Do I need a new retirement plan for my practice?

[MichaelB]

I am 44 and own my practice with a partner. We have two mid level providers and 15 other employees. We currently have a profit sharing (Keough) plan which we have had for 13 years. We both put in the max each year - $53k this year, and we of course contribute 15% to all employees.

We are looking into other options, including a 401k. We would still like to be able to put away as much as possible obviously. If we did that, we would bump up the pay for employees since we wouldn't be contributing as much to their retirement.

I would love some advice and guidance on this. Also, if there at some good online resources or books where I could learn more. Thanks.

[jfoxcpacfp]

Keogh's are kind of outdated - still in use, but not much. I think you should seriously consider a 401k possibly with a Defined Benefit component, depending upon the age of your employees and length of service. A pooled 401k plan may be an excellent choice for you and Kon Litovsky has a good article online at Dentaltown describing it.

It would help to know your long-term goals, account balance, how much you can contribute annually, etc. before recommending anything beyond generalities. Have you talked this over with your CPA or plan provider?

[MichaelB]

jfoxcpacfp wrote:

Keogh’s are kind of outdated – still in use, but not much. I think you should seriously consider a 401k possibly with a Defined Benefit component, depending upon the age of your employees and length of service. A pooled 401k plan may be an excellent choice for you and Kon Litovsky has a good article online at Dentaltown describing it.

It would help to know your long-term goals, account balance, how much you can contribute annually, etc. before recommending anything beyond generalities. Have you talked this over with your CPA or plan provider?

Click to expand...

My current balance is around $900k. I would like to be able to contribute the maximum annually, $53k, and also do backdoor Roths for me and my wife. My goal is also to save another 60-80k for retirement each year, which will go into a taxable account we have with Vanguard. The Keogh is with Schwab.

Our CPA discussed a cash balance plan, but we don't think we want to go that direction. I don't like the fees, and honestly I felt like we were being sold this by our CPA. I read the link on the pooled 401k, and I like the idea, but I really want to manage my own investments.

Is it possible to have 2 or 3 different plans? We have a parent S Corp and then my partner and I each have our own S Corp. Thanks for for your help.

[Docbeans]

I am going through the process as we speak! There are some excellent posts on here re: small business retirement plans- both by WCI and Kon Litovsky. That will give you a very good overview of things. Then, it is a good idea to consult a professional to design a plan that is suitable for your situation- based on your practice demographics, etc. The custodians like Vanguard, Fidelity etc have cookie-cutter plans and they do not possess the ability/willingness to custom-design a plan that would be just right for you- enabling you to contribute the max as well as keep expenses relatively low. It is rather complex, that does not mean no one can do it themselves. Disclosure: Kon is helping us set up a 401k/PS for our small group practice.

[litovskyassetmanagement]

MichaelB wrote:

I am 44 and own my practice with a partner. We have two mid level providers and 15 other employees. We currently have a profit sharing (Keough) plan which we have had for 13 years. We both put in the max each year – $53k this year, and we of course contribute 15% to all employees.

We are looking into other options, including a 401k. We would still like to be able to put away as much as possible obviously. If we did that, we would bump up the pay for employees since we wouldn’t be contributing as much to their retirement.

I would love some advice and guidance on this. Also, if there at some good online resources or books where I could learn more. Thanks.

Click to expand...

Docbeans is right on the money!  A Keogh is most likely too expensive for you in terms of employer contributions (and there aren't too many custodians aside from Fidelity) that are still offering this option.  The best option for a practice like yours would be to do a custom-designed 401k plan and potentially add a Cash Balance plan.  All of these are very complex plans in the sense that they require a high quality TPA to design and maintain them, and a Cash Balance plan would require a specific approach to managing investments.  In any case, what you want is someone in a fiduciary capacity to review your situation and recommend a course of action.  If you simply go to a TPA or a recordkeeeper, they would be glad to sell you a plan, but none of them would try to make sure that

1) A specific plan (or plans) is/are the best option for you

2) The plan is custom designed for your needs, and as your needs change plan design gets updated

3) You know how to make the best use of your plans (for example, how long to have the CB plan open, how much to contribute, how to manage investments in both 401k and CB plans together, etc).

