By Brian Kane, CPC, QPA, QKA
Advisors to retirement plan sponsors who are looking for prospects, or looking to add value to existing clients, can get that chance by using data on plans’ annual filing report to the DOL, known as Form 5500.
Form 5500 contains a lot of plan details that can create opportunities to approach a prospective client on how to potentially improve their plan. Form 5500 is public information available at https://www.efast.dol.gov/5500Search/. There are also subscription services that will aggregate the information for you and allow for searches of the information by plan size, type of plan, location, etc.
Small plans with less than 100 participants will usually file a "Short Form" 5500-SF, but in some cases will file a full Form 5500 with financial information reported on Schedule I.
Here are 5 sales ideas based on reviewing a plan’s Form 5500:
No employer contribution being made to the plan (5500-SF line 8a(1); Schedule I line 2a(1))
It may never have been explained to the employer the advantages of making a Safe Harbor or Profit Sharing contribution. The Highly Compensated Employees of the company may not be maximizing their contribution due to the required nondiscrimination testing.
Your Approach to the Prospect: Have you and your Highly Compensated Employees been able to maximize your 401(k) contribution? Did you know that by adding a Profit Sharing contribution, you can make a total contribution of up to $66,000 in 2023?
Large employer contribution being made to the plan (5500-SF line 8a(1); Schedule I line 2a(1))
If there is a sizeable employer contribution being made to the plan, more than likely they are taking advantage of the Safe Harbor and Profit Sharing components of the plan. In this scenario, the demographics of the employees are allowing the plan to work out to the advantage of the Owners/Key Employees, which means a Cash Balance Plan will most likely work even better for them if they are looking to increase their retirement plan contribution.
Your Approach to the Prospect: I see that you are maximizing your contribution to your current plan, did you know that you can add a Cash Balance Plan which would significantly increase your overall tax- deductible contribution? Most likely there will only be slight increase in the amount you are already contributing to your employees in the 401(k) Profit Sharing Plan.
Low Employee Participation (5500-SF lines 5b & 5c; 5500 lines 6f & 6g )
You can determine if a plan has low employee participation by comparing Line 5b-Total Number of Participants at the End of the Plan Year and Line 5c-Participants with an Account Balance. If there is a large discrepancy between the number of eligible employees and the number of employees participating, the plan may benefit by having an Automatic Enrollment feature. Automatic Enrollment makes it the default option that the employee contributes to the plan at a certain percentage, unless they opt out. This has been shown to increase plan participation and the employer also receives a credit of $500 per year for 3 years on their company’s taxes for implementing the Automatic Enrollment option. If the plan is not a “Safe Harbor” plan, then additional contributions by Non-Highly Compensated Employees may also result in the ability of owners and other Highly Compensated Employees being able to increase their contributions to the plan.
Your Approach to the Prospect: Are you aware of the Automatic Enrollment option which should help increase Plan participation and will allow you to receive a credit of $500 on your company’s taxes for the next 3 years just for implementing the option?
Corrective Distributions (5500-SF line 8e, Schedule I line 2f)
If there is amount listed under Corrective Distributions, it is usually because the plan failed a nondiscrimination test referred to as “the ADP test,” and the Highly Compensated Employees received a refund of overcontributions to the plan to correct the failed test. There are several different advanced techniques that can be used to both perform the plan’s nondiscrimination testing and to correct a failed nondiscrimination test that may not have been explored by the plan’s TPA or bundled administrator. Also, the ADP test can be eliminated if the plan is a Safe Harbor Plan which can be implemented after the year is completed and the testing results are known.
Your Approach to the Prospect: Your plan failed the ADP test and there were refunds issued to your Highly Compensated Employees. Did your plan administrator offer you any options to correct the failed test other than to issue refunds? Did they explain the option of implementing a Safe Harbor Non-Elective contribution of 4% of pay instead of issuing refunds?
No Fidelity Bond (5500-SF line 10c, Schedule I line 4e)
A Fidelity bond is required to cover at least 10% of plan assets. If they checked the box that they do not have a Fidelity bond, or if the amount of the bond is less than 10% of plan assets, then the plan is out of compliance. This not only calls into question how the plan’s compliance work is being handled by the plan’s current administrator, but can also lead to large fines and penalties assessed to the plan sponsor.
Your Approach to the Prospect: Your plan does not have the required Fidelity bond. Did anyone inform you of this? We can provide a full plan compliance review free of charge from our partner TPA firm.
If you are able to engage the client further after your initial discussion and they are willing to share their current plan document and employee census, we can run a full plan analysis free of charge for them to evaluate their options.
These are just a few of the many ideas to engage your prospects or clients based on information on Form 5500. As always, please contact us if you have any questions regarding a prospective client or how we can help you win retirement plan business.
For more information on Form 5500, please see: