Retirement PlanningHome PageSolo 401(k) PlanIRA WithdrawalsIRA InvestmentsIRA PlanningIRA RolloversProtect Retirement Header1.jpg

 


       
 
   Follow "Prudent Investor"
   Guidelines

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 ready cash.

 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 mutual funds.

 

Virtualex.com Ronald J. Cappuccio, J.D., LL.M.(Tax) 1800 Chapel Avenue West Suite 128 Cherry Hill, NJ 08002 Phone:(856) 665-2121      Fax: (856) 665-9005 Email: ron@taxesq.com
 
 
Retirement Planning | Home Page | Solo 401(k) Plan | IRA Withdrawals | IRA Investments | IRA Planning | IRA Rollovers | Protect Your Retirement