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Employer Retirement Plan - WCI's Secret Sauce?

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  • Employer Retirement Plan - WCI's Secret Sauce?

    Maybe this would work better as a podcast email question or speakpipe, but...

    I've been wondering for a few months since hearing it mentioned in The White Coat Investor podcast what exactly an awesome employer retirement plan would look like, with all the bells and whistles. I've not read details anywhere (probably deliberate), and I wouldn't ask for the exact recipe, but I am curious... Is it paprika or coriander seeds? Does the asset allocation have to thaw overnight in the fridge? Does the vesting period have to be name brand or organic? What wine does it pair best with?

    I'm not trying to create a new employer retirement plan myself, and I doubt I'll be able to change any future employer's plan readily, so my interest is mainly academic (or me just being nosey). If I only got a question or two answered, I suppose I'd want to know the most effective way for employers to max out employer contributions to reach the $61k cap. Also, was there anything during the process of creating the retirement plan that was learned that surprised you?

    Also, if anyone else has experience in this realm, I'd be really interested to hear about it.

  • #2
    Well, my employer’s plan is pretty great, so I’ll lay it out the 403b portion for you. (Not including 457 or annuity plans in the discussion.)
    1. 403b with 10% match paid into a 401a account
    2. Both the 403b (employee contribution) and 401a (employer contributions) have separate $61k max contributions
    3. Both allow after tax contributions and in service rollovers to a 403b Roth (could also send to my personal Roth).
    4. The 403b conversion is automatic every pay period. The 401a conversion is manual
    5. Vanguard institutional funds expense ratios. Very good fund selection.

    Not perfect. But hard to beat.

    Comment


    • #3
      Originally posted by Special Delivery View Post
      Maybe this would work better as a podcast email question or speakpipe, but...

      I've been wondering for a few months since hearing it mentioned in The White Coat Investor podcast what exactly an awesome employer retirement plan would look like, with all the bells and whistles. I've not read details anywhere (probably deliberate), and I wouldn't ask for the exact recipe, but I am curious... Is it paprika or coriander seeds? Does the asset allocation have to thaw overnight in the fridge? Does the vesting period have to be name brand or organic? What wine does it pair best with?

      I'm not trying to create a new employer retirement plan myself, and I doubt I'll be able to change any future employer's plan readily, so my interest is mainly academic (or me just being nosey). If I only got a question or two answered, I suppose I'd want to know the most effective way for employers to max out employer contributions to reach the $61k cap. Also, was there anything during the process of creating the retirement plan that was learned that surprised you?

      Also, if anyone else has experience in this realm, I'd be really interested to hear about it.
      Good question, it is a lot more fundamental than just picking the funds. Here's my take. The first link is more basic, while the second one has a lot more details (especially if we are talking about larger group practice plans vs. solo plans with a single owner and staff):

      https://www.whitecoatinvestor.com/th...-your-practice

      https://www.whitecoatinvestor.com/ho...tirement-plan/

      The main idea is to select good service providers. Plan features are secondary, but with good service providers the main benefit is having comprehensive and high level advice and service so that your plan is working smoothly, and of course your plan features should be customized to your specific practice/employer, as there are plenty of differences out there, so a single type of layout is not going to make sense for every practice/employer. Ongoing compliance is extremely important on the administrative side. Making sure that you have only low cost funds and no AUM fees should be standard. There are also options to provide one-on-one participant advice that are available to improve participant outcome. One thing to remember is that a retirement plan is also a benefit for the rank and file staff, not just the owners, but the owners have to get a good benefit out of it as well.

      Each plan should be custom-designed to fit a specific practice. Some practices will end up with a 401k and a Cash Balance plan, others might only do profit sharing, or even just safe harbor and/or a discretionary match (depending on the cost vs. benefit analysis). It is key to make sure that your service providers are working in the best interest of the plan sponsor, otherwise things might not be optimal on both the cost and plan design front. Service provider selection is critical as often large service providers are not very good at providing advice, so selection of TPA/actuary and ERISA 3(38) fiduciary is important. A record-keeper selection is also important because they can provide many secondary features such as participant education and advice. A lot of times your 3(38) fiduciary has to wear many hats, especially if the group does not have an HR department, and their role is to provide education and advice to the partners/owners so that they can make the most of their retirement plan(s) as well as assist in selecting the best service providers and evaluating opportunities such as adding a Cash Balance plan and/or redesigning an existing 401k and/or CB plan to better fit the needs of the practice (or to lower the cost of an existing arrangement).

