In companies of real scale, non-qualified deferred compensation plans tend to get introduced with vague language. “Retention tool.” “Executive benefit.” “Tax deferral.” All true, and all incomplete.

For a private company with 500+ employees and a defined shareholder group already participating in a private stock plan, an NQDC plan isn’t window dressing. It’s a mechanism. It changes cash flow timing, tax exposure, retention dynamics, and balance sheet planning for both the company and its most important people.

Let’s get specific.

An NQDC plan allows select executives to defer earned compensation, not hypothetical future value. That usually includes:

• Annual bonuses
• A portion of base salary above qualified plan limits
• Incentive compensation tied to performance metrics

The executive elects, in advance, to defer a percentage or dollar amount of compensation they would otherwise receive in cash. That deferred amount is not taxed currently. It becomes a promise by the company to pay it later.

From day one, this is a liability of the company.

This is where misconceptions creep in.

Executives “fund” the plan economically by choosing not to take cash today. The company “funds” the obligation by managing future cash flow to pay it.

There is no separate trust holding assets for participants. No magical pool of money. The deferred compensation remains on the company’s balance sheet as an unsecured liability.

That said, many companies choose to informally fund the obligation.

This often looks like:

• Corporate-owned life insurance (COLI)
• Side investment accounts
• Internal reserves earmarked for future payouts

These assets belong to the company, not the executives. Their purpose is to help the company manage the future cash obligation, not to guarantee benefits.

The executive bears credit risk. Full stop.

Deferred compensation doesn’t just sit idle. It is typically credited with a return based on:

• A market index (S&P 500, blended portfolios, etc.)
• A fixed rate
• Company performance metrics
• A custom formula approved by the board

No actual investment occurs on behalf of the executive. This is accounting, not custody. The credited return simply determines how much the company will owe in the future.

The elegance here is flexibility. Growth can be conservative, aggressive, or tied directly to business outcomes.

Payout timing is defined up front, which is non-negotiable under 409A rules.

Common distribution triggers include:

• Retirement
• Separation from service
• A fixed future date
• Change in control (sometimes)

Payouts may occur as:

• A lump sum
• Installments over 5–15 years
• A customized schedule

This is where NQDC shines alongside equity. Equity pays when the company transacts. NQDC pays when the executive plans their life.

Executives benefit by:

• Deferring taxes in peak earning years
• Creating predictable future income
• Reducing pressure to force liquidity events
• Complementing illiquid equity with scheduled cash flow

The company benefits by:

• Retaining key talent without issuing more equity
• Avoiding dilution
• Controlling payout timing
• Aligning leadership behavior with long-term performance
• Strengthening golden-handcuff dynamics without drama

Founders benefit because pressure comes off the cap table. Not every retention problem needs to be solved with stock.

Private stock plans reward ownership. They do not reward patience, timing, or personal cash flow needs. An NQDC plan fills that gap.

Executives who already hold meaningful private equity exposure can use deferred compensation to diversify timing risk, create income independent of a sale, and balance lifestyle planning against concentration risk.

Meanwhile, the company can use NQDC to reward senior leaders who are critical but who are not shareholders, creating a parallel incentive track without complicating governance.

Equity answers the question: “What happens if this works?”
NQDC answers the question: “How do I live well while we’re building?”

Deferred compensation is only as good as the company behind it. Participants are unsecured creditors. If the business struggles, the obligation is still there, but the ability to pay may not be. This risk must be understood, documented, and accepted.

There is also inflexibility. Once elections are made, changes are limited. Poor plan design locks people into outcomes they may regret later.

From the company’s side, poorly governed plans create resentment and confusion. Clear communication and disciplined administration are not optional.

NQDC plans work best when:

• The company has durable cash flow
• Leadership is highly compensated and highly concentrated
• Equity is already meaningful
• The board wants retention without dilution
• Founders want to slow the drumbeat for liquidity

They fail when treated as perks, sold as guarantees, or bolted on without a clear philosophy.

Non-qualified deferred compensation plans are contracts, not benefits. They move income across time, risk across the balance sheet, and pressure away from the cap table. For companies with real scale and real leadership depth, they provide a level of nuance where equity is blunt.

When designed thoughtfully, NQDC plans can make long-term leadership decisions easier, calmer, and better aligned.

