Need 2nd Opinion on practice 401k, CBP, Profit Sharing

[OralMaxillofacial]

I'm a young partner in a group of 4.  We have a 10-15 year old 401k, CPB, profit sharing plan for owners and employees.

Due to older employees costing a lot, and younger partners not having cash for many years to come and older partners not maximizing the plans anyway, it has morphed into a massive cost for the practice with marginal tax benefits to owners.  Sure there is the tax savings on the way into the plan but it is almost 100% cancelled out by the costs in terms of fees and employer obligations.  We still have to pay the taxes on the way out of these plans in 30 years so I don't like it at all.

Does anyone know of a fee basis advisor that could really look at this and give us opinions or at a minimum just help us quantify the costs and benefits?  We have a fiduciary, administrator and all that, but I want an outside opinion.

[Physicians Capital Management LLC]

Send me an email, and perhaps I can help.

[cgossage]

I know Kon Litovsky performs this kind of work.  Perhaps some others will chime in with some suggestions as well.

You may also take a look at the recommended Financial Advisor's list: https://www.whitecoatinvestor.com/financial-advisors/

[jhwkr542]

Is your fiduciary and TPA separate from the record-keeper?

[OralMaxillofacial]

Will do

[OralMaxillofacial]

To answer the above, yes TPA and fiduciary are separate. The TPA has a 3rd company involved as well but they just provide documents I believe.

[litovskyassetmanagement]

OralMaxillofacial wrote:

I’m a young partner in a group of 4.  We have a 10-15 year old 401k, CPB, profit sharing plan for owners and employees.

Due to older employees costing a lot, and younger partners not having cash for many years to come and older partners not maximizing the plans anyway, it has morphed into a massive cost for the practice with marginal tax benefits to owners.  Sure there is the tax savings on the way into the plan but it is almost 100% cancelled out by the costs in terms of fees and employer obligations.  We still have to pay the taxes on the way out of these plans in 30 years so I don’t like it at all.

Does anyone know of a fee basis advisor that could really look at this and give us opinions or at a minimum just help us quantify the costs and benefits?  We have a fiduciary, administrator and all that, but I want an outside opinion.

Click to expand...

Would be happy to take a look at your plan.  We specialize in fixing up old plans, and making them work better.  The first steps is to look at optimizing plan design, and of course lowering the cost of both plans to the lowest possible amount (ideally by eliminating all asset-based fees).  We have an actuary, a TPA, as well as ERISA attorney available in case your plan requires more serious attention.  While taxes and costs are important, it is really the compliance that gets most plan sponsors in trouble, and the cost of that can be quite large.  Here's my WCI post on the topic of reducing plan cost:

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

And another post is coming in a month or two on compliance. Unfortunately it is hard to cover most of the possible compliance issues that are observed in practice, but with older plans it is almost certain that something is wrong that can be easily fixed if a top notch team examines the plan.

[OralMaxillofacial]

I guess I should clarify, I'm happy with the TPA and fiduciary.  Everyone deserves to make a living and they take their time to educate my employees.

 

I'm just questioning the benefit to me in terms of tax deferral vs the expense of my contributions to employees and the fees of managing the whole thing.

[litovskyassetmanagement]

OralMaxillofacial wrote:

I guess I should clarify, I’m happy with the TPA and fiduciary.  Everyone deserves to make a living and they take their time to educate my employees.

 

I’m just questioning the benefit to me in terms of tax deferral vs the expense of my contributions to employees and the fees of managing the whole thing.

Click to expand...

Well, if your TPA and your ERISA 3(38) are doing their jobs, THEY are the ones who should be doing design studies and answering your questions.  I'm not sure anyone else in the forum can address your specific plan needs without doing a thorough analysis.  Who knows what's going on, and who knows whether your set up is optimal for your practice.  There are tons of important details that have to be examined, and without doing that there is nothing that can be said about your specific plan. I recommend that you go back to your TPA and your ERISA 3(38) and have them do the analysis and tell you what can be improved (if anything).

As a ballpark, if you are paying any more than 0.15% in asset-based fees for everything in the plan (including investment options), you are overpaying.  Same thing goes for the 401k and Cash Balance plan, including all fees paid to all providers and investments.  That's the first thing.  Also, if your % to owner is lower than 70% with both 401k and Cash Balance plan, I would really try to examine the design and see whether it is done correctly.  Presumably your ERISA 3(38) should be able to do tax-deferred vs. after-tax analysis to see whether all of the costs of your plan are worth it or not given your tax situation - this is very basic type of analysis that is important to do periodically. If your service providers are incapable of getting this done for you, then you might want to look into changing your providers.

