Small Business Resource: Offering Investment Alternatives to Address Growing Employee Demand

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November 15, 2006

Offering Investment Alternatives to Address Growing Employee Demand

In today’s economic climate, there are those employees that concern themselves with minor money issues such as entertainment costs, status purchases and frivolous home improvements instead of learning how to make more money and make it work for them. But this trend is changing, as more employees are choosing their own investment routes. This is especially true when individuals reach a certain age and begin thinking more seriously about retirement. And a growing number of these individuals are looking at non-traditional investments—such as investing in private stock, hedge funds, real estate and tax liens using retirement funds as their primary choice.

Providing the ability to invest in assets other than securities through retirement plans available at work would be a welcome opportunity for a growing number of employed investors. Increasingly, business owners also want to be able to invest in alternative options. The owner of a construction company, for example, might prefer investing in real estate over a more traditional portfolio, and may do better investing in the former, given his or her knowledge of the industry. Similarly, owners of private companies may want to invest in their own organization’s success through private stocks and invite employees to do the same or provide stock for retirement for individuals as an incentive.

Many options exist outside the realm of traditional retirement investing. And without knowledge of these, investors may be missing out on an opportunity to earn more on their retirement nest eggs, while also enjoying added tax advantages that investing with an IRA provides (profits made from the investment grow tax-free with a Roth IRA, for instance. This can be a huge benefit upon retirement). At one time investing in real estate or private stock with an IRA might have been considered obscure and risky, not to mention an unknown option for many. But these views are dissipating as friends and family are making greater returns with less risk, and many are educating themselves through courses offering training on due-diligence, locating assets, negotiating and selling assets for a profit.

Added Fuel for Alternative Investments

Additionally, the likelihood of Social Security being able to sustain the demands of the retiring baby-boomer is becoming a concern with taxpayers and their representatives. This is encouraging more people to look for alternative investment options in markets in which they may be more familiar and the government to also help to facilitate new methods of investing. To help alleviate the potential burden, President Bush recently enacted a bill submitted by congress to protect pension beneficiaries and force companies that offer pensions to make good on their obligations. The new law also brought forth a few benefits to IRA holders. In 2010, anyone will be able to convert their traditional IRA into a Roth IRA regardless of their income status. This means that more investors will be able to enjoy tax-free benefits on income earned from IRA investments. In contrast, today a married couple cannot have a Modified Adjusted Gross Income greater than $155,000 to convert to a Roth IRA.

In addition, contributions to an IRA will now be tied to an index, presumably for inflation purposes. This means that the maximum contribution that investors can make may increase as inflation increases. As a result, investors may be able to contribute more and to enjoy even greater tax-free benefits on income made with a Roth.

How Investors and Their Companies Can Get Started in Investing in Alternative Investments

Many company executives would agree that providing more investment opportunity is a good thing; how to go about implementing such a program is the question. Benefits providers and advisors can team up with professionals in the alternative asset industry to distinguish their offerings and help companies that are interested in making this leap, transition to providing a more comprehensive offering for business owners and employees.

Companies don’t have to scrap what they have with a broker or advisor or make drastic changes. Changing the plan document to allow for early rollover of contributions allows employees the opportunity to take alternative investments on their own if they wish. This change can be made on the next review of the retirement plan.

Engaging a self-directed IRA Advisor to help executives make alternative asset offerings can help advisors and the companies they represent to identify proven investment strategies. For example, if tax liens are of potential interest, then learning how to properly investigate and value tax liens is a must. A qualified instructor can prevent capital loss and maximize returns.

Using a self-directed IRA custodian (versus an “advisor”) is useful as well, but be aware that custodial firms do not bear responsibility for the success or failure of strategies nor do they offer advice, but are instead focused on facilitating transactions and record keeping. An example of one such self directed IRA custodian can be found at http://www.sunwestira.com.

Important Considerations that Companies and Individuals Should Know

Brokers and the employers that they work for should make sure that a qualified advisory group offer the information they need, so as not to inadvertently make prohibited transactions (for instance, it is prohibited for a person buying real estate with an IRA, and/or his or her immediate family, to live in the property). Keeping the costs down for employees is also an important factor. The same advisors should be able to provide the needed information to evaluate pricing and the value that will likely be received from alternative investments.

Daniel Cordoba, CEA is principal and founder of Asset Exchange Strategies, LLC. Asset Exchange Strategies is an Advisory Group for self-directed IRA structures. You can visit his website at http://www.myrealestateira.com

Source: Benefits and Compensation Solutions, October 2006

For a .pdf version of this article go to:
http://bcsolutionsmag.com/archives/BCS-Oct06-web/BCS-Oct06-RetireDept.pdf

Posted by David at November 15, 2006 5:41 AM