And in private companies that plan to stay private for a while, that’s no small thing.

This information does not constitute legal advice. Prime Capital Financial and its associates do not provide legal advice. Individuals should consult with an attorney regarding the applicability of this information for their situations.

Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. Tax planning and preparation services are offered through Prime Capital Tax Advisory. PCIA: 6201 College Blvd., Suite 150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness | Family Office | Tax Advisory.

Authored by Kenji Noguchi

If you’re saving for retirement, you’ve likely heard about both 401(k)s and IRAs. These are two of the most common ways to invest for the future, but they work a little differently. Understanding how each one works can help you make more confident decisions about where your money goes and how it grows over time.

For many people, the question isn’t just which one is better, but how each fits into an overall plan.

A 401(k) is a retirement account offered through your employer. Contributions are typically made automatically through your paycheck, making it easy to stay consistent without having to think about them each month.

One of the biggest advantages of a 401(k) is the potential for an employer match. In many cases, your employer will contribute additional money based on what you put in. This is often considered one of the most valuable benefits available and can significantly accelerate your long-term savings.

401(k) plans have higher annual contribution limits compared to other retirement accounts. However, the investment options are selected within the plan, which can simplify things but may limit flexibility given the available funds.

An IRA, or Individual Retirement Account, is something you open on your own, outside of your employer. It allows you to contribute independently and gives you more control over how your money is invested.

With an IRA, you typically have access to a broader range of investment options, including individual stocks, bonds, ETFs, and mutual funds. This flexibility can be appealing if you want to be more hands-on or tailor your portfolio more specifically to your goals.

IRAs also have contribution limits, and eligibility can depend on factors like your income and whether you are already participating in a workplace retirement plan. There are also different types of IRAs, including traditional and Roth, which can impact how and when your contributions are taxed.

While both accounts are designed to help you save for retirement, there are a few important differences to understand:

• Where it comes from: A 401(k) is offered through your employer, while an IRA is opened on your own
• Contribution limits: 401(k)s generally allow for higher annual contributions than IRAs
• Investment options: IRAs typically offer more flexibility, while 401(k) options are selected within the plan
• Tax treatment: Both accounts can offer tax advantages depending on whether contributions are made pre-tax or after-tax
• Employer involvement: 401(k)s may include an employer match, while IRAs do not

These differences don’t necessarily make one better than the other, but they do impact how each account fits into your overall strategy.

A 401(k) may make sense if:

• Your employer offers a match, and you want to take full advantage of it
• You prefer contributions to happen automatically through your paycheck
• You want a simple, structured way to build long-term savings

An IRA may make sense if:

• You want more control over how your money is invested
• You’re looking to save beyond your employer-sponsored plan
• You don’t currently have access to a 401(k)

In many cases, the decision isn’t either-or. It’s about how to use each account to support your long-term goals.

Yes. Many people use both a 401(k) and an IRA as part of their overall retirement strategy. For example, someone might contribute enough to their 401(k) to receive the full employer match, then use an IRA to add additional savings and gain more investment flexibility.

Using both accounts can help you take advantage of different benefits and create a more balanced approach to saving. It also allows you to diversify not just your investments, but how your contributions are taxed over time.

Understanding the differences between a 401(k) and an IRA is a strong first step, but the right approach depends on your individual situation.

If you want a quick side-by-side breakdown, download our 401 (k) vs. IRA guide below and connect with our team to talk through your options.

This information does not constitute legal advice. Prime Capital Financial and its associates do not provide legal advice. Individuals should consult with an attorney regarding the applicability of this information for their situations.

Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. Tax planning and preparation services are offered through Prime Capital Tax Advisory. PCIA: 6201 College Blvd., Suite 150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness | Family Office | Tax Advisory.

ESOPs: A Practical Ownership Strategy for Founders Who Think Long-Term

Authored by Matt Waters

ESOPs tend to suffer from a branding problem. Mention one to a founder and it is often dismissed as an HR initiative or a feel-good employee benefit. In reality, an Employee Stock Ownership Plan is neither soft nor sentimental. It is a structured ownership, liquidity, and succession planning strategy that, when used correctly, can provide meaningful flexibility for long-term founders.