Just to clarify, plan level ERISA 3(38) should be in charge of answering all of your questions.  If all your adviser does is ERISA 3(21), this is not good enough for you, because as the plan sponsor you can benefit tremendously from high quality plan level advice.  Participant education, while important, can be easily done by a 3(21) under the supervision of a 3(38), but a 3(21) often has no idea about plan level issues that need to be addressed, and usually the 3(38) should work with the TPA to address any plan design issues as well.  So it sounds to me like you don't have the right type of adviser for the plan, or they are not doing their job if you do have a 3(38) as well as a 3(21).

Here's a very brief summary of what types of fiduciaries do what for retirement plans:

http://litovskymanagement.com/2014/01/hiring-fiduciary-adviser/

These roles are not set in stone, and sometimes a 3(21) also deals with plan level issues, but in most cases for smaller plans a 3(21) is just an education provider and sort of a fund picker (albeit rarely a good one). Bottom line is that your providers should work with you to make sure that you get all of the answers, as well as make sure that you get the lowest cost investments, the best plan design and good participant education component, and usually the 3(38) picks investments and builds model portfolios as well as deals with plan level issues, while a 3(21) is strictly limited to participant education.  This way you can have someone who actually knows what's going at all times, rather than the plan sponsor having to go online to try to find answers that should come directly from your plan service providers.

[OralMaxillofacial]

Kon Litovsky wrote:

OralMaxillofacial wrote:

I guess I should clarify, I’m happy with the TPA and fiduciary.  Everyone deserves to make a living and they take their time to educate my employees.

 

I’m just questioning the benefit to me in terms of tax deferral vs the expense of my contributions to employees and the fees of managing the whole thing.

Click to expand…

Well, if your TPA and your ERISA 3(38) are doing their jobs, THEY are the ones who should be doing design studies and answering your questions.  I’m not sure anyone else in the forum can address your specific plan needs without doing a thorough analysis.  Who knows what’s going on, and who knows whether your set up is optimal for your practice.  There are tons of important details that have to be examined, and without doing that there is nothing that can be said about your specific plan. I recommend that you go back to your TPA and your ERISA 3(38) and have them do the analysis and tell you what can be improved (if anything).

As a ballpark, if you are paying any more than 0.15% in asset-based fees for everything in the plan (including investment options), you are overpaying.  Same thing goes for the 401k and Cash Balance plan, including all fees paid to all providers and investments.  That’s the first thing.  Also, if your % to owner is lower than 70% with both 401k and Cash Balance plan, I would really try to examine the design and see whether it is done correctly.  Presumably your ERISA 3(38) should be able to do tax-deferred vs. after-tax analysis to see whether all of the costs of your plan are worth it or not given your tax situation – this is very basic type of analysis that is important to do periodically. If your service providers are incapable of getting this done for you, then you might want to look into changing your providers.

Just to clarify, plan level ERISA 3(38) should be in charge of answering all of your questions.  If all your adviser does is ERISA 3(21), this is not good enough for you, because as the plan sponsor you can benefit tremendously from high quality plan level advice.  Participant education, while important, can be easily done by a 3(21) under the supervision of a 3(38), but a 3(21) often has no idea about plan level issues that need to be addressed, and usually the 3(38) should work with the TPA to address any plan design issues as well.  So it sounds to me like you don’t have the right type of adviser for the plan, or they are not doing their job if you do have a 3(38) as well as a 3(21).

Here’s a very brief summary of what types of fiduciaries do what for retirement plans:

http://litovskymanagement.com/2014/01/hiring-fiduciary-adviser/

These roles are not set in stone, and sometimes a 3(21) also deals with plan level issues, but in most cases for smaller plans a 3(21) is just an education provider and sort of a fund picker (albeit rarely a good one). Bottom line is that your providers should work with you to make sure that you get all of the answers, as well as make sure that you get the lowest cost investments, the best plan design and good participant education component, and usually the 3(38) picks investments and builds model portfolios as well as deals with plan level issues, while a 3(21) is strictly limited to participant education.  This way you can have someone who actually knows what’s going at all times, rather than the plan sponsor having to go online to try to find answers that should come directly from your plan service providers.

Click to expand...

Thanks.

 

So that 70% number is what peaked my interest.  I think I read that number somewhere on this site and thats what began me delving into this a few months ago.

If you add up employer/owner contributions to employees + owner contributions to themselves + fees, the owner contributions are way under 70%.

It feels like our business is just profitable enough to make it reasonable but not enough to make it a slam dunk decision to keep the program going.

Now, at the end of the day, this is a tremendous benefit to the employees.  The benefit to me/owners is questionable though.

[White.Beard.Doc]

Our plan gives generous contributions to our employees, meaning the owners get less than they theoretically could.

