Quick Tips for 5500 Prospecting

1. The Basics: Background info

Your Point of Contact

  • The Plan Administrator of the 5500 is typically a decision maker who is in charge of overseeing matters related to the plan.
  • The Plan Administrator signature is usually found at the bottom of the 5500.
  • They may be an owner, CFO, or HR representative and in some cases their TPA may be signing.

The Plan’s Effective Date

  • Has the plan sponsor done a comprehensive review of the plan since the plan started? Every 3-5 years is a good rule of thumb.
  • Has there been any required compliance updates they should have considered during this time?

2. Finding an angle: Service and compliance

Reviewing Participant Data

What is the participation rate (eligible vs. participating)? Perhaps employee engagement programs need reviewed.

  • Are there terminated employees who need rolled out of the plan? Rolling terminated employees out of the plan helps the plan sponsor better manage fiduciary risk and plan costs.

Reviewing Compliance Questions

  • Keep an eye out for any boxes marked “yes”, as most of them indicate the plan was not in compliance that year or there are may be caveats to consider.
  • Question 4. e is one question that should be marked “yes”, since a fidelity bond is required by law. The fidelity bond should be worth about 10% of the plan’s assets.
  • If it appears the plan has failed to apply participant contributions in a timely manner or provide benefits when due, the plan sponsor likely requires a higher level of administrative support than they are currently receiving.
  • If you identify any corrective distributions this means highly compensated employees are missing opportunities to max deferrals.

3. Finding an Angle: Plan design considerations

Locating the Current Plan Assets and Deposits 

  • Part III shows the plan financials, and is where you can determine the current size of the plan and annual contributions broken down by employer and employee.
  • A plan with no employee contributions is likely an ESOP or profit sharing only plan.
  • A plan with no employer contributions is a standard defined contribution/401(k) plan with no employer match or profit sharing.
  • When a plan has no employee contributions, it means the employees are missing out on opportunities to defer income taxes and contribute to their own retirement savings. Whether this be by choice or limitations by the plan’s design, it might be in order to educate the plan sponsor on the consequences of such a missed opportunity.
  • When a plan has only employee contributions, a discussion may be in order around the advantages of offering employees a match or profit sharing. These benefits include: it’s a recruiting tool, it increases employee retention, it can result in some major tax-advantages for the business owner.

Understanding Plan Characteristics Codes 

  • Located on Part IV of the 5500, these codes indicate specific features which apply to the plan.
  • Some codes are simply informative and will help you be better-equipped for a meaningful conversation with the plan sponsor.
  • Other codes, or a lack thereof, may reveal fiduciary red flags or inadequacies in the plan’s design that will give you a competitive edge against the current service providers.
  • The following page provides a table which describes some of the more common codes to look for and the opportunities they may present.
  • Most 5500 websites provide a hyperlink to a code key which defines every possible code.

4. Other miscellaneous notes

Plan Assets and Deposits 

  • Plans with more than 100 participants will have additional schedules that will provide details such as the investment holdings, broker info, TPA info, auditor info and information on certain types of fees. They are also subject to costly large plan audits, yet another reason to roll terminated employees out.
  • 5500 Filings are not required for Solo K plans, SEP or SIMPLE IRAs.
  • 5500 Filings are accessible to the public and can be accessed at:
Code Feature Opportunity
2A Cross-tested profit sharing is offered Indicates the plan has either New Comparability or Age/Service-weighted profit sharing. Firms with good age/wage disparity between owners and rank-and-file employees, and those who have less than 50 employees are usually great candidates for this plan design feature.
2E Pro-rata profit sharing plan is offered Indicates all participants receive the same % of their salary. It could mean a more cost-effective or strategic plan design should be explored.
2F The plan is 404(c) compliant Being 404(c) compliant means the plan sponsor has agreed the investment menu will adhere to certain standards to ensure the participants have diversified options. If 2G is selected this is especially important.
2G Participant directed accounts Without this code it could be assumed the plan’s assets are in a pooled account whose investments are selected by the plan sponsor. Today’s standard for 401(k) plans is to have participant directed accounts, which enable the participants to be invested according to their individual needs.
2J 401(k) deferrals are being made Without this code it could be assumed the plan is either profit sharing only or ESOP only. This would mean employees are missing opportunities to max their own retirement savings and decrease their personal income tax.
2K Employer is offering a match If the employer is offering a match and participation rates are low, it would be reasonable to examine the participant awareness/education program. If the employer is not offering a match, it might be worth a closer look at whether or not the owner is maximizing tax-efficiency for themselves and if their benefits are competitive enough.
2O Employee Stock Ownership Plan (ESOP) An ESOP plan can be a fantastic way for a business to reduce taxes and for an owner to pass ownership on when retiring. It means the employees each receive a % of ownership of the company which can be great for moral and retention. Works best for large, very profitable firms.
2R Self-directed brokerage Indicates the participants have the ability to invest their assets in holdings outside of a consolidated record-keeping platform.
2T Qualified Default Investment Alternative (QDIA) Having a QDIA means if a participant does not select their own investments, they will automatically be invested into a target risk or target date fund which corresponds with their current age.  Not having a QDIA subjects the plan sponsor to an easily avoidable fiduciary risk.

To download this information, click here.

For Form 5500 Technical Resources, click here.

For a tutorial or to view a recorded webinar on how to electronically sign the Form 5500, click here.

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