Vesting

[VagabondMD]

No, not the garment in those antiquated three piece suits, and, not the garment worn by WCI when he is spring skiing.

Our practice has a 401k with a profit sharing plan which allows us to put away the maximum, amount tax-deferred, into a qualified retirement plan, currently $53,000. All physicians participate, all receive a "gross up" of $18,000 to max out the 401k portion, and all receive the profit sharing contribution from the practice ($35,000). Our plan is written with the provision of a four year vesting of the profit sharing component, in that after each year of service, 25% of the account is vested such that by the end of year four, 100% of the profit sharing plan is vested (and all future contributions, as well).

The practical aspect of this is that if someone works in our group for 18 months and leaves, only 25% of the PS contribution goes with the individual and the rest reverts to the practice. This scenario has only played out twice in the last 20 years.

I am not sure if this was placed in the plan as a retention tool (a clumsy one, at that) or because of retirement plan regulations, but it has increasingly become a sticking point for those whom we are recruiting to join our practice. We have generally countered by offering more salary or other benefits, but I am wondering if we should drop it entirely. Does anyone else have any experience with this issue?

[childay]

Do you have employees?  I expect the vesting may save you some $$ if so..

[VagabondMD]

All of our plan members are physicians: partners, associates on a partnership track (1-2 years), or employed physicians.

[The White Coat Investor]

If they balk, do you really want them anyway? I know our group is ONLY looking for long-term docs. You don't even get your buyout from the partnership until a 2 year partnership track plus 5 years of vesting as a partner. But the vesting for the 401(k)/PSP is immediate, since we're "self-matching" there.

[VagabondMD]

Our group is only looking for long term docs, too, but the people coming on want to protect themselves. I cannot blame them for it.

[Zaphod]

It seems totally reasonable, and is a good retention tool. Where else are they going to go where they get a 200% match instantly? They could leave and get a nice padded 401k instantly for basically free, its a risk to and benefit from your practice, good luck finding much different in the real world. Sometimes applicants have to think of it from a different side, youre putting 35k down on good faith, its up to them to come through on that, you arent obligated to this, its a benefit.

I would keep it. Promotes long term thinking and protects you from some capital outflow for which you may get zero return on.

[litovskyassetmanagement]

Vagabond MD wrote:

No, not the garment in those antiquated three piece suits, and, not the garment worn by WCI when he is spring skiing.

Our practice has a 401k with a profit sharing plan which allows us to put away the maximum, amount tax-deferred, into a qualified retirement plan, currently $53,000. All physicians participate, all receive a “gross up” of $18,000 to max out the 401k portion, and all receive the profit sharing contribution from the practice ($35,000). Our plan is written with the provision of a four year vesting of the profit sharing component, in that after each year of service, 25% of the account is vested such that by the end of year four, 100% of the profit sharing plan is vested (and all future contributions, as well).

The practical aspect of this is that if someone works in our group for 18 months and leaves, only 25% of the PS contribution goes with the individual and the rest reverts to the practice. This scenario has only played out twice in the last 20 years.

I am not sure if this was placed in the plan as a retention tool (a clumsy one, at that) or because of retirement plan regulations, but it has increasingly become a sticking point for those whom we are recruiting to join our practice. We have generally countered by offering more salary or other benefits, but I am wondering if we should drop it entirely. Does anyone else have any experience with this issue?

Click to expand...

Actually, all of the plans we set up have a 6 year vesting schedule, with 20% vested after 2 years and 100% after 6 years.  We do this to avoid asset leakage.  We don't want those who come and go to take the profit sharing, which is a reward for those who would stay on for at least several years.  We also have a 1 year waiting period for all new participants for that same reason - to limit plan turnover.

Whether this is an incentive for anyone is a good question but in my experience, the following is mostly true:

1) Unsophisticated and lower paid employees usually don't care that much.  They just don't understand enough about this, and even after we spend time with them, not all of them 'get it'. The older they get, the more savvy they get though, so older practice employees who've already had a retirement plan profit sharing will appreciate this benefit more in some cases.

2) More sophisticated/higher paid employees (PTs, hygienists, associates, etc) almost always get it. For some the ability to contribute a salary deferral to a retirement plan is very important, so many PTs and associates would ask whether the practice has a retirement plan in the first place.  Some practices might even exclude some types of employees from profit sharing and/or the plan.  Vesting schedule is not going to deter them much because they are not looking to move on quickly.

I don't see how vesting schedule would be a sticking point for any of your potential employees though because in addition to profit sharing they have a salary deferral and also either a 3% safe harbor contribution or a 4% safe harbor match.  Most corporate plans don't even offer that. So maybe these are not the types of employees that you are looking for in the first place ;-)