Safe harbor 401(k) Plans

[Acownt4it]

Does anyone have any experience or knowledge regarding these 401(k) plans?

Are they risky?
Are they a good idea for a small business with 20 employees?

[JoshinNC]

Depends on the goals of the business owners

Does anyone have any experience or knowledge regarding these 401(k) plans?

Are they risky?
Are they a good idea for a small business with 20 employees?

I would be inclined to say without any further info that a SIMPLE IRA would most likely meet their needs with substantially less in associated costs. How much do the business owners want to defer in each tax year?

[Acownt4it]

They want to put away as much as possible. It is a jewelry store owned by Mom, Dad and kids just starting in the business. They had a profit of $350,000 last year and were informed by a financial planner (after the fact) that they could have put a significant amount of money in a Safe Harbor 401(k). They have spoke to two other financial planners since then and one said good idea and one said to risky.
They have since fired their previous CPA and hired me. The owner mentioned this plan to me and wanted my opinion.
I have read several articles about the pros and cons and I think the riskiest part of these plans are that employees are 100% vested immediately and you must contribute to them annually.
I am hoping to get other professional opinions.

[JoshinNC]

Just starting in the business

and made $350,000 (wow, I need to start selling gold in my office).

That changes everything, not only do they need a 401K, they most likely need a 412i.

[Acownt4it]

what is a 412i?

[JoshinNC]

A defined benefit plan funded by life insurance or an annuity

There are no maximum contribution limits and you get a current tax deduction for the contributions.

[sea-tax]

Does anyone have any experience or knowledge regarding these 401(k) plans?

Are they risky?
Are they a good idea for a small business with 20 employees?

No, safe harbor 401k's are not risky . In fact this is not Even the correct question. Safe harbor 401k plans can have portfolio options which are risky or less risky. Meaning you could choose options that are aggressive or less aggressive.
To say that a safe harbor 401k is risky is like saying " I once invested in a IRA and lost money so all IRA's are risky". The title of IRA or 401k does not in itself tell a person as to the risk or lack there of a portfolio. One must look at the investment choices in the IRA or 401k.
As to your second question yes safe harbor 401ks can be great investment tools for smaller business.
As for JoshNC idea of a 412i plan he is correct that this can also be a wonderful tool but with 20 employees I think they will find that this option might be cost prohibitive.
Look at the oppenhiemer safe harbor 401k . Last time I set one up a couple months ago I think they chaged like $750 which is pretty cheap.

[Acownt4it]

thank you for your replies. This gives me good information to take to my client.

[JoshinNC]

I missed the 20 employees in the original post

No, safe harbor 401k's are not risky . In fact this is not Even the correct question. Safe harbor 401k plans can have portfolio options which are risky or less risky. Meaning you could choose options that are aggressive or less aggressive.
To say that a safe harbor 401k is risky is like saying " I once invested in a IRA and lost money so all IRA's are risky". The title of IRA or 401k does not in itself tell a person as to the risk or lack there of a portfolio. One must look at the investment choices in the IRA or 401k.
As to your second question yes safe harbor 401ks can be great investment tools for smaller business.
As for JoshNC idea of a 412i plan he is correct that this can also be a wonderful tool but with 20 employees I think they will find that this option might be cost prohibitive.
Look at the oppenhiemer safe harbor 401k . Last time I set one up a couple months ago I think they chaged like $750 which is pretty cheap.

I haven't looked at Oppenheimer's plan, as I mainly write SIMPLE's, but this is a case where the 401k is going to be a better fit, definately.

Also, they could look at variable annuities from a low cost provider like Vanguard or Fidelity. They won't get an upfront tax break, but they can get tax deferred growth.

Also, Pacific Life has a wonderful plan known as a 401k mirror in which the company funds a deferred compensation plan using variable life insurance as the funding mechanism and the employee defers a set percentage with the company matching this deferral (no limit on contributions or match). The company won't get a deduction for the match, but the employee doesn't have to include the compensation on their W-2. If you want more info my contact info is available on my site www.nctaxpros.net.