However, one of the reasons we have top employees with very low turnover is that we take very good care of everyone.

The quality of our team is what supports the quality of our work life and the quality of the care that we provide.  I feel the generous 401k profit sharing plan is a wise investment and one of many things that sets our practice apart.

My work life is immersed in the quality of our team and this makes me "wealthy" in ways more important than a larger investment account.  In fact, it is likely that this overall philosophy of taking care of every employee is integral to the incredible success of our practice.

Sorry to sound preachy but I do work hard to live this philosophy every day....

[litovskyassetmanagement]

OralMaxillofacial wrote:

Kon Litovsky wrote:

OralMaxillofacial wrote:

I guess I should clarify, I’m happy with the TPA and fiduciary.  Everyone deserves to make a living and they take their time to educate my employees.

 

I’m just questioning the benefit to me in terms of tax deferral vs the expense of my contributions to employees and the fees of managing the whole thing.

Click to expand…

Well, if your TPA and your ERISA 3(38) are doing their jobs, THEY are the ones who should be doing design studies and answering your questions.  I’m not sure anyone else in the forum can address your specific plan needs without doing a thorough analysis.  Who knows what’s going on, and who knows whether your set up is optimal for your practice.  There are tons of important details that have to be examined, and without doing that there is nothing that can be said about your specific plan. I recommend that you go back to your TPA and your ERISA 3(38) and have them do the analysis and tell you what can be improved (if anything).

As a ballpark, if you are paying any more than 0.15% in asset-based fees for everything in the plan (including investment options), you are overpaying.  Same thing goes for the 401k and Cash Balance plan, including all fees paid to all providers and investments.  That’s the first thing.  Also, if your % to owner is lower than 70% with both 401k and Cash Balance plan, I would really try to examine the design and see whether it is done correctly.  Presumably your ERISA 3(38) should be able to do tax-deferred vs. after-tax analysis to see whether all of the costs of your plan are worth it or not given your tax situation – this is very basic type of analysis that is important to do periodically. If your service providers are incapable of getting this done for you, then you might want to look into changing your providers.

Just to clarify, plan level ERISA 3(38) should be in charge of answering all of your questions.  If all your adviser does is ERISA 3(21), this is not good enough for you, because as the plan sponsor you can benefit tremendously from high quality plan level advice.  Participant education, while important, can be easily done by a 3(21) under the supervision of a 3(38), but a 3(21) often has no idea about plan level issues that need to be addressed, and usually the 3(38) should work with the TPA to address any plan design issues as well.  So it sounds to me like you don’t have the right type of adviser for the plan, or they are not doing their job if you do have a 3(38) as well as a 3(21).

Here’s a very brief summary of what types of fiduciaries do what for retirement plans:

http://litovskymanagement.com/2014/01/hiring-fiduciary-adviser/

These roles are not set in stone, and sometimes a 3(21) also deals with plan level issues, but in most cases for smaller plans a 3(21) is just an education provider and sort of a fund picker (albeit rarely a good one). Bottom line is that your providers should work with you to make sure that you get all of the answers, as well as make sure that you get the lowest cost investments, the best plan design and good participant education component, and usually the 3(38) picks investments and builds model portfolios as well as deals with plan level issues, while a 3(21) is strictly limited to participant education.  This way you can have someone who actually knows what’s going at all times, rather than the plan sponsor having to go online to try to find answers that should come directly from your plan service providers.

Click to expand…

Thanks.

 

So that 70% number is what peaked my interest.  I think I read that number somewhere on this site and thats what began me delving into this a few months ago.

If you add up employer/owner contributions to employees + owner contributions to themselves + fees, the owner contributions are way under 70%.

It feels like our business is just profitable enough to make it reasonable but not enough to make it a slam dunk decision to keep the program going.

Now, at the end of the day, this is a tremendous benefit to the employees.  The benefit to me/owners is questionable though.

Click to expand...

Ok, there is another consideration.  Setting your salaries properly can make a huge difference in terms of managing employer contribution.  So if this is the case, that's something that has to be examined in detail.  It may be a really bad design, incorrectly set salaries, bad demographics, etc.  I think the design should be reviewed, and so should the fees. I recommend doing a comprehensive analysis of everything in the plan so that you can solve all of your issues in one shot. Often providers get complacent and there is nobody looking out for your bottom line. So someone has to sit down with your TPA and discuss your options and try different designs to see how your situation can be addressed.  When the plan sponsor is getting the short end of the stick, this is the worst case scenario in my book. At that point many just close their plans because they are not getting good advice, and to them cutting their losses might be the only known solution.

[litovskyassetmanagement]

White.Beard.Doc wrote:

Our plan gives generous contributions to our employees, meaning the owners get less than they theoretically could.