At its core, an ESOP is a qualified retirement plan that owns company stock on behalf of employees. The company establishes a trust, the trust purchases shares from the founder, and those shares are gradually allocated to employees over time. Employees do not write checks or take personal financial risk. They earn ownership through participation.

For the founder, the ESOP is simply a buyer, but one with very different incentives than private equity firms or strategic acquirers.

How an ESOP Transaction Typically Plays Out

Consider a founder-owned business valued at $50 million. It is profitable, well-managed, and generates consistent cash flow. The founder wants liquidity but has no interest in selling control, disrupting culture, or answering to outside investors.

The company establishes an ESOP and sells, for example, 40 percent of the shares for $20 million. The ESOP finances the purchase using a combination of bank debt and a seller note. Over time, the company repays that debt using future profits.

The founder receives liquidity at closing and interest payments on the seller note. The business continues operating as it always has. Employees gain a meaningful economic stake in the company’s success without assuming personal risk.

In many cases, the company’s identity, leadership team, and strategic direction remain largely intact. Ownership broadens, but control can remain exactly where the founder intends.

Control Is More Flexible Than Most Founders Expect

A common misconception about ESOP planning is that it requires surrendering control. That is rarely the case.

ESOPs can be structured as minority or majority owners. Voting control can often be retained. Boards may remain intact. Management continuity is typically encouraged rather than disrupted.

The ESOP trustee serves a fiduciary role, not an operational one. Their responsibility is to ensure fair valuation and protect employee interests. They do not run the business or dictate strategy.

For founders who value independence and long-term stewardship, this distinction is critical.

When an ESOP Makes Sense

An ESOP is generally best suited for companies with:

• Consistent profitability
• Predictable cash flow
• Strong management beyond the founder
• A desire for gradual ownership transition

It can be particularly attractive to owners who want partial liquidity today, optional liquidity later, and no external exit timeline.

For founders who care about company culture and continuity, an ESOP can offer a succession planning path that prioritizes stability. Unlike many third-party sales, ESOP structures are typically designed to support long-term continuity rather than short-term cost cutting or rapid resale.

When an ESOP Is Not the Right Fit

An ESOP is not appropriate for every business.

It may be a poor fit for companies with unstable earnings, thin margins, or founders seeking a clean and immediate exit. It is also not a strategy that should be pursued solely for tax advantages. While the tax benefits can be meaningful, they are secondary to the operational and cultural commitments required.

Like any ownership transition strategy, alignment matters more than structure alone.

How ESOP Planning Fits Into a Founder’s Wealth Strategy

From a personal wealth planning perspective, ESOP transactions can offer valuable flexibility. Liquidity generated from a partial sale may be used to diversify concentrated holdings, fund trusts, support charitable strategies, or balance inheritances among family members. Remaining ownership can be transitioned over time rather than compressed into a single decision.

This ability to separate liquidity planning from long-term succession planning is often the quiet advantage of an ESOP.

Coordinating the transaction with tax strategy, estate planning, and long-term portfolio construction is essential. Without thoughtful planning, liquidity can create complexity. When integrated properly, it can strengthen a founder’s broader financial position while preserving business continuity.

The Takeaway

An ESOP is not a compromise solution. It is a deliberate one.

For the right founder, it can provide liquidity without surrender, continuity without stagnation, and a structured path for ownership transition that aligns personal wealth goals with the long-term health of the business.

For the wrong founder, it can become an obligation rather than an opportunity.

At this level, the structure is rarely the deciding factor.

Clarity of the owner is.

Important Disclosures

The scenario mentioned in this piece is hypothetical and does not represent any clients or client experiences. This scenario was developed for educational purposes and to illustrate a potential strategy, not to guarantee a specific outcome. Your experience with our firm can and will most likely differ from what is described in this scenario.

This information does not constitute legal advice. Prime Capital Financial and its associates do not provide legal advice. Individuals should consult with an attorney regarding the applicability of this information for their situations.

Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. Tax planning and preparation services are offered through Prime Capital Tax Advisory. PCIA: 6201 College Blvd., Suite 150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness | Family Office | Tax Advisory.

Authored by Matt Waters

For founders who have built meaningful value in a closely held business, the hardest part is often not growth, but deciding how to step into liquidity without blowing up everything that made the business worth owning in the first place.

