1. Retirement Plan Funding Dynamics: How Retirement Plan Variables Affect Funding Outcomes Jack Lawless, CPA, APM Pension Strategies, LLC DFW FPA Platinum Sponsor

2. Objectives Identify the variables that play a roll in funding options when looking at a Qualified Retirement Plan. Explore how those different variables affect the available funding for both Defined Contribution and Defined Benefit Plans. Look at strategies to optimize the future outcome by correctly managing the current variables.

3. What are the Variables in Play? Age of the participant. Compensation: –Compensation by definition consists of the earned income paid to a participant in a given year. Investment Return: –Asset accumulation results from plan contributions as well as investment return. Participant Demographics - census management.

4. Why is it important to pay attention to the variables? It will help identify what type of plan best suits your client’s needs. It can help better leverage plan benefits toward the business owner. It will help defer some taxes and eliminate others.

5. Variable One: AGE Most commonly thought about variable when looking at the best retirement plan option available to meet future retirement income desired. The effect of Age on a Defined Contribution plan: Maximum salary deferral is limited to $17,500 until age 50, and then a ‘catch-up’ contribution of $5,500 available (total of $23,000) age 50+. Profit Sharing contributions may be age weighted to favor older participants. The effect of Age on a Defined Benefit Plan: Maximum contribution amounts and maximum lump sum amounts increase with age as the participant gets closer to retirement. Once a participant reaches age 65, the contribution limits and lump sum limits begin to decrease.

6. A look at the AGE effect: NameGp SalaryDef %DeferralPS ContDB ContER ContTot Cont Age 251210,0008.33%17,50012,60041,00053,60071,100 Age 301210,0008.33%17,50012,60053,00065,60083,100 Age 351210,0008.33%17,50012,60068,00080,60098,100 Age 401210,0008.33%17,50012,60088,000100,600118,100 Age 451210,0008.33%17,50012,600132,000144,600162,100 Age 501210,00010.95%23,00012,600162,000174,600197,600 Age 551210,00010.95%23,00012,600197,000209,600232,600 Age 601210,00010.95%23,00012,600199,000211,600234,600 Age 651260,0008.85%23,00015,600223,000238,600261,600 Age 701260,0008.85%23,00015,600188,000203,600226,600

9. Variable Two: Compensation Current maximum compensation allowed: $260,000 How compensation affects available funding in a Defined Contribution Plan: –Profit Sharing Contribution is based off of 25% of compensation, up to a total DC contribution allowed of $52,000. –Once Compensation is above $138,000, participant has reached maximum contribution limit of $52,000 (or $57,500 if over age 50), between the maximum deferral and profit sharing contributions. How compensation affects available funding in a Defined Benefit Plan: –Defined Benefit Plans use current, high average, or final average compensation. –Defined Benefit compensation maximum when calculating a lump sum is $210,000 at retirement age 62.

12. Variable Three: Return Asset accumulation results from two sources: –Contributions made into the plan. –Rate of Return on investments. In a Defined Contribution Plan, the rate of return on investments plays no part in the calculation of the contributions allowed. –High growth rate investments do better in a Defined Contribution Plan. In a Defined Benefit Plan, these two sources work hand in hand: As the rate of return increases, the contribution requirements will decrease. Likewise, if there is a negative rate of return (loss), the contribution for the next year will increase, in order to make up a portion of the investment loss. –Very conservative investments work best in a Defined Benefit Plan.

15. Variable FOUR: Company Demographics There are different allocation methods available in Defined Contribution plans, which are chosen depending on age and salary history of the employees at a company. Depending on company demographics, an employer may chose to have a cross-tested Defined Benefit Plan or go with a Cash Balance option. Also, part-time (otherwise excludable) employees, may be used to help balance testing requirements in either a Defined Benefit or Defined Contribution plan.

16. Design with Owner and Employee Employee Name Salary 401(k) Contribution Safe Harbor Contribution Profit Sharing Contribution Defined Benefit Contribution Total Contribution Owner- Age 53 150,000 23,000 - 1,000 94,594 118,594 Employee- Age 48 65,000 - 1,950 9,845 9,107 20,902 Totals 215,000 23,000 1,950 10,845 103,701 139,496 Design with Owner, Employee, and Stepson: Employee Name Salary 401(k) Contribution Safe Harbor Contribution Profit Sharing Contribution Defined Benefit Contribution Total Contribution Owner- Age 53 150,000 23,000 - 1,000 94,594 118,594 Employee- Age 48 65,000 - 1,950 2,080 2,277 6,307 Stepson- Age 19 8,000 - 240 256 48 544 Totals 223,000 23,000 2,190 3,336 96,919 125,445 Total Contribution 139,496125,445 % to Owner and family85%95% % to Others 15%5% Rewards of a little investigative work:

17. Let’s take a look…. Pension Strategies, LLC Mallory Young Senior Pension Consultant (214) 221-9800 Ext. 334 myoung@pensionstrategies.com www.pensionstrategies.com Request for proposal Retirement plan limits Sign up for Newsletter