Understanding the difference between establishing a qualified retirement plan and opening an investment account
A Solo 401(k), also known as an Individual 401(k) or One-Participant 401(k), can be an attractive retirement savings option for self-employed individuals and small business owners who do not have eligible employees other than themselves and potentially their spouse.
ESI supports Solo 401(k) accounts through Non-Prototype 401(k) brokerage accounts on the National Financial Services (NFS) platform. However, it is important for financial professionals and advisors to understand that ESI provides the investment account only. The underlying qualified retirement plan must be established separately before the brokerage account can be funded.
Step 1: Establish the Solo 401(k) Plan
Before opening an investment account through ESI, the business owner must establish a qualified retirement plan.
This generally involves working with a retirement plan document provider, third-party administrator (TPA), or qualified retirement plan attorney to:
- Determine whether the business is eligible to establish a Solo 401(k).
- Obtain an Employer Identification Number (EIN), if one has not already been established.
- Prepare and execute the qualified retirement plan adoption agreement and supporting plan/trust documents.
- Designate the plan trustee and establish the plan’s effective date.
- Determine responsibility for contribution calculations, recordkeeping, and ongoing plan administration.
Important: Opening a Non-Prototype brokerage account at ESI does not establish the underlying Solo 401(k) plan. The plan must be separately adopted and documented.
Step 2: Open the Non-Prototype Brokerage Account Through ESI
Once the Solo 401(k) plan has been established, the advisor can assist the business owner with opening a Non-Prototype brokerage account through ESI/NFS.
The brokerage account serves as the investment vehicle for the qualified retirement plan, allowing plan assets to be held and invested through the NFS platform.
Advisors and financial professionals should be prepared to provide:
- The completed NFS Brokerage Account Application and applicable ESI account-opening documentation.
- The Trustee Certification of Investment Powers, outlining the plan name, applicable tax identification number, and trustee information.
The account registration and tax identification number must be consistent with the underlying plan documentation and NFS requirements.
Step 3: Fund the Investment Account
After the Non-Prototype brokerage account has been established and approved, the business owner or authorized plan trustee may direct eligible contributions or transfers into the account.
Solo 401(k) plans generally allow contributions in two capacities:
- Employee contributions: Elective deferrals made by the participating business owner, subject to applicable IRS limits and deadlines.
- Employer contributions: Contributions made by the sponsoring business, subject to compensation, business structure, and applicable IRS limitations.
Contribution limits and calculations vary based on the business owner’s compensation, business structure, participation in other retirement plans, and applicable IRS rules.
Advisors and financial professionals should direct clients to their tax professional or plan administrator to determine allowable contributions and applicable deadlines.
Understanding the Responsibilities
Because ESI offers an investment-only Non-Prototype account, the business owner and their designated plan administrator remain responsible for the administration and ongoing compliance of the underlying qualified retirement plan.
This includes:
- Maintaining the qualified plan documents and amendments.
- Determining participant eligibility and allowable contributions.
- Tracking contributions and distributions.
- Preparing applicable tax and regulatory filings, including Form 5500-EZ when/if required.
- Ensuring ongoing compliance with applicable IRS and retirement plan requirements.
ESI/NFS provides brokerage custody and investment account services but does not serve as the Solo 401(k) plan document provider or third-party administrator.
Where Can Business Owners Establish a Solo 401(k)?
Business owners may work with an independent retirement plan document provider, TPA, or qualified retirement plan attorney to establish the underlying plan.
Some retirement plan providers offer bundled Solo 401(k) solutions that include plan documents, administration, and investment custody. Advisors and financial professionals should be aware that these arrangements may require the client to maintain investments with the provider’s designated custodian.
For clients intending to invest through ESI/NFS, it is important to confirm that the selected plan provider supports an investment-only, Non-Prototype brokerage arrangement with an outside custodian.
Key Takeaway
Establishing a Solo 401(k) through ESI is a two-part process:
- Establish the Plan: The business owner adopts a qualified Solo 401(k) plan through an outside provider and establishes the appropriate plan administration arrangements.
- Open the Investment Account: The financial professional opens a Non-Prototype brokerage account through ESI/NFS to hold and invest the plan’s assets.
Understanding this distinction will help financial professionals and advisors guide business-owner clients through the process, establish appropriate expectations, and avoid delays during account opening.
For questions regarding Non-Prototype brokerage account documentation and submission requirements, please contact ESI Brokerage Suitability Desk.
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