Section 1042 of the Internal Revenue Code sits at that exact intersection. When implemented appropriately, it can be an efficient structure. When it doesn’t, it’s usually because it was treated like a tax move instead of what it really is: a long-term ownership and estate strategy.

This is not about gaming the system. It’s about structuring a transition that aligns capital, control, people, and legacy.

• What a 1042 Plan Really Is (and Isn’t)
• A More Complete 1042 Example
• The Role of Qualified Replacement Property
• When a 1042 Strategy Makes Sense
• When a 1042 Strategy Doesn’t Make Sense
• Integrating a 1042 Plan with the Founder’s Estate Plan

What a 1042 Plan Really Is (and Isn’t)

At its core, a 1042 transaction allows a shareholder of a C-corporation to sell stock to an Employee Stock Ownership Plan and defer capital gains taxes, provided the proceeds are reinvested into Qualified Replacement Property within the required window.

That sentence undersells what’s happening.

Economically, the founder is exchanging a concentrated ownership position in a single operating company for a diversified portfolio of operating-company securities, while the business itself transitions to partial employee ownership. The IRS’s role is simply to reward that behavior by stepping out of the way on taxes, at least for now.

It is not tax avoidance. It is tax deferral, with the possibility that the tax is never paid if the strategy is coordinated correctly with the founder’s estate plan.

A More Complete 1042 Example

Consider a founder who owns 80 percent of a C-corporation valued at $40 million. The business has consistent cash flow, a solid management bench, and no desire to sell to private equity. The founder wants liquidity, but not a clean exit. Control still matters. Culture matters. Employees matter.

Instead of selling the entire company, the founder sells 30 percent of the outstanding shares to an ESOP for $12 million.

The ESOP does not show up with a suitcase of cash. The purchase is typically financed through a combination of third-party bank debt, a seller note, and future company cash flow. The company itself repays the ESOP debt over time, using profits it would have otherwise distributed or reinvested.

From the founder’s perspective, the transaction closes, liquidity is created, and a Section 1042 election is made. The $12 million in proceeds is reinvested into Qualified Replacement Property within the allowable timeframe. Capital gains that would have been immediately taxable are deferred.

Post-transaction, the founder still owns 50 percent of the company, retains voting control, and remains CEO. Employees now have a meaningful ownership stake, not in theory but economically. The company continues operating. No press release. No culture shock. No new overlords.

What has changed is the founder’s balance sheet. A single illiquid operating asset has been partially converted into a diversified, income-producing portfolio, while preserving upside in the remaining equity.

This is not an exit. It is a recalibration.

The Role of Qualified Replacement Property

The success or failure of a 1042 transaction often hinges on what happens after the sale.

Qualified Replacement Property must consist of securities issued by U.S. operating companies. This excludes most of what high-net-worth investors instinctively think of as diversification. Public market ETFs, mutual funds, real estate, private funds, and anything exotic are off the table.

In practice, sophisticated founders typically use custom-designed 1042 note structures that provide exposure across multiple operating companies, generate income, and avoid single-issuer concentration risk. The goal is not aggressive growth. It is stability, predictability, and alignment with long-term estate objectives.

This is where careful structuring and coordination are critical. Poorly constructed QRP portfolios create frustration. Well-constructed ones are designed to align with long-term planning objectives.

When This Strategy Makes Sense

A 1042 plan becomes compelling when the founder already thinks in long arcs. The business has dependable cash flow. The management team is capable of running without constant founder intervention. The founder wants liquidity but still cares deeply about the company’s future and people.

Transaction size matters. Below a certain threshold, the fixed costs and ongoing compliance simply don’t justify the structure. Above it, the economics become difficult to ignore.

Just as important is temperament. This strategy rewards patience, discipline, and coordination. Founders who want a clean break or immediate disengagement usually find this structure constraining rather than empowering.

When It Doesn’t

This approach breaks down quickly when the business is unstable, when conversion from an S-corp is rushed, or when the founder’s only motivation is tax savings. A 1042 plan layered onto a weak operating company or an unclear personal vision almost always disappoints.

This is not a financial product. It is an ownership philosophy wrapped in tax code.

Integrating a 1042 Plan with the Founder’s Estate Plan

Where Section 1042 becomes truly powerful is when it is intentionally woven into the founder’s estate plan.

