Practices differ in what theywant from a pension plan. Ingeneral, the goal of a pensionplan is to put tax-deferred investmentsaway for retirement. In a doctor'soffice, where there tends to behighly compensated owners of thebusiness and several non-highly compensatedemployees, the goal of thepension plan should be to maximizethe amount of money the doctorscan put away every year while minimizingthe amount of money put intothe plan for other employees (includingthe office manager).
A self-directed 401(k) plan allowseach individual employee to choosefrom their plan's investment options(usually mutual funds). More elaborate401(k) plans can allow a brokerto manage employee's money forthem, but that service is more expensive.This article deals with optionsgiven in a self-directed plan.
401(K) PLAN ADVANTAGES
Before deciding on a retirementplan for your practice, acknowledgethe differences between a 401(k) anda traditional non-401(k) profit sharingplan. Note the following importantadvantages a 401(k) plan offers:
• Asset management fees (ie,internal expense of administrationand mutual fund fees) of a profitsharing plan are typically paid by theemployer; in a 401(k) plan, themajority of the costs are normallyspread out among the participants.
• The employee is not allowed tocontribute any of their own moneyinto a typical profit sharing plan; in a401(k) plan, the employee may contributeup to 15% of their income(not exceeding $30,000) into theplan for their own benefit.
• In a typical profit sharing plan,the employee has little or no input asto where and how the money is beinginvested; a 401(k) plan is usually setup so that the employee directs whatkind of investments their money goesinto (ie, conservative or aggressive).
• A traditional plan involves someshifting of the employer's fiduciaryduty to ensure that the money in theplan is invested prudently. In a self-directed401(k) plan, the employeepicks where the money is deposited,usually with the help of experts fromthe company administering the plan.
• A well-crafted 401(k) planshould allow physicians to put themaximum amount of money awayfor themselves while at the sametime minimizing what other employeesmust contribute.
TYPICAL 401(K) SETUP
After deciding to establish a401(k) plan, most employers findan insurance company, bankinginstitution, mutual fund family, orbrokerage firm to set up andadminister the plan. The companyshould sit down with the physiciansin your practice to go through theplan's many options.
Make some basic decisions,including: the minimum age allowedfor participation (typically 21), howlong someone must work for thepractice before they can participatein the 401(k) plan (typically 1 year),and the maximum contribution theemployees can contribute to the plan(typical range, 10% to 15% of pay).
In addition, consider when a newemployee will start vesting (ie, receivingemployer-contributed benefits)from the plan. Most companies use asliding vesting schedule. For example,after you work for your practice 1year, you can start contributing yourown money to the plan. The year youstart contributing, your practice alsostarts contributing on your behalf.
Typically you will not start to vest inmoney the practice has contributedon your behalf for at least 1 year.That means if the practice contributed$1000 on your behalf yourfirst eligible year and you quit the dayafter that money was put into theplan on your behalf, you may not getto keep any of that money. It dependson whether or not you are vested.Typical plans will allow 20%vesting after 1 year and an additional20% after the second and eachsucceeding year until you are 100%vested by the 6th year. You arealways 100% vested in money youput into the plan.
MATCHING & INVESTMENTS
Is the employer going to matchwhat the employee contributes tothe plan? To allow the doctors tomaximize the amount they put intothe 401(k) plan for themselves,they must have participation fromthe employees. To help that process,the employer sometimes willmatch what the employee puts intothe plan. Also, the employer maycap the amount of the match. Atypical cap rate would be 6% ofpay. If an employee put 15% oftheir pay into the plan, the employerwould only have to match thefirst 6% of that employee's pay.
Consider what kind of investmentsare going to be used in theplan. Typically, most offices will usemutual funds as the main option forinvestments. Depending on who isrunning your plan, mutual funds thatgive a variety of options will beoffered (eg, aggressive, conservative,international, bond, small cap, largecap, index fund, money market, etc).The company chosen to set up andrun your 401(k) plan should have aconsultant sit down with all employeesto help them determine which ofthe available funds their moneyshould be put in.
Employees may opt to switchtheir investment options. I wouldsubmit that trading quarterly is sufficient, though you can offer dailytrading. The more options yougive your employees, the moreexpensive your plan will be from theadministrative side.
How often will the participantsreceive their financial statements? Iwould submit that quarterly statementsare sufficient. Will the planallow for withdrawals other than atretirement? Some plans allow forloans to be taken out by participants.Typically, plans permit withdrawalsof employee dollars incases of financial hardship.
Whether you have a 401(k), aprofit sharing plan, or a combinationof the 2, periodic reviews of theplan's setup, cost ratios, and rates ofreturn on money invested are veryimportant. Consider how much moneyyour office could lose by havinga poorly established pension plan.If your office invests an average of$10,000 a month for 20 yearsthrough a company that is overchargingyou 1% a year in internal expenses,and if the funds chosen are underperforming1% a year, you will havelost more than $1.72 million overthat 20-year period. If you're notwith the right company to administerand set up your office pension plan,the money lost could be astronomicalover the life of your pension plan.Expenses and rates of return must bemonitored on an annual basis.
Roccy DeFrancesco is an
attorney and author of "The
Doctor's Wealth Preservation
Guide." He has run a medical
practice and lectured for many
state and national medical associations.
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