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What to Know About Solo 401(k)s

By C.J. Marwitz

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The word “solo” in “solo 401(k)” might lead one to think there’s little opportunity for helping a large number of clients. But with the entrepreneurial spirit still alive and kicking in the U.S., despite the pandemic’s blows to small businesses, it might be time to reconsider. For some perspective on the subject, we approached Tom Granger, Second Vice President, Qualified Plans, for Security Benefit, to get his views.

BENEFITSPRO: What is the opportunity for advisors with small businesses and solo enterprises, and their retirement savings plans?

TOM GRANGER: We are seeing the gig-economy on the rise, particularly since the start of the COVID-19 pandemic. For these workers, solo 401(k) plans are the ideal solution because they allow considerable contribution flexibility and plan design. Financial advisors have an opportunity to address this shift with their clients and offer unique solutions that may allow for optimal growth of retirement savings amid the continued impact of the COVID-19 pandemic and beyond.

Are there comparable 401(k) alternatives that participants in select earning brackets should consider?

There are some powerful and agile solutions available that can provide freelancers and gig workers with added flexibility. One particular solution for these one-person businesses, and freelancers looking to save, is a solo 401 (k) plan which is designed for businesses without employees.

Business owners can choose a traditional pre-tax 401(k) in which ‘salary deferral’ contributions reduce their income in the year they are made. Alternatively, individuals can choose a Roth after-tax Solo 401(k) in which contributions are not made on a pre-tax basis, however distributions can be taken tax-free if certain requirements are met.

How do these non-traditional defined contribution plans work for small businesses and the gig economy—what segments are impacted?

Small business owners and freelancers who choose to invest in a Solo 401(k) also may have the opportunity to borrow from themselves via a participant loan from the Plan, which may allow individuals seeking quick capital to become their own investor.

How do these non-traditional defined contribution plans work for small businesses and the gig economy—what segments are impacted?

Solo 401(k)s offer higher contribution limits, up to $64,500 per year for those age 50 or older, allowing additional flexibility for small business owners. These plans also allow individuals to choose their preferred tax advantage, pre-tax salary deferrals or after-tax Roth contributions up to $19,500 or $26,000 if age 50 or older.

Additionally, with a Solo 401(k) plan, since the individual is self-employed, they can contribute both as the employee and the employer, which may allow the individual to exceed the typical 25 percent of their income, in some cases the contributions as a percent of income can range as high as 90%.

Are there specific strategies, tools or solutions that would prove effective for these clients to consider?

There are primarily four areas they need to thoroughly examine before identifying the right plan for their small business or freelancing clients. These include:

  1. Fiduciary options: This depends on factors like plan size, budget, control over plan’s investment as well as administrative responsibilities and liabilities one would be expected to undertake as part of sponsoring/joining the plan
  2. Plan sponsor engagement and satisfaction: This includes addressing questions like: is the plan document up to date from a regulatory perspective? Is making contributions easy and efficient? Are the providers sharing valuable tools to help aid the process?
  3. Investments: this includes identifying asset classes covered, assessing the share class, average expense ratio and performance relative to peers
  4. Employee Engagement: this includes ensuring access to the right experts and education resources around the plan

How should advisors approach existing Solo (k) plan participants?

Today, financial advisors have the opportunity to educate the growing gig economy about solutions like Solo 401(k)s. To make their service offerings more compelling, advisors will need to be fully equipped with access to educational materials, technology solutions and a broad range of investments to help clients navigate the complicated world of retirement options.

With more and more Americans opting to freelance and gig workers seeking additional flexibility, advisors can choose to educate their clients about the features and benefits  of Solo 401(k) plans, as well as the advantages of such plans over other available options like a traditional IRA.

This can be done effectively by entering strategic partnerships with retirement solution providers and easy-to-use platforms that can help maintain client engagement.

For example, a simple but effective idea is to use digitized platforms to engage with and offer solutions. Doing so can not only help cut down on the amount of time financial advisors usually spend guiding their clients through plans, they also give clients the option to check in or learn more at their own speed.

Clients who are more aware of the intricacies of their plans can develop a deeper understanding of their financial advisors’ plan recommendations.

Additionally, in the right circumstances, a combination of the Solo 401(k) Plan and a Cash Balance Plan can be a powerful tool in helping an individual save a lot of money for retirement, in a short period of time.

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