Because capital gains are deferred on the QRP, the founder has flexibility in how wealth ultimately transfers. If the QRP is held until death, the embedded gain may receive a step-up in basis, effectively eliminating the original capital gains tax altogether. That alone can materially change how much wealth passes to heirs.

Beyond taxes, QRP assets can be placed into trusts, used to equalize inheritances among children who are and are not involved in the business, or paired with charitable strategies for further planning flexibility. Meanwhile, the remaining operating company shares can be transitioned separately, whether to family members, management, or eventually the ESOP itself.

In other words, a 1042 transaction can decouple liquidity planning from succession planning. That separation is often what allows founders to make better decisions in both domains.

The Bottom Line

Section 1042 is not clever. It is deliberate.

For the right founder, it offers a rare combination: liquidity without surrender, tax efficiency without gimmicks, and a way to align personal wealth planning with the long-term health of the business and the people inside it.

For the wrong founder, it is an expensive reminder that complexity does not create clarity.

The real question is never whether a 1042 plan is available. It is whether the founder is ready to think beyond the transaction and design an outcome that still makes sense twenty years from now. That’s where this strategy earns its keep.

If you have more questions about 1042 plans, contact our team of financial advisors in Denver today.

This information does not constitute legal advice. Prime Capital Financial and its associates do not provide legal advice. Individuals should consult with an attorney regarding the applicability of this information for their situations.

Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. Tax planning and preparation services are offered through Prime Capital Tax Advisory. PCIA: 6201 College Blvd., Suite 150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness | Family Office | Tax Advisory.

Authored by Matt Waters

Many executives and long-tenured employees have one wealth-building asset that often flies under the radar: employer stock in their retirement plan. While rolling the stock into an IRA is the default move, it can be a costly mistake. Enter Net Unrealized Appreciation (NUA), a tax strategy that can turn company stock into a multi-million-dollar after-tax advantage.

NUA allows employees to transfer employer stock out of a tax-deferred plan and pay ordinary income tax only on the stock’s cost basis, while the appreciation is taxed at the lower long-term capital gains rate. The result? Significant tax savings and strategic flexibility.

How NUA Works

1. In-Kind Distribution – At retirement or separation, move employer stock out of the 401(k) or other qualified plan into a taxable brokerage account.
2. Tax on Basis – Pay ordinary income tax only on the original cost basis of the shares, not the current market value.
3. Capital Gains on Appreciation – Any growth above the cost basis is subject to long-term capital gains tax when sold.

For executives who have held stock for years, the difference between ordinary income rates (up to 37%) and long-term capital gains rates (typically 20% plus 3.8% Net Investment Income Tax) can translate into millions in tax savings.

Suppose an executive has:

• 100,000 shares of company stock
• Cost basis: $10 per share ($1 million total)
• Current market value: $100 per share ($10 million total)

If rolled into an IRA:

• Entire $10 million is taxed at ordinary income rates when withdrawn.

Using NUA:

• Pay ordinary income tax on $1 million basis.
• Remaining $9 million in appreciation is taxed at long-term capital gains rates when sold.

Outcome: A $10 million stock position could cost $3-4 million less in taxes using NUA versus an IRA rollover.

Benefits of NUA

• Massive Tax Savings – Especially for long-tenured employees with concentrated stock holdings.
• Flexibility – Spread the sale of stock over multiple years to manage tax brackets.
• Strategic Planning – Integrates with charitable giving, estate planning, or reinvestment strategies.

Risks and Considerations

• Timing Matters – NUA is only available at the time of distribution, typically retirement or separation.
• Diversification Risk – Concentrated stock positions carry market and company risk.
• Plan Rules – Not all employer plans allow in-kind distributions.
• IRS Scrutiny – Proper documentation is critical to validate the NUA election.

When NUA Works Best

• Executives or employees with long-term, highly appreciated company stock.
• Those approaching or at retirement, ready to take a distribution.
• Individuals who can manage concentrated stock risk or diversify post-distribution.

Final Thoughts

NUA is a rare tax strategy where proper timing and planning can yield multi-million-dollar savings. For employees with company stock, ignoring NUA can result in paying far more in taxes than necessary, a mistake that’s completely avoidable with foresight.

