Principal 403b plan

[PolypMD]

My wife's employer (dental practice) currently does not have a retirement option set up and after some convincing it sounds like they may be in the process of setting up a 403b plan with Principal.  I looked thru their funds today and it seems like expense ratios are pretty high compared to what I'm used to (vanguard/schwab funds).  Someone show me the light or should we ask them to consider alternative options.  Thanks!

[Faithful Steward]

Is it a mutual fund 403(b) or is it a an annuity-based plan? If it's annuity-based, there are even more expenses than the sub-account expense ratios.

[PolypMD]

Faithful Steward wrote:

Is it a mutual fund 403(b) or is it a an annuity-based plan? If it’s annuity-based, there are even more expenses than the sub-account expense ratios.

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My wife was told that it is a 403(b) plan, but will make sure tomorrow.

[Steven Podnos MD CFP]

I've seen many of these Principal 403b plans and they are awful.  They put all the expenses on the fund side and tell the employer that the cost to them will be minimal.  As fund assets increase, the amount paid to the mutual funds and to Principal becomes outrageous.   Your wife should ask her employer to consider either an unbundled plan with a TPA and advisor or use one of the lower cost custodians like Fidelity.

[litovskyassetmanagement]

PolypMD wrote:

My wife’s employer (dental practice) currently does not have a retirement option set up and after some convincing it sounds like they may be in the process of setting up a 403b plan with Principal.  I looked thru their funds today and it seems like expense ratios are pretty high compared to what I’m used to (vanguard/schwab funds).  Someone show me the light or should we ask them to consider alternative options.  Thanks!

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A 403b plan is a plan for a tax-exempt/non-profit entity, and you can not set one up with a dental practice unless this practice happens to be a non-profit.  When it comes to retirement plans for doctors and dentists there are many variables to consider, so I would suggest taking a look at these articles that will provide you with more details:

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

http://www.dentaltown.com/blog/post/3376/small-practice-retirement-plans-how-they-are-different

http://whitecoatinvestor.com/how-to-reduce-your-practice-retirement-plan-cost/

In a nutshell, I would recommend the following:

1) Find an ERISA 3(38) fiduciary who can help you figure out what you need as far as retirement plan options and cost, and who can put together a low cost retirement plan for the practice, as well as to provide ongoing fiduciary advice and assist you in selecting the best plan service providers such as a TPA who has experience working with 401k profit sharing plans and an open architecture record-keeper that will allow you access to low cost index funds (with an average expense ratio of 0.15% or so).

2) Have the ERISA 3(38) fiduciary put together a proposal comparing various options, including the current one on the table.  When evaluating various proposals you will want to have the tools at your disposal that allow you to compare different types of fees side by side:

retirementplanhub.com/retirement-plan-cost-calculator/

3) Make sure you understand what types of services your plan needs and what types of providers you need to hire.  While bundled (or all in one) providers might seem convenient, they are rarely going to be cost-effective.  What you want is an open architecture platform with the best possible providers all of whom charge only fixed/flat fees, so that the only asset-based fee you are paying is the low expense ratio for index funds such as Vanguard.  This way you can save significant amount of money going forward vs. any other platforms that have all of the services integrated (and get better quality service from independent providers all of whom are working for you, not for the company that employs them).

4) Be aware that retirement plan providers are in the business of selling plans, not providing fiduciary advice to you.  When working with retirement plan providers, always make sure that your adviser is an ERISA 3(38) fiduciary who has experience working with complex retirement plans (such as 401k with profit sharing and Cash Balance plans) specifically set up for medical and dental practices.  There are lots of advisers who might be able to offer helpful advice, but because retirement plans are ERISA plans, you as the plan sponsor retain full fiduciary responsibility and liability, so only working with an ERISA 3(38) fiduciary who understands the complexities of retirement plan advice will allow you to get the highest fiduciary protection as well as value for the advice provided.

[litovskyassetmanagement]

If somehow it turns out that the practice can open a 403b, I would still recommend against it. Why would a 401k plan not work vs. a 403b?  That's another analysis that has to be performed because it is not clear to me how a 403b has any advantages over a 401k with profit sharing.  There are definitely fewer providers available for 403b plans, and that's another reason why I would not recommend a 403b because the costs of opening one for a smaller practice can be significant vs. a 401k.

[PolypMD]

Thanks for all the great info!  My wife works for a non-profit that sees kids in a couple counties that would otherwise not have access to dental care.  She doesn't own or manage the practice, so we are at the mercy of the office manager.  I have looked the non-profit up on guidestar and it looks like they have had a balanced/slightly negative budget based on their tax filings over the last couple years.  Not really sure that there would be much to profit share.  I want to inquire how they decided on Principal and what funds we will be offered, but not sure how else to approach this.  I feel that asking to get a fiduciary involved will continue to delay the process of getting a retirement option set up.

[litovskyassetmanagement]

PolypMD wrote:

Thanks for all the great info!  My wife works for a non-profit that sees kids in a couple counties that would otherwise not have access to dental care.  She doesn’t own or manage the practice, so we are at the mercy of the office manager.  I have looked the non-profit up on guidestar and it looks like they have had a balanced/slightly negative budget based on their tax filings over the last couple years.  Not really sure that there would be much to profit share.  I want to inquire how they decided on Principal and what funds we will be offered, but not sure how else to approach this.  I feel that asking to get a fiduciary involved will continue to delay the process of getting a retirement option set up.

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First, Principal is one of the worst, their expense ratios are very high.  But as I said above, if they insist on a 403b plan (vs. 401k), then the choices are  few.  However, they could have gotten a much better plan than Principal would offer.  This all comes down to doing the legwork.  So two questions:

1) Why did they pick a 403b vs. a 401k? There are certain advantages and disadvantages to each plan, and they have to have a very clear reason to pick one over another.  Here's a comparison between the two:

https://www.rbcwm-usa.com/resources/file-687824.pdf

One reason to have a 403b plan might be to avoid dealing with ERISA (which is a huge reason by the way, and that is because you are automatically exempt from certain requirements under ERISA, and this should bring the cost of the plan down significantly):

http://www.consultrms.com/Resources/36/403(b)/91/What-Does-it-Take-to-be-a-Non-ERISA-403(b)-Plan

So in that case they don't need a fiduciary at all.  They can just drop this plan off at any provider they wish, even if it has the worst funds and the highest costs, but again, they do not have to do that.

2) Why did they pick Principal?  What are the alternatives?  Why did they not pick low cost open-architecture providers vs. a bundled one with high fees? I've seen really nice 403b plans with low cost funds. Vanguard does 403b plans as well:

https://personal.vanguard.com/us/whatweoffer/smallbusiness/403b7

They have all of the investor shares funds in their lineup, I bet that's a lot better than what Principal would offer. So I would have them call Vanguard and compare the fees side by side with Principal.