Consider Gold Plating Your 401(k) Plan

Physician's Money Digest September 2005
Volume 12
Issue 13


What is a gold-plated 401(k) plan and whyshould medical practices care? Back inNovember, MSN heaped goldplatedaccolades on a plan instituted by OklahomaCardiovascular Associates (OCA), the state'slargest cardiology practice. Pat Holloway, chiefexecutive officer of the 400-employee physicians'group, told MSN columnist Timothy Middletonthat their old plan combined high costs and toofew beneficial services.

With the previous annuity-based 401(k) plan,OCA paid more than 2% for professional management.But Holloway was skeptical that he was gettinghis money's worth and started exploring otheroptions. In 2001, he approached my company,Investor Solutions, Inc, with a challenge: help himcreate a new plan as futuristic as the 2-year-oldOklahoma Heart Hospital, which is half-owned bythe company's 39 physicians.

Old Vs New

Most 401(k) plans are dominated by bundledproviders (ie, companies that supply everythingfrom portfolios to administration). In this case,it's easy to sneak in high expenses like 5% commissionfees for brokers and insurance agentswho sell the plans.

The plan adopted by the Oklahoma cardiologistsis unbundled. Although Investor Solutionswas selected to offer advice, Dimensional Fund Advisorsruns the investments and plan administratorHeintzberger Co of Portland, Ore, serves as recordkeeper, handling back-office work such as sendingout statements, keeping the books, and operatingthe plan's Web site. Each company was chosen separatelyand none share revenues with the others.Elsewhere in the 401(k) business, kickbacks andrevenue sharing are common.

Plan Specifics

OCA contributes 6% of base pay for employeesand pays all of the plan's fees, which average lessthan half a percent. The funds are index portfoliosdesigned by Dimensional and can be purchasedonly through company-trained advisors. InvestorSolutions oversees the investments, tilting portfoliosin favor of small and value stocks.

The plan's portfolios are made up of mutualfunds designed to capture additional risk premiumsover and above the foreign market index. Accountsare rebalanced every quarter and employees receivea newsletter that explains the market and Dimensional'sapproach—and OCA receives this expertisefor half the usual price. Employees also have theoption of receiving independent newsletters andcreating a direct brokerage account.

The total annual cost of the new plan, both theportion paid by participants in the form ofexpense ratios and the portion paid by the companyfor overhead, comes in at about 125 basispoints or 1.25%. So even if the company didn'tsubsidize the administration costs, it would stillcome in at 25 points less than the average mutualfund. The real bottom line for OCA employees isthat they're involved and on the path to a surprise-free retirement.

Frank Armstrong III is the founder and principal of Investor Solutions,

Inc, a fee-only, SEC-registered investment advisor. He is

also the author of The Informed Investor: A Hype-Free Guide to

Constructing a Sound Financial Portfolio (Amacom; 2002), which

is now available in paperback. For more information, visit

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