
preliminary work on the new plan to be completed.
5. Begin
Contributions to the New Plan
Develop the data transmission protocols and plan setup procedures
with your qualified plan administrator to administer your new
worksite tested plan.
6. Select
the Single Employer Plan Termination Date
There are several choices in how you would terminate your
single employer plan.
The plan can be frozen, merged,
formally terminated, or silently terminated (See Feature 2).
Many intermediate steps are required, but this information is
provided as a basic blueprint. All 401 (k) plans are not created
equal. Contact a team of qualified legal counsel and qualified
plan administrative professionals that know and understand the
PEO industry to assist you. Customized benefits are a major
concern to potential clients in determining which PEO most completely
meets their needs. Your 401 (k) plan can be a powerful gateway
to attract potential clients who are interested in employee
or executive benefits.
Your 401 (k) plan can be the pinnacle
point of a "marketing wedge" to penetrate both vertically
and horizontally into your selected client markets. THE
MARKETING WEDGE™ can penetrate your chosen client
markets and contribute to your growth exponentially. This
multidimensional approach begins with the PEO 401 (k) plan,
the center point of your marketing wedge, to provide vertical
growth in your client base.
The growth in your client capture
continues to expand horizontally if you chose to include the
value-added benefits of a non-qualified deferred compensation
plan and financial planning. The deferred compensation plan
allows PEO management to select highly compensated executives
and client owners to make contributions on a tax-deductible
basis to a tax preference retirement plan. The addition of
this program will supercharge your sales and marketing. Financial
planning provides a strategic plan for your clients to achieve
financial security. By developing a financial profile, they
will see a clear demonstration of their ability to shelter
current income from taxes and reach their personal wealth
accumulation goals.
When you combine a customized 401(k)
with non-qualified deferred compensation, certain sponsored
wealth accumulation plans, and financial planning, you support
your client's objective to accumulate wealth. Applying this
multidimensional marketing approach will help you maximize
the competitive advantage of client benefit customization
into the 21st century.
David W.D. Core is a registered representative
of, and securities offered through, Lincoln Financial Advisors
Corp.
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