While this post is written more from the standpoint of a real estate broker recruiting real estate agents, it is applicable to any professional real estate agent who is interested in their career.Can a self-directed 401(k) or self-directed IRA assist a real estate broker with the recruitment of real estate agents?
Many real estate brokerage offices take an active role in the recruitment of real estate agents. The recruitment of real estate agents is a tedious but necessary aspect of most brokerage offices if they are interested in growing their brokerage.
While every broker would state that retention of real estate agents is where they truly grow their business, they cannot escape the fact that recruitment of real estate agents is of critical importance. Can introducing a self-directed 401(k) or self-directed IRA plan assist with the recruitment of real estate agents? Does a broker even introduce these retirement plan options to a prospective agent during the recruiting interview? Finally, can the introduction of these plans assist with agent retention? The answer to these questions may just be….YES!
Self-Directed IRAs and 401(k)s Assisting in Recruitment of Agents?
For brokers who are interested in growing their business, the introduction of a self-directed 401(k) or IRA plan during the recruitment of real estate agents can be of great benefit….to both the broker and the agent for a number of reasons, inclusive of:
- An Extra Arrow in the Quiver — The broker may be aligned with the best real estate company in the country, but they still must compete against other companies in the recruitment of agents. Might introducing a self-directed SOLO 401(k) plan to the prospective agent be just one more “positive” that this company has in the recruitment process. Yes, for a number of reasons. With this tool, the broker hopefully demonstrates to the agent that they are concerned about their financial well being…and not just selling more homes. A retirement plan that can benefit the agent by making new contributions, rolling over funds from previously-accumulated retirement plans, and assisting with the transition of the agent moving from corporate America to their new role as a self-employed agent.
- Best Interests of the Agent — Brokers talk a good game about why their company is the best. They amaze the interviewee of the educational programs to assist the agent in their real estate career. By introducing the self-directed IRA or Solo 401(k), they are demonstrating that they care about the future goals and needs of the agent. Being self-employed, the “solo” self-directed 401(k) may certainly be a retirement plan of choice for the agent. Combine that with the fact that the individual Solo-K plan is fairly easy to administer make this plan a serious consideration.
- Solo 401(k) Better Than the IRA? — In general contrast to the IRA, the 401(k) plan will provide greater benefits to the agent in that: a) the agent can make contributions to the 401(k) at a much higher level than the IRA; b) participant loans may be taken from the 401(k) and NOT the IRA; c) the 401(k) can be possibly established with minimal on-going fees vs. annual IRA fees; and, d) the 401(k) plan will not incur UDFI (Unrelated Debt Financed Income) taxes for real estate investments, where UDFI transactions within an IRA will always incur the tax.
- Checkbook Control or Not — This is an elective choice of the agent, but they have the ability to have this feature. Why be limited to investing in traditional assets of stocks, bonds and mutual funds (only) when the agent can invest into any asset (including real estate) not prohibited under IRS and DOL Prohibited Transaction regulations. The agent acts, legally, as the Trustee of their own 401(k) plan. See if the agent has any friends who are W-2 employees who have this benefit…in most cases, they will not. And, I can almost virtually guarantee you that no other real estate brokerage company will be offering this benefit.
- Bona-Fide Agent Retirement Plan — The Solo 401(k) plans are established with IRS-approved plan documents. No second guessing their ability to establish and operate their plan, they just need to follow the rules. The ability, as a self-employed individual, to not only have a 401(k) plan like the “big boys” (e.g., company sponsored 401(k)), but having full control and little administrative expense and reporting. In most cases, this freedom to invest as you see fit (again, don’t forget those IRS rules) is not something the “big boy” plans have.
- Can the Agent Include Their Spouse? — Yes, if the spouse is a legitimate participant in the business and the business is owned by the husband and wife. Many agents are in business with their spouses. When applicable, what a nice benefit to have extended to these individuals where they can both rollover and make new contribution to their Solo 401(k) plan. In this situation, the spouse can make contributions to the plan (in compliance with IRS rules), rollover funds from other plans, and exercise loan provisions as well). Of course, in addition to IRS regulations, you want to ensure that the business entity has been established in compliance with any applicable State regulations.
- Can I Only Invest in Non-Traditional Assets? Of course not. The way we establish these plans is providing the best of both worlds. Have your account established so that you can invest in traditional and non-traditional assets all from one account.
Checkbook Control? Personal Control?
You probably noticed that Item #4 referenced “personal” and “checkbook control”? And you read that correctly. A real estate agent, being self-employed, may be the Trustee of their own plan and control the retirement checkbook. This is a benefit that, as a self-employed individual owning their own business, they may capitalize on. One could certainly state that the broker who introduces this option during the recruitment of real estate agents will be “one leg up” over potential suitors for the agent’s services.
An argument can be made that the introduction of self-directed plans can have a meaningful impact on a broker’s recruitment of real estate agents AND retention of these agents as well. But, are there other tangible benefits with these types of plans whereby an agent can increase their commissions? YES! Would this also contribute to agent retention? Of course.
Introduction to Other Qualified Individuals, BUT….
By establishing, operating and experiencing their own plan, the agent soon realizes that their plan can invest into any asset not specifically prohibited by IRS regulations. They learn they have the ability to invest into real estate (or many other asset classes for that matter). They understand the potential power of investing into assets such as real estate. They soon realize that this may be a “natural” discussion to have with their database of clients and contacts. It certainly may be a better “touch” for an agent to have with a client versus sharing a cooking recipe. This “touch” may lead to a real estate sale by opening a client’s mind to the power of self-direction….utilizing, in most cases, there greatest amount of financial resources….the IRA, 401(k) or other retirement plans. . And, if they are interested investing in real estate, they most likely would use the services of the agent that introduced them to self-direction.
Of course there is a BUT…..
The introduction of self-directed plans is simply that…an introduction. The broker may not want the agent to make this introduction for a variety of reasons. The agent and broker would need to make sure that the introduction of such a service does not violate any state regulations pertaining to holding a real estate license. While the agent would not be providing any tax, legal,, financial or investment advice, it must be clearly stated that the information of self-directed plans, if even provided, is simply that…information.
As always, this information is provided for educational purposes. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. You must always consult with your respective professional in all such matters.