When your company sponsors a qualified
retirement plan, you must comply with complex rules
established by the IRS and the Department of Labor. Ignore the
rules and your firm could face costly penalties from federal
regulators — and plan participants might sue you for
mishandling trust assets.
This is no time to be a do-it-yourselfer. You
need the help of a skilled professional who knows the
requirements and can help you stay in compliance. Here's why.
In the worst
case scenario, the IRS could disqualify your company's
plan if you engage in prohibited transactions.
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.
Real estate investments can be included, too,
although you will have to cope with valuation and liquidity
issues. 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.
If your plan earns, say, 5 percent per year in
low-risk investments while the major stock market averages go
up 20 percent, you could be forced to pay all — or part — of
the differential to employees.
Of course, you should hold some money in T-bills
or money funds 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
One way to avoid some of the liability: Set
up an SEP or 401(k) plan that allows employees to make their
own portfolio decisions. Under this option, a skilled
professional or mutual fund company helps set up the program.
And staff members make their investment choices from a list of