7 Questions to Ask Your 401(k) Business Financing Provider

With 401(k) business financing (also known as Rollovers for Business Start-ups or ROBS), it’s possible to use your retirement funds to start or buy a business without incurring any tax penalties or getting a loan. Made possible by the Employee Retirement Income Security Act of 1974, ROBS offers a quicker path to profitability since there are no monthly payments or interest rates involved. But setting up this structure properly requires some very specific steps be taken. As a result, many choose to work with a  reliable ROBS provider to help them navigate the process.

All ROBS providers were not created equal. By doing your homework early on, you can identify the provider that will support you and your business before, during and even after the process, and weed out those that won’t live up to expectations. Here are seven questions you should ask every potential ROBS provider before making your decision:

1. How experienced is your firm?

You want a ROBS provider you can count on to provide accurate and efficient results. Aside from the number of ROBS transactions the firm performs each year, you should also assess their business history to ensure they have a solid reputation. The firm should have a 10+ year track record of ROBS success and be recognized as a leader in the industry (look for awards and honors they’ve received to back them up).

The best firms perform more than 1,000 rollovers per year and employ subject-matter experts who can provide advice based on their past experience working with entrepreneurs.

2. What are your costs?

You shouldn’t encounter any surprises when working with a ROBS provider, so look for transparency in pricing. Make sure the
firm provides audit protection, as well as in-house legal, business valuation and plan administration services as part of their costs. In general, the average ROBS setup costs around $5,000 while the average monthly maintenance fee is $120.

Don’t forget — you get what you pay for. Do you want a firm to only complete the transaction, or do you want more support for
your business? If you decide to pay less upfront, the cost to your business could be steeper in the end.

3. What’s your ROBS process and timeline? Can the process be expedited?

The firm you choose should detail their ROBS process upfront, provide a reasonable timeline and complete the transaction on time. They should also be able to review state filing timetables and be familiar with how your current 401(k) custodian could affect the schedule. Most rollovers take about three to four weeks, but an efficient firm will rush the process if needed. However, firms that claim they can complete the ROBS process in 10 days are often not able to follow through on that promise.

4. Have any of your ROBS transactions been audited by the DOL or IRS?

ROBS transactions do not automatically flag business owners for an audit, but if an audit should occur, a trustworthy ROBS firm will stand behind you. They’ll pay for all legal representation if an audit does occur and should boast a spotless audit record (meaning no taxable event has ever occurred as a result of one of their ROBS arrangements).

5. Am I allowed to work with external legal counsel during the rollover process?

Investing part or all of your nest egg into a small business is a big decision – and not one to take lightly. Look for a ROBS firm that encourages you to seek outside legal representation that can provide unbiased advice. Better yet, seek a firm that offers this outside counsel as part of their rollover package.

6. Will you help me with ongoing maintenance of the 401(k) plan?

The ROBS arrangement requires monthly maintenance to keep your new business and its 401(k) plan compliant. Most firms offer plan administration services, but look for one that employs an in-house plan admin team in addition to an on-site compliance crew and attorneys. Having these teams in-house means a much better customer experience and faster response times.

7. Can you help me grow my business?

You want a ROBS firm that can support you as your business grows – that includes additional funding solutions in case you need working or growth capital, as well as access to business services that can help you streamline operations.

Above all, the company you choose to help you complete your ROBS transaction ought to leave you feeling confident. They should provide exceptional customer service and be available to answer your questions quickly and thoroughly.

Your peace of mind is important; now that you know more about choosing the best ROBS provider for your business or franchise, you’ll be one step closer to realizing your dreams with a company you trust behind you.

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