It is amazing how much lower the cost of a custom-designed 401k can be in terms of employer contributions vs. badly designed 401k plans.  And a Cash Balance plan does not work for all practices, but works great for some.  Given your age, this is definitely something that might be a good idea to evaluate.

Another thing to consider is how to evaluate which solution would work best for you.  The first step would be to get a  practice census and to run a number of design illustrations to see which plan design would work best for you as far as the 401k plan.  The next step would be to consider a 'paired' 401k plus Cash Balance plan and what the employer contribution would be for this plan.

You can have a plan with low cost investments and NO asset-based fees whatsoever.  In my experience, a poorly designed (and poorly maintained) plan is going to cost you a lot of money in employer contributions and missed opportunities because small practice plans have a lot of issues that have to be considered.  This is a link to two WCI posts I've made on the topic of small practice plans that should provide you some background on this important topic:

http://litovskymanagement.com/2015/07/small-practice-retirement-plans/

 

[MichaelB]

Thanks to all for the advice. Our CPA did discuss a cash balance plan with us, and I have looked into the pooled 401k. To be honest, I felt like our CPA was trying to sell us on the CB plan, and that really turned me off of it. As far as the pooled 401k, I really would like to manage my own investments, so I don't think that will be a great option. Our Keogh is with Schwab, but we are open to moving the plan.

It looks like we need to do some more research and find an advisor to give us some direction. Thanks again.

[litovskyassetmanagement]

MichaelB wrote:

Thanks to all for the advice. Our CPA did discuss a cash balance plan with us, and I have looked into the pooled 401k. To be honest, I felt like our CPA was trying to sell us on the CB plan, and that really turned me off of it. As far as the pooled 401k, I really would like to manage my own investments, so I don’t think that will be a great option. Our Keogh is with Schwab, but we are open to moving the plan.

It looks like we need to do some more research and find an advisor to give us some direction. Thanks again.

Click to expand...

It does not matter whether your 401k is pooled or participant-directed - it is the plan design that matters.  A cross-tested plan for example can significantly decrease your employer contribution vs. a Keogh or a badly designed plan. Yes, that's the problem, isn't it - you just never know whom to trust.  We typically do NOT recommend CB plans even if you are a good candidate, until you get comfortable with your 401k with profit sharing.  Last thing we want is for you to find out that the plan is not a good fit for the practice, so it is better to do the analysis upfront, and until I'm convinced, I wouldn't recommend it.  If you've already had a plan in place, then it might be appropriate, but only if this plan fits you like a glove (and only after you are very familiar with the rules and how the plan works, both good and bad).

The adviser better give you more than direction.  They have to act as an ERISA 3(38) fiduciary and provide ongoing advice to your plan(s).  They have to recognize when you might need an updated plan design, and provide you ongoing advice with respect to your plan investments and model portfolios.  You might know something about investing, but your employees certainly do not.  There are also many features that you might want to utilize (such as in-plan Roth conversions, incoming rollovers, etc), so there are plenty of moving parts that have to be addressed.  These are not DIY plans for a practice with employees, and especially with a CB plan, you can't let the TPA give you advice as they are not fiduciaries, and you have to coordinate the investment strategy in both plans (and CB plans ARE pooled plans where you don't have the choice of investments, and if you have employees, you absolutely do not want to handle the money yourself in any case).  While it is important to have a low cost open architecture recordkeeper, set up investment menu for the plan using Vanguard index funds, and design model portfolios and QDIA portfolio for the employees, this is only part of what a good adviser should be able to do for you.

I get emails from time to time from doctors whose plans are messed up in one way or another, and the costs can be quite high to fix broken plans (especially CB plans), and plans do get messed up quite often if you don't have the benefit of good quality advice (and don't work with a TPA/adviser team who know what they are doing) especially if you do not know what is going on and what to watch out for.