Sick of your 401(k) or don’t have one due to high cost, liability and hassle? Help is on the way. New rules are changing how waste and recycling employees and owners save for retirement.
By Nathan Brainard
The place with highest per capita income in the U.S. is Fisher Island, FL, ZIP Code 33109. Before it was sub-divided into winter playgrounds for tennis, TV and tech millionaires, it was owned by Garfield Wood. Fischer Island was purchased by Wood with savings earned from his mass-production of hydraulic rear-load refuse trucks, among other ventures. Today, the retirement savings vehicle of choice at 9,000 waste and recycling firms is the 401(k), where more than 200,000 industry owners, key staff, and employees have invested some $10 billion. But recent and pending legislation may very well shift retirement savings away from 401(k) to:
- Employee-focused Payroll Deduction Individual Retirement Accounts (PDIRA) that eliminate the hassle and fiduciary risks of a 401(k)
- Owner-focused pension plans with far higher potential tax-deferrals than 401(k)s
An Better Plan for Employees
Here’s some background on pending changes and what it means for you:
- Today, 40 million Americans work at firms that do not offer a 401(k) or similar retirement plan. The odds that someone in this group has any sort of retirement savings are about 7 percent.
- While lower in our industry, the number jumps to 70 percent when a retirement plan is offered at the workplace.
- From the perspective of state and federal public policy officials, 70 percent is okay, but 7 percent is a pending crisis.
Legislation is beginning to emerge that will require employers to facilitate a Payroll Deduction IRA if they do not sponsor a 401(k) or similar plan. Specifically, the federal government and half of the U.S. states are considering mirroring PDIRA laws recently passed in California, Illinois, Michigan, Connecticut, and Massachusetts and North Carolina.
Here’s the problem: Even though the maximum one can save in a 401(k) is currently $18,000 per year (and $24,000 if one is over 50 years old), the vast majority of waste and recycling plan participants save less than the IRA limit of $5,500 per year.
That’s a problem because while employees save like you are offering a Payroll Deduction IRA, you (the business owner) bear the full brunt of running a 401(k). For example:
You are increasingly the target of both the tort bar and the 1,000 investigators recently hired by the Department of Labor to generate penalties
You pay $15,000/year for an ERISA audit if you employ more than 100 people
You pay a fancy consultant to lead quarterly investment meetings
You tie up hundreds of hours on 401(k) tasks such as approving loans, vendor RFPs and researching eligibility
Sure, new rules will open retirement savings for 40 million but here is the unintended consequence: Payroll Deduction IRA mandates will encourage many plan sponsors to get out of the 401(k) business and pivot to a PDIRA instead.
Here’s why. Unlike a 401(k), pretty much the only thing companies with a PDIRA are responsible for is uploading a payroll-type file. Unlike a 401(k), a company with a PDIRA has zero fiduciary liability, zero ERISA audits no ability to authorize hardship loans and zero corporate costs.
So the question that 9,000 owners of waste and recycling firms need to ask is, “If so few employees are even participating, and if those who participate don’t save above the IRA limit, why are we taking on all these 401(k) tasks, costs and liabilities?” Good question. Again, the answer for many may be to shut down their 401(k) and pivot to a Payroll Deduction IRA.
A Better Plan for Owners
While some may pivot to a PDIRA, others may keep the 401(k) based on its higher deferral limits. This brings us to the second potential shift in retirement savings: private pensions for owners and key executives. Here are the traditional choices:
- Put a small percentage of each employee’s pay into a Profit Sharing account: This qualifies them to defer another $35k on top of their 401(k) deduction.
- Invest post-tax money with “wealth managers” (who used to be called stockbrokers): It is tough to find brokers who beat the market, much less claw back the 50 percent lost to federal, state, payroll capital gains taxes and advisor fees.
- Take that 50 percent post-tax hit and work with Asset Protection Consultants (who used to be called life insurance salesmen): While life insurance serves its purpose, avoid 770/702(j) accounts, Section 412(i)/79 plans and charitable gift annuities. The IRS is batting 1,000 against tax avoidance schemes, whose motto seems to be “a fool and his money are lucky to get together in the first place”.
The good news for those with high incomes is that prudent applications of both the IRS rules and the Pension Protection Act allow significant pre-tax funding into defined benefit accounts and retiree medical plans. We have seen annual deferrals of $100,000 per year and more. Not enough to buy Fischer Island but doable for many waste and recycling owners nearing the end of their careers.
A couple of important things:
Defined benefit plans, designed correctly, require a manageable number of staff need be included. But the staff requirement isn’t 1,000 or 500, it’s 40 percent of staff with a maximum of 50. Employee classifications can be designed to maximize forfeitures back to the plan or slap golden handcuffs on key people.
These are self-trusteed plans, so you decide were the deferrals are placed. If you love your stockbroker, then invest deferrals in mutual funds or managed accounts. If you love your life insurance broker, then pivot the post-tax premiums you now pay for term, universal, buy/sell and key man insurance inside the trust. Premiums are pre-tax and assets are protected from bankruptcy and litigation.
Again, the IRS is batting 1,000 against tax avoidance schemes so only work with an enrolled actuary licensed by a Joint Board of the Department of the Treasury and the Department of Labor. Since few actuaries understand the design described, shop around.
What Garfield Wood invented improved operating efficiencies and helped him retire comfortably. No one is saying that your path to Fischer Island is a payroll deduction IRA and a private pension plan, but changes are coming your way and they will impact waste and recycling retirement savings. | WA
Nathan Brainard is Vice President, Environmental Division, at Insurance Office of America (IOA) (Longwood, FL) and a member of the NSWMA Safety Committee and ANSI Standard Committee. Nathan has been with IOA for eight years and specializes in Environmental Insurance with an emphasis on insurance for the Waste, Recycling, Remediation and Demolition industries. He can be reached at (407) 998-5287 or via e-mail at [email protected].
Garfield Wood.
From Wikipedia Commons.