First attending job but no 401k. Options?

[litovskyassetmanagement]

childay wrote:

Interesting Kon thanks for your post as usual you always provide good information.

Just curious, can you give some rough examples?  I imagine most physician practices do not have very many HCEs unless employing a lot of mid-levels?  Aside from employed HCEs perhaps if you had a huge elderly staff?

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Well, it only takes a handful of staff to make a plan expensive, especially if the owner is very young.  Physicians might have PAs who often make six figures, but who might not be HCEs (who can be excluded from profit sharing/matching, for example, if they make $120k or more).  Dental associates, on the other hand, are almost always HCEs. If you are in your 30s, and you got 3-5 staff making $40k-$80k (and possibly close to $100k in the case of PAs) who are in their 40s, 50s and 60s, things go downhill from there, but again, depending on the actual details the employer contribution might vary from relatively low to marginally acceptable (and your tax brackets play a role because your employer contribution is tax deductible, so this definitely takes a lot of the bite out of it if you are in the 50% bracket).  I can't actually cook up a detailed example because it takes sophisticated software to do an actual illustration, and details matter.  And this won't help a bit because every practice is different.  For a tiny practice even hiring (or letting go) of a single older staff member who is highly compensated can either improve or exacerbate the employer contribution situation.

Profit sharing is assigned based on age and salary, so if you are really young and your staff is much older, that can create a problem, but sometimes a TPA can assign profit sharing in creative ways to minimize employer contribution to older staff, and there are other tricks that can be used, up to a point. I see this issue more often with dental practices, because dentists tend to buy practices with older staff, and can be very young. This is not so much a problem with medical practices, but practices that have lots of staff might have issues (for example, larger practices might have billing staff or lab taff).  Also, if the doc does not make enough to max out and has a relatively low net profit, then employer contribution can be high if demographics is poor.  It is rarely all bad or all good, usually most practices are somewhere in the middle, but at some point the practice owners might balk at doing a 401k plan if the cost of profit sharing is high (which in their mind can be any number they are not comfortable with).

In short there are lots of reasons this situation can occur.  And people can disagree on what 'expensive' means.  That's why I prefer side by side analysis so that things are put into perspective.  Someone in the 50% bracket will benefit a lot more from an 'expensive' retirement plan than someone in the 25% bracket.

[childay]

Interesting Kon thanks for your post as usual you always provide good information.

Just curious, can you give some rough examples?  I imagine most physician practices do not have very many HCEs unless employing a lot of mid-levels?  Aside from employed HCEs perhaps if you had a huge elderly staff?

[litovskyassetmanagement]

childay wrote:

I would be very curious why a two-physician couple would not set up a 401k plan, the expenses would have to be amazingly high not to justify the tax savings in presumably the top bracket.  Perhaps they aren’t saving for retirement?  Are they living super-large?

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No, that's probably not the case.  To contribute say $54k each, they might have (as an example) an employer contribution of say $50k.  This is not uncommon if you have a practice with large, highly compensated and older staff.  So they decide that the cost is too high.  In cases like this, one has to do an analysis of 401k vs. SIMPLE, and 401k vs. after-tax and decide which one is better, objectively and considering all of the variables. Once we did an illustration for a dentist and his employer contribution would be around $30k to make a $54k contribution for himself, and adding to that the cost of admin and advice, it would not be worth doing a 401k at that point. A SIMPLE might have been a better choice for him (or just doing after-tax, since a SIMPLE can be costly if you have a very large staff, and he did).  So this has nothing to do with the ability to contribute, but rather with the demographics of each practice, which has a huge effect on the amount of employer contribution.  This is why for a small practice you need a really good TPA who can do cross-tested design (which can significantly minimize employer contribution, though only up to a point), and an adviser/fiduciary who can also analyze the numbers and figure out whether a particular plan is better.  The problem is that 401k plan providers are in business of selling plans, not in business of providing fiduciary advice, so I'm not surprised that this couple simply closed the plan down (in addition to the employer contribution cost, they probably also had high investment cost as well, and I've had clients who closed their plans before for that reason alone).

We work with several couples like that, and before recommending a particular type of plan it is a requirement that we do a thorough design study.  This way we know for sure that their demographics is ideal for setting up a 401k with profit sharing and also the cost of employer contribution would be known beforehand so that there are no surprises (and we would try various scenarios to make sure that we know what the worst case scenario might be).  Many companies simply get their clients to sign a contract, and a year later they find out that to max out their own contribution, the employer contribution would have to be gigantic, which is something they did not expect.  If the employer contribution is too high, you might not want to start a 401k with profit sharing just yet, and concentrate on debt repayment for example (or do a SIMPLE).  I'd rather they do that than find out a couple of years later that their 401k is way too expensive, and then decide to close it.

[childay]

I would be very curious why a two-physician couple would not set up a 401k plan, the expenses would have to be amazingly high not to justify the tax savings in presumably the top bracket.  Perhaps they aren't saving for retirement?  Are they living super-large?

[litovskyassetmanagement]

JK wrote:

Just started the job search as I will be a rising senior resident in a well paying specialty. Some potential employers have offered a 401k with profit sharing as well as some other great retirement plan options that I’m looking to take advantage of with a higher salary.

However, one private practice that I’m incredibly interested in is a two physician couple (plus 2 midlevels) who makes very good money. However, on inquiring more about the job specifics further, they said they got rid of their 401k because it was too costly because they had to pay for their employees too. Seems to me that as a two physician couple, the pros would outweigh the cons.

Does it cost that much to setup a 401k plan? How much extra for setting up a profit sharing component? Any recommended sites for information that I could direct them to in order to get it up and running? Any other thoughts?

