Medical practice retirement plan - how analyze fees?

[KGeyeMD]

I am a solo owner of an ophthalmology practice with 14 employees.  Our old 401 k was not practical due to fees and the large amount of time/paperwork I had to do myself.  I am very happy with a switch to a SIMPLE IRA (despite the cons, the Simple IRA blog on WCI is excellent).  However the options before me are confusing in regards to fee analysis.  Does anyone out there have the ability to explain how to wade through (American funds for example) the product descriptions to see what the actual cost of the investments will be?  (the management of the plan itself will be quite cheap, $10 per participant to set up, $10 annual fee).  This is a major reason why we're moving away from the 401k, I need to get these fees right.

 

Thank you in advance!

Kevin

[Zaphod]

You'll want to look for expense ratios, loads, and hb-1 fees mainly. My friend runs his practice using American funds I believe and their expense ratios alone were 1.5-high 2% alone, they were atrocious. Does vanguard not offer a solution that is better?

[KGeyeMD]

Good point; I had originally looked at TD ameritrade, and their fees were more clearly stated.  I almost went with them, but it turns out that they had no electronic option to fund the investments!  (I would have to send a paper check each pay period, with a statement of how they were to break that amount down into each employee's investment accts, quite a burden given that I'm doing this myself each payroll).

 

I will keep looking, there has just got to be an option that lets me electronically draft from the corporate checking acct to the employee's designated investments, and to a low-fee investment (mutual fund, etc.)

 

Tks!

[litovskyassetmanagement]

Kevin Greuloch wrote:

I am a solo owner of an ophthalmology practice with 14 employees.  Our old 401 k was not practical due to fees and the large amount of time/paperwork I had to do myself.  I am very happy with a switch to a SIMPLE IRA (despite the cons, the Simple IRA blog on WCI is excellent).  However the options before me are confusing in regards to fee analysis.  Does anyone out there have the ability to explain how to wade through (American funds for example) the product descriptions to see what the actual cost of the investments will be?  (the management of the plan itself will be quite cheap, $10 per participant to set up, $10 annual fee).  This is a major reason why we’re moving away from the 401k, I need to get these fees right.

 

Thank you in advance!

Kevin

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This is a very typical story.  There are several guides on when to use a SIMPLE IRA and when to use a 401k:

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

There are definite advantages of using a 401k vs. SIMPLE, provided that you minimize your plan cost and getting the best plan design possible given your practice demographics.

To limit the paperwork and simplify your life, you can use a pooled not a participant-directed plan:

http://www.dentaltown.com/Dentaltown/Article.aspx?i=393&aid=5411

As far as fees, you might want to avoid ALL asset-based fees in your plan:

http://litovskymanagement.com/2015/05/cost-of-fees/

That's why if you want a SIMPLE IRA, Vanguard's SIMPLE IRA is probably the best solution.  You might also want to educate yourself about retirement plans, fees, plan design, etc., so that you are very knowledgeable about this, as this knowledge can potentially save you a lot of money:

https://www.whitecoatinvestor.com/how-to-run-a-successful-retirement-plan-for-a-medical-or-dental-practice/

[KGeyeMD]

Thank you very much for your post Mr. Litovsky.  I also read your article on WCI, it was very informative.  For me personally, the SIMPLE IRA will be a welcome change due to the fact that with declining practice revenue, I tend to do most things with my own time.  Such as the yearly safe harbor paperwork, etc.  It was too painful of a time cost, and when you get to a certain age time becomes the more valuable asset than money.  Thus, the lower limits of the simple beats the higher limits of the 401k at this time.  The trick has been finding a plan that will let me submit funds electronically on a relative 'autopilot' basis.  (at that same time as allowing no load, low expense ratio index funds, as you recommended).  I think Fidelity seems to be my best option currently, but I am trying to dive into their lengthy paperwork to find any hidden fees.  Again, thank you for your post,

 

Kevin

[litovskyassetmanagement]

There definitely are fees for using the brokerage accounts:

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/Brokerage_Commissions_Fee_Schedule.pdf

But if you use their funds, there shouldn't be any purchase/redemption fees.  The breakpoint for Spartan shares also is $500.

There are also administrative fees:

https://www.fidelity.com/retirement-ira/small-business/compare-plans

"Low cost with option of annual fee of $25 per participant or $350 plan fee"

 

[Zaphod]

This area seems ready for disruption, a wealthfront/betterment type of deal. Its complicated and opaque and ultimately very costly for smaller businesses. I agree that even if there isnt one currently, there is no inherent reason this should be such a difficult and painful process. All the elements are there, they just arent packaged conveniently, and Im sure thats purposeful but still...

[litovskyassetmanagement]

Zaphod wrote:

This area seems ready for disruption, a wealthfront/betterment type of deal. Its complicated and opaque and ultimately very costly for smaller businesses. I agree that even if there isnt one currently, there is no inherent reason this should be such a difficult and painful process. All the elements are there, they just arent packaged conveniently, and Im sure thats purposeful but still…

Click to expand...

Actually, not even close.  Too many opportunities to charge insane fees.  Nobody would be able to do this for a flat fee all the way because the costs are just too high to run big plans with no staff.  Have you tried some of the 'online' platforms?  They have absolutely no knowledgeable staff, the plan designs are terrible, and there is no fiduciary oversight over everything, but boy are they cheap (that is, until you realize that admin fees are low because the investments cost 1% or more).  It becomes very clear why the fees are so low when they can't even put together a design study for your plan if you want anything more than a Safe Harbor 401k.  And when you try to do anything that requires help/support, this is where things get interesting because retirement plans have simply way too many moving parts to them that SOMEBODY has to take care of all the time - and this can't be done with a piece of software, that's for sure.

What we do can't really scale to large plans.  We open and manage retirement plans for a flat fee, and a darn competitive one, with all of the bells and whistles, but I don't think I would want to handle plans with more than 100 people.  And so be it - the biggest value proposition is for the tiny plans which pay some of the highest fees around, so when trying to provide the same level of service to big plans, the costs would be simply too high, thus the 'robo' approach would work best for such plans, but even then you'd have to go to a huge bloated recordkeeper if you want to get any support at all (without which any plan would just become a nightmare to manage).

So what I think should happen is that a plan should be offered for a flat fee from A to Z, but the biggest issue is that there is no fiduciary to oversee and manage the process (and none seem to want to do this for a flat fee), so there is nobody who can take full ownership over making sure that the fees are the lowest possible, the design is done in the most optimal way, and that the lowest cost investments are selected, participants are placed in balanced portfolios, etc.  This industry is run by brokers/salespeople and by huge fund companies which are more interested in the sale of their funds than in lowering the cost for the plan sponsors, and this will remain the case for the foreseeable future.