      There are a lot more details which are secondary in my opinion, including MBR 401k option, which in many plans can be fulfilled by using in-plan Roth conversions:
      https://www.whitecoatinvestor.com/me...sa-401k-plans/

      Overall, if your plan is in good hands, you'll get holistic comprehensive advice on all aspects of your plan, from design to investments to administration, and you will work with all involved to create the best plan possible for the practice, and you will also get ongoing advice and assistance, which is a lot more important than having all of the right bells and whistles set up, as things often can go sideways if the plan is not administered prudently or if high risk features are introduced (such as outside self-directed brokerage accounts).
      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

      Comment


      • #4
        Originally posted by Special Delivery View Post
        Maybe this would work better as a podcast email question or speakpipe, but...

        I've been wondering for a few months since hearing it mentioned in The White Coat Investor podcast what exactly an awesome employer retirement plan would look like, with all the bells and whistles. I've not read details anywhere (probably deliberate), and I wouldn't ask for the exact recipe, but I am curious... Is it paprika or coriander seeds? Does the asset allocation have to thaw overnight in the fridge? Does the vesting period have to be name brand or organic? What wine does it pair best with?

        I'm not trying to create a new employer retirement plan myself, and I doubt I'll be able to change any future employer's plan readily, so my interest is mainly academic (or me just being nosey). If I only got a question or two answered, I suppose I'd want to know the most effective way for employers to max out employer contributions to reach the $61k cap. Also, was there anything during the process of creating the retirement plan that was learned that surprised you?

        Also, if anyone else has experience in this realm, I'd be really interested to hear about it.
        It's not complicated and it's not a secret. Just think about everything you'd want in a 401(k) and try to put it in there. Here's a list of what we wanted:

        1) Very low fees (not too hard)
        2) Fees paid by the company using pre-tax dollars rather than the participants using their limited tax protected funds (easy)
        3) Great investments like index funds (easy)
        4) The ability to use "self-directed" investments should you so desire (harder)
        5) 401(k) loans (easy)
        6) Roth 401(k) contributions (easy)
        7) Mega Backdoor Roth 401(k) contributions (not too hard)
        8) In plan conversions (not too hard)
        9) The ability for everyone to put in $61K if they desire in whatever form they desire, but for everyone to be able to put in whatever they want in whatever form they want (very hard)
        10) Automatic opt-out enrollment (easy)
        11) A solid automatic investment (easy)
        12) Automatic increase in % of pay that goes into the 401(k) (fairly easy)
        Helping those who wear the white coat get a fair shake on Wall Street since 2011

        Comment


        • #5
          Originally posted by The White Coat Investor View Post

          It's not complicated and it's not a secret. Just think about everything you'd want in a 401(k) and try to put it in there. Here's a list of what we wanted:

          1) Very low fees (not too hard)
          2) Fees paid by the company using pre-tax dollars rather than the participants using their limited tax protected funds (easy)
          3) Great investments like index funds (easy)
          4) The ability to use "self-directed" investments should you so desire (harder)
          5) 401(k) loans (easy)
          6) Roth 401(k) contributions (easy)
          7) Mega Backdoor Roth 401(k) contributions (not too hard)
          8) In plan conversions (not too hard)
          9) The ability for everyone to put in $61K if they desire in whatever form they desire, but for everyone to be able to put in whatever they want in whatever form they want (very hard)
          10) Automatic opt-out enrollment (easy)
          11) A solid automatic investment (easy)
          12) Automatic increase in % of pay that goes into the 401(k) (fairly easy)
          4) The ability to use "self-directed" investments should you so desire (harder)

          -This one is actually pretty easy to do in a participant-directed plan with a decent size record-keeper via in-plan SDBAs that are ERISA restricted.

          7) Mega Backdoor Roth 401(k) contributions (not too hard)

          -This one is actually impossible to do for most plans with NHCE staff. In-plan Roth conversions would be the way to go instead, but the end result will be the same.

          9) The ability for everyone to put in $61K if they desire in whatever form they desire, but for everyone to be able to put in whatever they want in whatever form they want (very hard)

          -Thankfully for most practices that are small to midsize this can be done more often than not (the tax-deferred version of this plus Roth salary deferral). For those who can not do the 401k maximum it can sometimes be possible to add a Cash Balance plan and to increase contributions this way. For many group practice plans this is tricky but doable, at least design studies can be done to figure out whether it is possible and what the cost vs. benefit would be.
          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

          Comment


          • #6
            Originally posted by The White Coat Investor View Post
            Just think about everything you'd want in a 401(k) and try to put it in there.
            Frank's Red Hot.

            Thanks for taking a moment to share the ingredient list!

            Comment


            • #7
              Originally posted by litovskyassetmanagement View Post
              NHCE staff
              Non-Health Care Employee?

              Comment


              • #8
                Originally posted by Special Delivery View Post
                Non-Health Care Employee?
                Non-highly compensated employees. This limitation is explained here in more detail:
                https://www.whitecoatinvestor.com/me...sa-401k-plans/


                Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                Comment


                • #9
                  It would something like Kaiser's plan -- pension + autofunded amounts + 403b availble + MBDR ability + company stock plan + paid health benefits in full.

                  Comment


                  • #10
                    Originally posted by litovskyassetmanagement View Post

                    9) The ability for everyone to put in $61K if they desire in whatever form they desire, but for everyone to be able to put in whatever they want in whatever form they want (very hard)

                    -Thankfully for most practices that are small to midsize this can be done more often than not (the tax-deferred version of this plus Roth salary deferral). For those who can not do the 401k maximum it can sometimes be possible to add a Cash Balance plan and to increase contributions this way. For many group practice plans this is tricky but doable, at least design studies can be done to figure out whether it is possible and what the cost vs. benefit would be.
                    The tricky part is that the employer gets "penalized" if the plan primarily benefits the high earning employees and earners via various complicated tests that must be run on all the different types of contributions. Most people never get past there because they either never ask "What is the penalty?" or actually find the penalty onerous. The penalty is that the employer has to put a few thousand dollars more into the non-high earning employees' 401(k)s. That wasn't a problem at all for Katie and I, so it allowed us and the high earning employees to get $61K into their 401(k)s. Our employees have been educated to understand that "penalty" as a highly valuable form of their compensation. Like a bonus, it builds loyalty and helps with employee retention. Now it might be tricky for a dental practice to convince their 22 year old employee making $30K that this is a huge benefit, but it's not hard at all at this company.
                    Helping those who wear the white coat get a fair shake on Wall Street since 2011

                    Comment


                    • #11
                      Originally posted by The White Coat Investor View Post

                      The tricky part is that the employer gets "penalized" if the plan primarily benefits the high earning employees and earners via various complicated tests that must be run on all the different types of contributions. Most people never get past there because they either never ask "What is the penalty?" or actually find the penalty onerous. The penalty is that the employer has to put a few thousand dollars more into the non-high earning employees' 401(k)s. That wasn't a problem at all for Katie and I, so it allowed us and the high earning employees to get $61K into their 401(k)s. Our employees have been educated to understand that "penalty" as a highly valuable form of their compensation. Like a bonus, it builds loyalty and helps with employee retention. Now it might be tricky for a dental practice to convince their 22 year old employee making $30K that this is a huge benefit, but it's not hard at all at this company.
                      Yes, if you can get everything in after-tax in such a way as to pass all the tests (with staff contributing after-tax), that works out for the owners very well. However, in 99.9% of the cases the owners (and HCE staff) want to make a maximum tax-deferred contribution (esp. for dental or medical practices), and in that case they have to pass another set of tests, and this mostly depends on demographics, not on contribution amounts. So from this point of view, doing MBR 401k with in-plan Roth conversion of tax-deferred contribution is worse than with after-tax contributions (assuming you can pass the test to max out) because if everyone's making after-tax deferrals you don't have to make extra staff contributions, but regardless of deferrals, you have to make staff contributions with 'traditional' tax-deferred contributions for the owners. So the employer contribution cost of after-tax only plan can be lower, but the benefit is also potentially not as high for the owners if their goal is to max out on tax-deferral.
                      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                      Comment

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