This information does not constitute legal or tax advice. Prime Capital Investment Advisors, (“PCIA”) and its associates do not provide legal or tax advice. Individuals should consult with an attorney or professional specializing in the fields of legal, tax, or accounting regarding the applicability of this information for their situations. Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite#150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness.

Authored by Matt Waters

Few things frustrate employees more than finding out they were left out of their company’s 401(k) plan. Or discovering later they should have been eligible months ago. For employers, eligibility and entry date mistakes are one of the most common compliance failures the IRS and DOL uncover.

The rules may seem straightforward, but the details (and recent law changes) make this a frequent trap for plan sponsors.

How Eligibility Works

Every 401(k) plan spells out its own eligibility requirements in the plan document, often based on:

• Age (commonly 21)
  
• Service (e.g., one year of service, defined as 1,000 hours worked)
  

Once an employee satisfies those requirements, they can enter the plan on the next entry date (e.g., January 1 or July 1).

Where Plans Go Wrong

1. Late Entry Dates
   
   • An employee meets eligibility but isn’t enrolled until a later pay period (or not at all).
     
2. Miscounting Service Hours
   
   • Especially common with part-timers, variable-hour employees, or rehired workers.
     
3. Applying Rules Inconsistently
   
   • Different locations or managers interpret eligibility differently.
     
4. Ignoring SECURE Act Requirements
   
   • Beginning in 2024, long-term part-time employees (500+ hours in 3 consecutive years, dropping to 2 years in 2025 under SECURE 2.0) must be allowed to defer. Many payroll systems aren’t set up to track this correctly.

The Fallout

• Missed Deferrals: Employees lose the chance to contribute when they should have been allowed.
  
• Missed Employer Contributions: If a match or profit-sharing was tied to those deferrals, the employer owes even more.
• Correction Costs: Employers must make a contribution to “true up” the missed opportunity, plus lost earnings.

Correcting Eligibility Errors

The IRS correction program, Employee Plans Compliance Resolution System or EPCRS, provides guidance:

• Missed Deferral Opportunity: Employer must contribute 50% of the employee’s missed deferral (based on average deferral rate for their group).
  
• Employer Match: Must be made in full as if the deferral had occurred.
  
• Lost Earnings: All corrections are adjusted for earnings through the date of correction.
  

Example: If an employee should have been allowed to defer 6 months ago and missed $3,000 of deferrals, the employer owes a $1,500 corrective contribution plus the missed match and earnings.

How to Prevent Eligibility Mistakes

1. Align Payroll and Plan Documents
   
   • Make sure payroll systems track service hours according to plan definitions.
     
2. Automate Enrollment
   
   • Automatic enrollment greatly reduces the risk of “forgotten” eligible employees.
     
3. Centralize Responsibility
   
   • Don’t leave eligibility tracking up to managers. Your HR/payroll team should handle it consistently.
     
4. Review SECURE Act Rules
   
   • Ensure your systems are ready for part-time employee tracking and enrollment.
     
5. Regular Compliance Checks
   
   • Spot-check eligibility lists against actual payroll and hours at least quarterly.

Bottom Line

Eligibility errors may be easy to make but could be expensive to fix. They can undermine employee trust and create significant employer liability if not caught early.

By aligning systems with the plan document, automating enrollment, and monitoring service data, plan sponsors can avoid this common pitfall and keep their 401(k) running smoothly.

Have questions about late 401(k) contributions? Reach our to our team of professionals at Prime Capital Financial Denver to see how we can help. 

Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. Tax planning and preparation services are offered through Prime Capital Tax Advisory. PCIA: 6201 College Blvd., Suite 150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness | Family Office | Tax Advisory.

Gen X Clients Need Help Saving for Retirement. What’s The Cure?

The oldest members of Generation X are turning 60 this year, but many of them are not confident that their retirements will be just like heaven.

Data from Cerulli released in September showed that four out of five Gen X 401(k) participants don’t expect they’ll be able to maintain their current standard of living in retirement, and two-thirds of them have less than $100,000 in individual retirement assets, according to Cerulli. Gen X covers people born between 1965 and 1980, so there’s a wide range of ages, from those turning 60 this year to those who are 45. Education and outreach to this generation, which is known for being independent but also pragmatic, is critical to help them boost their savings. For advisors, working with these individuals can give a needed boost to their retirement readiness, and help provide clients with added value.

