Advisors have a new weapon in their fee-boosting arsenal: Individual 401(k) plans.
Thanks to a little-known provision of tax legislation passed in June, self-employed individuals can not only create 401(k) accounts for the first time, but they can shield more earnings than ever from taxes.
To illustrate how this works, imagine the owner of an incorporated one-person business who makes $100,000 a year. In the past, he could set aside 25 percent of his income in a variety of tax-protected investments. Now he can put it in a 401(k) and add another $11,000 to boot. Owners of one-person unincorporated businesses can put aside 20 percent of their income, plus the maximum $11,000 employee contribution.
“It's a slam dunk,” says Hal Bundrick, a financial advisor for Merrill Lynch in Shreveport, La. who holds seminars and workshops on the new offering.
The change is so new that few of the major 401(k) providers have had a chance to react. Only Pioneer Investment Management and Strong Capital Management now offer one-person 401(k) plans. And a Strong spokesman says the firm isn't aggressively marketing the product.
Bundrick says he expects to start opening accounts in March. Other major 401(k) providers, including Charles Schwab and Fidelity, say they're looking into the single-person 401(k), but currently don't offer a product. (A Principal Financial spokeswoman says it's being “cautious,” concerned about potential complications should a firm's size grow.)
Deborah Levine, vice president, retirement plans at Pioneer in Boston, says much of the interest so far has come from individuals wanting to roll over existing 401(k) plans.
Levine says the potential for roll-overs is a strong selling point for registered reps. “They look at it as a door opener,” she says, because it could bring them clients with other assets that a representative could bring under their management. Which, of course, means more fees and more clients.