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I'm very familiar with situations like these.  Given what you are describing, what might be happening is that they do not have the right TPA to do the plan design and they don't have anybody to do a proper analysis of their situation.  If you have two owners and a huge staff that makes good money, employer contribution can be significant.  However, if you have staff that is HCE ($120k or more in compensation), they can be excluded from profit sharing/matching (if desired) to allow the owners some degree of control over the employer contribution.  If there is enough older staff that makes good money (but not HCE), the employer contribution can be quite significant, but it would take a detailed design study to figure out whether their employer contribution can be minimized.  In some cases the demographics is just so bad (meaning older, highly compensated employees who are not HCEs) that the cost of doing a 401k plan can be prohibitive.

So the first step is to get the best possible design illustration.  The second step is to do side by side analysis, similar to what is done in this paper:

http://www.dentaltown.com//Dentaltown/Article.aspx?i=403&aid=5625

Just deciding that the cost of a 401k plan is too high is not particularly useful unless you compare this cost to say that of a SIMPLE IRA and/or not doing a plan at all.  Their tax brackets should also be taken into account because employer contribution is tax deductible as a business expense.  So only after doing a side by side analysis using the best possible illustration can one be sure that a particular retirement plan solution is better than another one (or doing nothing).

[jfoxcpacfp]

DMFA wrote:

What is the business model?  Are you an employee or a partner?  Are you paid on a W-2, 1099, K-1, etc?  That’s what would determine if you could set up 401(k) or SEP, DBP/CBP, etc.

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It's hard to believe that they can have high-qualify long-term employee retention and relationships without benefits such as a 401k. That would have to impact business efficiency and relationships. Wonder what they are doing for retirement with neither spouse havin access to a retirement plan - I guess he didn't mentor you about preparing for the long term.

I like @DMFA's idea. If you can negotiate for 1099 status, you can set up a SOLO-k and an HSA, which they also may not offer.  Perhaps do some locums in addition? You will be less "tethered" if the job doesn't work out.

[DMFA]

What is the business model?  Are you an employee or a partner?  Are you paid on a W-2, 1099, K-1, etc?  That's what would determine if you could set up 401(k) or SEP, DBP/CBP, etc.

[janettebournes]

JK wrote:

Appreciate the comments. Tough part is that this guy has been my mentor the last five years and initially for me into the specialty. Also, he continues to take care of my parents and does a great job. I like the way he practices. That’s what makes the decision more challenging. Had it just been husband/wife and no 401k for a practice I didn’t know, the decision would have been a no brainer. He also said that I could potentially train my wife who happens to be a midlevel at some point in the future while other practices were hesitant. I know working with your spouse has its own pros/cons, but it is one other thing to think about. Decisions, decisions….

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I would echo the advice about thinking very carefully about working with/for a husband/wife team. It has not worked out well for anyone I've ever met (limited as that n may be)

I will also say (from learning the hard way) that learning from and working for a mentor can be two very different experiences. Some mentors are great at teaching but actually very despicable human beings once money is involved.

I ended up working for a mentor as well and it fractured our relationship. He was stealing money from me (which I let slide at first because of conflicted feelings about him being my mentor and intro to the field) and he felt I was being ungrateful and nitpicky when I confronted him about it. In the end, I think our relationship would have been preserved and significantly better if I had worked elsewhere and regarded him solely as a mentor and not my boss.

[East coast]

JK wrote:

 

Does it cost that much to setup a 401k plan? How much extra for setting up a profit sharing component? Any recommended sites for information that I could direct them to in order to get it up and running? Any other thoughts?

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Vanguard will do a small business one for $3500/yr. It can be done for cheaper (especially if they do AUM charges, which often are shared with the employees, so cost to employer is significantly less). Along with the other concern stated, I'd be concerned with an employer that doesn't see the benefit in offering this option to employees (maybe they pay more than competitors, so that negates the lack of a 401k??).

[JK]

Appreciate the comments. Tough part is that this guy has been my mentor the last five years and initially for me into the specialty. Also, he continues to take care of my parents and does a great job. I like the way he practices. That's what makes the decision more challenging. Had it just been husband/wife and no 401k for a practice I didn't know, the decision would have been a no brainer. He also said that I could potentially train my wife who happens to be a midlevel at some point in the future while other practices were hesitant. I know working with your spouse has its own pros/cons, but it is one other thing to think about. Decisions, decisions....

[VagabondMD]

Sounds like a bad gig. Keep looking.

[Dr. Mom]

Be wary of joining where the only other owners are a couple.  It is not too expensive to set up a 401K.  My husband is a solo practitioner and has one set up for us and his employees.  It is not your job to talk them into setting one up if they already decided not to do it.  That decision to not set one up would be a huge red flag to me as it illustrates their decision making and choices which do not seem to mesh with yours.

[HikingDO]

Sorry to be completely off track, but I'd be cautious about taking a job with a practice where the two other owners are a couple (husband/wife) if that's the case. From my experience, this sets up a lot of issues, such as the couple wanting to take vacation together (leaving you to cover by yourself), and being outvoted 2-1 on issues if you become a partner. Just my two cents from my experiences, and experiences of some my other colleagues as well.

[JK]

Just started the job search as I will be a rising senior resident in a well paying specialty. Some potential employers have offered a 401k with profit sharing as well as some other great retirement plan options that I'm looking to take advantage of with a higher salary.

However, one private practice that I'm incredibly interested in is a two physician couple (plus 2 midlevels) who makes very good money. However, on inquiring more about the job specifics further, they said they got rid of their 401k because it was too costly because they had to pay for their employees too. Seems to me that as a two physician couple, the pros would outweigh the cons.

Does it cost that much to setup a 401k plan? How much extra for setting up a profit sharing component? Any recommended sites for information that I could direct them to in order to get it up and running? Any other thoughts?