You must comply with complex rules established by the IRS and the Department of Labor when your company sponsors a qualified retirement plan. Your firm could face costly penalties from federal regulators if you ignore the rules, and then you plan participants might sue you for mishandling trust assets. It’s best to not handle this process yourself. You should hire a skilled professional who knows the requirements and can help you stay in compliance. Here’s why.
Under the so-called “prudent investor” guidelines, a company owner is considered a “fiduciary.” You must look at the plan’s entire portfolio and take appropriate risks in search of suitable rewards. That generally means that proven stocks and high-grade bonds should be the foundation of your retirement plan.
And although you will have to cope with valuation and liquidity issues, real estate investments can be included too. You can speculate with perhaps 10 percent of the plan’s portfolio, as long as you document that there’s a decent chance that your long shot will pay off.
However, investing all of a fund’s money in Treasuries or Certificates of Deposit won’t keep you out of trouble either. Those investment vehicles have under performed equities in virtually every extended period. There have been court cases that involved employees suing their retirement plans because they earned low returns when the stock market was way up.
You could be forced to pay all, or part, of a differential to employees if your plan earns, say, 5 percent per year in low-risk investments while the major stock market averages go up 20 percent.
Of course, you should hold some money in money funds or T-bills so you can quickly convert it to cash for distributions. The older your employees and the closer your obligation to paying distributions, the greater your need for ready cash.
One way to help avoid some of the liability: Setting up a 401(k) plan or SEP is a good choice, because it allows employees to make their own portfolio decisions. Under this option, a mutual fund company or skilled professional helps set up the program. And staff members make their investment choices from a list of mutual funds. Consult with your attorney for more information.