Financial advisors who are knowledgeable about IRS Form 5500 can detect a wide variety of issues that represent untold opportunities for advisors to demonstrate their expertise and advise retirement plan sponsors.
The IRS 5500 tax return, filed annually by all plan sponsors, is the EKG of the retirement plan. For plan advisors, the 5500 Form, the pulse of the pension plan, presents incredible marketing opportunities to differentiate themselves for business development. Financial advisors who are knowledgeable about the form can detect a wide variety of issues that represent untold opportunities for advisers to demonstrate their expertise, as well as advise the plan sponsors. Here are a few of the most important fields of the form and how you can use the information to develop relationships with prospective plan sponsors and cement associations with current clients.
Although you might initially skip the Annual Report Identification Information field, don't overlook it. This field reveals facts about the plan year and when the plan sponsor is required to file documents. The plan may have a calendar or fiscal year-end, which coincides when the business files its corporate tax return. If the plan has a fiscal year-end, participants make contributions on a calendar year basis, so the human resources department has to perform two calculations, which is time-consuming. Moving the plan to a calendar year may win you raving fans.
Plan sponsors may resist changing to a calendar year, because of large profit-sharing contributions timed with deductions for the corporate return and the 5500 filing. That information gives you a great opening to start a conversation about the profit-sharing contributions and how the company's business is faring during this year and during the economic downturn of the past few years.
Section 4 of Part 1 has Company Information, which can be used to build your database. This is an ideal task for a student intern. This field also has a two-digit number that identifies the number of amendments of the plan. This allows you to see how the plan has grown over time. Be sure to ask the plan sponsor why they have made amendments or revisions to the plan and if they are happy and satisfied. This conversation may uncover opportunities for you to suggest changes. The Company Information field says a lot about the owners' philosophy toward the participants' involvement in the company and whether the owners value the employees or they are more interested in their own retirement plan benefits.
Sections 5 and 6 of Part 1 indicate the number of participants in the plan at the beginning of the year and at the end of the year, the number of terminations and any rollover opportunities that may be available. Be sure to run at least three consecutive years of the 5500. Plans with over 100 employees with account balances need annual audits. You may discover a plan with over 100 with account balances; however, 40 participants have terminated. If the plan sponsor removes those terminated, it could save the cost of audit.
If the plan is a group annuity, you can view the assets in the plan by their individual investment funds on the Schedule D. Load this information into a spreadsheet covering a historical three year time period and you may observe certain investment patterns among plan participants or no changes at all, which may indicate little or no education is being provided.
In Section 8 of Part 1 plan sponsors designate plan characteristic codes, which present an enormous amount of additional opportunities for plan advisors. For example, a plan may allow participants to self direct their contribution investments and yet the plan elects not to be 404(c), which is the only opt out a plan fiduciary has for not being responsible for the investment decisions for each employee. Plan sponsors may not be aware that they are personally liable for all of the employees' investment decisions. You can point out the liability, which the plan sponsor has by not selecting the 404(c) code.
In another code example, 2A indicates if the plan is age weighted or a new comparability design. Plans that don't have this designation can increase contributions. If 2T is elected, the plan has a qualified default investment alternative (QDIA), which provides liability protection. If 2T is missing, you have an opportunity to guide the plan toward increased protection by including this valuable investment election.
In the future, plans with less than 100 employees will, most likely, file the simplified two-page 5500 and all fees will be aggregated, which will make it more difficult to determine who gets paid what fees and commissions. However, if the plan has 100 employees or more and if the plan is a group annuity contract, that data will be in Schedule A, which will highlight fees and commissions of the insurance broker, advisor and TPA, if there is one. Plan sponsors may be unaware whom they are paying and for what services. Oftentimes, carriers pay a TPA's ERA (expense reimbursement allowance) to subsidize their business, which allows them to charge a lower administrative fee. The Schedule C will provide all other direct and indirect compensation by all other service providers. You may uncover other payments about which the plan sponsor has no knowledge. This information can be an eye-opener for many plan sponsors.
The schedule I is the pulse of the money flow in the plan. Here you can create a spreadsheet and input three years of plan contributions, distributions, expenses and investment income, and then calculate and benchmark the internal rate of return as if it were a pooled retirement plan. This analysis will indicate the plan's asset performance against an index, such as the S&P 500. While the plan may be self-directed, this calculation may uncover a lack of employee education or poor investment options in the plan.
These are just a few of the opportunities that the IRS 5500 Form provides for plan advisors. The Form contains a wealth of data that with research and relatively easy calculations can reveal openings to start conversations with plan sponsors about their plans and validate your expertise. You can increase your prospective leads by demonstrating the significant resources you and your organization have to create successful retirement experiences for plan sponsors and their participants.
Resources That Can Help
Resources that can help you use the 5500 Form as a marketing technique:
The 5500 Form data is public information, which can be found in a number of resources such as www.freeerisa.com, www.judydiamond.com and www.larkspur.