But it’s important to not treat this generation as a homogenous block, said Marc Fowler, director of retirement education at Human Interest. It’s also necessary to “nuance your strategy, your education outreach, etc., to be able to work not only with the folks who still have 20 years but also work with those folks who are really looking at retirement as a near-term option,” Fowler said.

Show Me How You Do That Trick 

Stephanie Nanney, partner at Private Vista, who works with plan sponsors, said it’s not surprising that Gen X lacks confidence because cumulative stock market performance between 1998 and 2008, when many had started investing, was negative overall. Being bookended by the dot-com crash and the Great Financial Crisis may have scared them away from contributing to their retirement plan.

To combat those fears, Matt Waters, partner and wealth advisor at Prime Capital Financial whose firm also works with plan sponsors, said the No. 1 thing he tells 401(k) investors is “just get started.” If participants are saving but at low levels, he’s found success with encouraging gradual increases, such as increasing savings rates by 1% every time someone gets a raise or bonus, or to mark their calendar to annually remind the person to increase their savings. Gradual increases are easier to handle, rather than touting the industry standard to save 15% to 20% of income, and appeal to Gen Xers’s pragmatic nature. “It’s the small, digestible steps that people can take that don’t hit their cash flow at home so dramatically,” he said.

For people who aren’t already maxing out their 401(k), suggesting catch-up contributions once they hit 50 isn’t helpful. Instead, he likes to show low savers the power of compounding interest and how just slowly increasing savings can make a difference. “We’ve worked with lots of participants. They look up 10 years (later) and they’re like, ‘Wow, I never thought I would ever have this much money.’ And it’s because of these little decisions that they were able to put in place years ago,” Waters said.

Whenever I’m Alone With You

The Gen X demographic is now the “sandwich” generation juggling competing savings goals and responsibilities, including saving for children’s education, saving for retirement and possibly caretaking. Olivia Le Blan, vice president at Douglass Winthrop, said she worked with a client who was 52 and was stressed about meeting both his retirement and his three kids’ educational savings goals. Her analysis showed that he should focus on his retirement savings first. “We basically told him, ‘You really have to secure your own oxygen mask before helping others,’” she said.

Dina Alongi Caggiula, head of participant experience at Vanguard, said because savers have multiple goals, looking at participants’ holistic financial picture helps them feel more confident. With retirement anywhere from five to 15 years out, Gen X may be reaching an “aha” moment when they realize they need to take their retirement savings much more seriously, said Krysta Dos Santos, head of financial planning at GenTrust. They may be more willing to work with financial advisors. A lack of confidence may prohibit Gen X from actively saving money, so building confidence is key, she said.

Nanney said advisors may be able to appeal to the practical, independent mindset of Gen Xers by reminding them to think about diversification and their risk profile, and stick with that, rather than chase market trends. Target date funds can appeal to those who may not want to be as engaged.

Friday, I’m in Love. Savings platforms should be designed so that participants feel in control of their financial future without being overwhelmed. Educational material can sometimes still be too advanced for plan participants. As an example, Fowler said he was at a recent conference where people were asking him the difference between traditional and Roth 401(k)s. Webinars and other material can be useful, but human interaction such as live enrollment meetings when a plan sponsor offers a new plan to employees is important, he said. It allows employees to learn about the plan, how it functions and enables people to ask individual questions.

Waters said advisors need to consider both the workforce and how to deliver education. “It’s not a suitable practice to just drive people to a website and expect that they’re going to be able to read about stocks and bonds … Most folks don’t have the bandwidth for that,” he said.

When Waters works with blue-collar companies, he may tag along to a safety meeting and speak for 15 minutes at the end. “There’s no magic bullet. It’s really a number of different things,” he said.

Instead, Caggiula encourages plan sponsors to look at recordkeepers’ data, which can provide insight into participant behavior, contact-center interactions and popular topics. She said plan sponsors that access Vanguard’s financial wellness assessment data can use it to make decisions about plan design choices such as auto enrollment, auto increase and target date funds. “All of those features pay dividends in making sure more participants can get to retirement readiness,” Caggiula said.

– Author: Debbie Carlson | Guest Contributor to The Daily Upside