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small group retirement plan options 401k vs SEP IRA

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  • small group retirement plan options 401k vs SEP IRA

    I am the newest partner in a small medical practice and have recently become fully vested in our retirement plan. Being the youngest and not fully vested, I had been hesitant to "speak up" until recently. Our current 401 K profit sharing plan has grown in both size and complexity over the past several years; however, the returns have been less than impressive with a great deal of redundancy between the funds. I began to ask some questions about our current plan and was immediately encouraged to begin working on cleaning it up. Changing the allocation and funds we hold is the easy part. What I am struggling with is the vehicle we us to move forward. With the new fiduciary rules set to launch in the next couple of years, it sounds like the complexity and cost of a 401K profit sharing plan will increase significantly. We currently pay a 3rd party administrator around $4,000/year and from what I can gather, those fees are expected to significantly increase over the next few years. My questions are this:

    1. Is a 401K profit share plan the best option for a small medical practice (4 docs and 5 support staff) or is an option like a SEP IRA better and why? From what I can gather a SEP is cleaner and simpler, but it does create problems with backdoor Roth conversions and instead of being gradually vested, you are fully vested from day #1.

    2. Are you required to have a stock broker/advisor for a 401K profit sharing plan/SEP IRA or can Vanguard handle that directly since we will be switching to a passive investment plan going forward and won't need "advice".

    3. What type of plan do you use with your medical practice/small business? What do you like/dislike and why?

    Thanks,
    JH

  • #2


    1. Is a 401K profit share plan the best option for a small medical practice (4 docs and 5 support staff) or is an option like a SEP IRA better and why? From what I can gather a SEP is cleaner and simpler, but it does create problems with backdoor Roth conversions and instead of being gradually vested, you are fully vested from day #1. 2. Are you required to have a stock broker/advisor for a 401K profit sharing plan/SEP IRA or can Vanguard handle that directly since we will be switching to a passive investment plan going forward and won’t need “advice”. 3. What type of plan do you use with your medical practice/small business? What do you like/dislike and why?
    Click to expand...



    1. You have to make 100% of contributions with a SEP plan. That might be fine for the partners, but you'll have to contribute the same % for all other employees.

    2. Check with Vanguard on the 401k. They probably hand it off to another advisor as TDAmeritrade does. You don't need a separate advisor for the SEP, no reports need to be filed.

    3. We use a SIMPLE IRA for our office, which would not allow high enough contributions for your group. We do not use a SEP because of the answer to question #1.

    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3




      I am the newest partner in a small medical practice and have recently become fully vested in our retirement plan. Being the youngest and not fully vested, I had been hesitant to “speak up” until recently. Our current 401 K profit sharing plan has grown in both size and complexity over the past several years; however, the returns have been less than impressive with a great deal of redundancy between the funds. I began to ask some questions about our current plan and was immediately encouraged to begin working on cleaning it up. Changing the allocation and funds we hold is the easy part. What I am struggling with is the vehicle we us to move forward. With the new fiduciary rules set to launch in the next couple of years, it sounds like the complexity and cost of a 401K profit sharing plan will increase significantly. We currently pay a 3rd party administrator around $4,000/year and from what I can gather, those fees are expected to significantly increase over the next few years. My questions are this:

      1. Is a 401K profit share plan the best option for a small medical practice (4 docs and 5 support staff) or is an option like a SEP IRA better and why? From what I can gather a SEP is cleaner and simpler, but it does create problems with backdoor Roth conversions and instead of being gradually vested, you are fully vested from day #1.

      2. Are you required to have a stock broker/advisor for a 401K profit sharing plan/SEP IRA or can Vanguard handle that directly since we will be switching to a passive investment plan going forward and won’t need “advice”.

      3. What type of plan do you use with your medical practice/small business? What do you like/dislike and why?

      Thanks,
      JH
      Click to expand...


      Here are some of the issues to address:

      1) TPA fees should NOT increase unless they also get revenue sharing from some of your funds.  I think that you are on the right track as far as becoming aware of what you have is not optimal, but you haven't provided enough detail.  However, I can guess that your plan is not managed by a fiduciary adviser and it most likely has high asset-based fees and low quality investment options:

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

      2) In order to find out whether 401k with profit sharing is the best solution you will need to have a design study done for your practice.  Before the practice commits to a plan, we always do this if only to make sure that we know for sure that this plan would be the best solution for the practice.  I'd rather say no than have the practice terminate this plan because it does not fit, and if a SIMPLE is a better choice, the numbers will show that.

      There is a lot of stuff that has to be done for a small practice plan that is NOT done because plan providers are not fiduciaries and their job is only to sell you a plan, not to make sure you have the best plan money can buy:

      http://www.dentaltown.com/Dentaltown/Blogs.aspx?action=VIEWPOST&b=143&bp=3376

      3) You probably mean SIMPLE IRA, not SEP.  The cost of a SEP would be huge vs. 401k, but that's part of the analysis that a fiduciary adviser will do for you.  A SIMPLE IRA might be a good idea in some cases, but not others:

      http://www.dentaltown.com//Dentaltown/Article.aspx?i=403&aid=5625

      4) Vanguard outsources the TPA duties to another provider, and Vanguard is NOT a fiduciary, so they end up using Investor share classes vs. Admiral for their plans.  And the TPA they use (which is basically a record-keeper that does some plan design) is not really going to do a good job for you (which requires a lot of work for a small practice, including creating a custom-designed plan to minimize employer contribution and maximize your own among other things) because they are a huge outfit where you'll simply get lost (and they are not the cheapest either). Link #2 above explains exactly what has to happen for a small practice plan.  The TPA is a person who has experience in working with small practice plans, and a record-keeper is just a portal provider that keeps track of your contributions and investments, so you need a great TPA, and the record-keeper selection is secondary (though it is always nice to have a good one).

      Bottom line is that even though you don't need an adviser to provide advice to you personally, without a fiduciary to oversee your plan, things can get messed up. You also want a good TPA who will work with the adviser to optimize your plan based on your business needs.  The plan has to be absolutely the best one money can buy, and should have all of the best options available (including low cost investments, model portfolios, etc).  As a fiduciary, you are responsible for the employees, so you can't just say that just because you don't need advice that your employees don't need it either.  And while there are many vendors offering automated advice, the most valuable advice comes from the fiduciary adviser and the TPA, both of whom should be working exclusively for you.  It goes without saying that you should not be paying any asset based fees for your plan at all.

      Without good advice, plan sponsors simply don't know where to turn because a large TPA/record-keeper will not provide you with advice on your plan, so you'll always be wondering whether your plan is optimal or not.  Of course, you can (and should) try to learn as much as possible about retirement plan operation and design, as well as about fiduciary duties of plan sponsors, but this is something that should be outsourced to a fiduciary adviser/TPA because the cost of fixing mistakes would be a lot higher.
      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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