However, one of the reasons we have top employees with very low turnover is that we take very good care of everyone.

The quality of our team is what supports the quality of our work life and the quality of the care that we provide.  I feel the generous 401k profit sharing plan is a wise investment and one of many things that sets our practice apart.

My work life is immersed in the quality of our team and this makes me “wealthy” in ways more important than a larger investment account.  In fact, it is likely that this overall philosophy of taking care of every employee is integral to the incredible success of our practice.

Sorry to sound preachy but I do work hard to live this philosophy every day….

Click to expand...

Sometimes the plan is simply badly designed so the partners are not getting the benefits they deserve.  If the partners are getting the highest benefit possible, of course it is worth paying the staff generously as well.  But when the partners are not getting that much, and the cost of the plan is going through the roof, there is a problem there.  I'm yet to see a group practice where you can't do both: get the best/cost effective design and also give a significant share to the staff without breaking the bank.

I also rarely see partners saying, "the staff is getting 7.5%, let's actually give them 10% instead". Usually the partners are happy to give to the staff whatever the TPA calculates that is the optimal amount that allows the partners to maximize their contributions.  Sometimes the TPA is not doing these calculations right or practice demographics is just terrible for some reason, and in that case the partners bear the burden of a very high costing plan, so something has to give.  Either a plan can be redesigned cost-effectively or it has to be scaled down (so eliminate Cash Balance and/or profit sharing for example), because the extra features might be way too costly for the partners.

It is easy to say that the practice is generous when all you have to give to NHCEs is 7.5%.  What if the amount is 20%?  In this case any practice will think twice about doing this type of plan especially if there are many NHCEs.

[OralMaxillofacial]

Absolutely.  But when staff is paid well, and gets 100% of insurance paid for, and gets retirement plans funded by owners (and very few of them put their own cash in), and has a cushy work environment, and the owners personal situation doesn't allow for cash to be diverted the math starts to not work out.  Stability in your workforce is worth it for sure.  It's nice to share the wealth as well.

 

Young doctors and dentists have $300k in loans (my speciality of oral surgery given the DDS and MD tuition can easily hit $600k+), add a practice loan, a reasonable home and if they want to pay off debt at a reasonable pace, there is no cash or not much cash to put towards these plans.

 

As an owner, it's my responsibility to make sure these expenses and all expenses push us toward stability not instability/liability.  These CBP/pension plans have the worst liability timing out there in my opinion. I'm potentially responsible for putting in big money when the stocks go down and my business contracts as well and I lay off employees and they are asking for distributions/transfers to their new jobs, IRAs, 401ks, etc.

[OralMaxillofacial]

Kon Litovsky wrote:

White.Beard.Doc wrote:

Our plan gives generous contributions to our employees, meaning the owners get less than they theoretically could.

However, one of the reasons we have top employees with very low turnover is that we take very good care of everyone.

The quality of our team is what supports the quality of our work life and the quality of the care that we provide.  I feel the generous 401k profit sharing plan is a wise investment and one of many things that sets our practice apart.

My work life is immersed in the quality of our team and this makes me “wealthy” in ways more important than a larger investment account.  In fact, it is likely that this overall philosophy of taking care of every employee is integral to the incredible success of our practice.

Sorry to sound preachy but I do work hard to live this philosophy every day….

Click to expand…

Sometimes the plan is simply badly designed so the partners are not getting the benefits they deserve.  If the partners are getting the highest benefit possible, of course it is worth paying the staff generously as well.  But when the partners are not getting that much, and the cost of the plan is going through the roof, there is a problem there.  I’m yet to see a group practice where you can’t do both: get the best/cost effective design and also give a significant share to the staff without breaking the bank.

I also rarely see partners saying, “the staff is getting 7.5%, let’s actually give them 10% instead”. Usually the partners are happy to give to the staff whatever the TPA calculates that is the optimal amount that allows the partners to maximize their contributions.  Sometimes the TPA is not doing these calculations right or practice demographics is just terrible for some reason, and in that case the partners bear the burden of a very high costing plan, so something has to give.  Either a plan can be redesigned cost-effectively or it has to be scaled down (so eliminate Cash Balance and/or profit sharing for example), because the extra features might be way too costly for the partners.

It is easy to say that the practice is generous when all you have to give to NHCEs is 7.5%.  What if the amount is 20%?  In this case any practice will think twice about doing this type of plan especially if there are many NHCEs.

Click to expand...

I agree with your 7.5% vs 10%.  Despite my concerns regarding the value for us, we just threw another $25k at the employee plans because the year was good for us.  This is in addition to a great year for the markets and their (the employee's) underlying assets have done very well.  We are giving, but it has to make sense and be stable long term.