[Editor's Note: If you are an employee, you are basically stuck with the retirement plans offered by your employer, although you can lobby for change. If you are self-employed without employees, an individual 401(k) is a straightforward do-it-yourself retirement plan. However, once you have employees things get a little bit more complicated and it is time to seek professional help. In this post Mr. Litovsky describes what you should be looking for with that help. While the described best solution/advisor obviously has a very close resemblance to himself and his firm, I agree with him that getting a low-cost plan filled with low-cost investments and the best available features is critical as is meeting your fiduciary responsibility to the plan participants. Enjoy the post.]
By Konstantin Litovsky, Guest Writer
It is well-known that the majority of retirement plan providers that serve the small and mid-sized retirement plans are bundled platforms that make most of their money via asset-based fees. Many plan providers do not offer the best available solutions to small solo and group practice plans, and this often means subpar plan design and lack of any fiduciary or compliance services, which leads to higher plan cost and can potentially result in unnecessary expenses [such as litigation-ed] later on. Even those providers who are open-architecture tend to charge significantly higher fees for small solo and group practice plans relative to what the larger plans pay for the same services. However, it is definitely possible to get the best available plan services at a lower cost. The problem is that the information on how to lower your plan cost and improve the service quality can be hard to come by because plan providers are not fiduciaries, and they are not working in your best interest, so they don’t have to get you the best plan money can buy. Below are five ways to significantly reduce your plan cost, especially if your practice has an older plan with significant assets.
5 Ways to Reduce Your Retirement Plan Costs
#1 Eliminate All Asset-Based Fees
It is really unfortunate that asset-based fees dominate the retirement plan industry, and you pay a higher fee just because your assets grow, not because you are getting any extra services in return for the higher fee. For example, Group Cash Balance plans are often charged a 1% fee by investment advisors even though the plan portfolio is managed so conservatively that the asset-based fees will significantly diminish the investment returns over time. Not only are asset-based fees unfair, but they might be costing you hundreds of thousands of dollars in extra fees without much to show for it. There is no reason to pay any asset-based fees for your plan services (aside from the expense ratios of your investments), so always choose plan providers who only charge a fixed/flat fee. [Editor's Note: Or at a minimum compare the total AUM fee you are paying and compare it to available flat-fee based providers.]
While some record-keepers and Third Party Administrators (TPAs) do charge asset-based fees for their services, you can always find a provider who charges exclusively a fixed/flat fee. With investment advisors the asset-based fee is much more widespread, but you should still be able to find an advisor (in a fiduciary capacity) who would be willing to work for a fixed/flat fee. Use this calculator to estimate the fees you are paying, and compare with the fees that fixed/flat fee providers charge to see the difference over time. Many record-keepers charge a relatively small asset-based fee (which can be around 0.05% or so), but you can often elect to pay this fee from of your practice cash flow, not from your plan assets. Paying plan fees from the practice cash flow is always better because this is a tax-deductible business expense.
[Editor's Note: It seems appropriate to take a moment to make a brief editorial note here about the various players involved in a retirement plan:
- Plan Administrator/Plan Sponsor – This is the owner of the practice, i.e. you. Fiduciary duty unless delegated to a 3(38) fiduciary.
- Plan Participant – This includes your employees and also yourself. This is who the fiduciary duty is owed to.
- Recordkeeper – Processes transaction requests, submits trades to custodian, updates participant accounts, and provides information to plan and participants. No fiduciary duty.
- Third Party Administrator – Ensures compliance with tax laws and plan documents. No fiduciary duty. Can be (and often is) the same firm as the recordkeeper.
- Custodian – Actually holds the assets that are owned by the plan, like a bank. Think of a firm like Charles Schwab or Vanguard. No fiduciary duty. Often the same firm as the recordkeeper and TPA.
- 3 (21) Fiduciary/Plan Advisor – Named after a section of code, in this set-up the plan advisor is a partner with the plan sponsor where they are both have a fiduciary responsibility to the participants. Shared fiduciary duty. i.e. The advisor selects a list of five large cap funds and the plan sponsor picks which one goes in the plan.
- 3 (38) Fiduciary/Plan Advisor/Investment Manager – In this set-up, the plan sponsor has delegated the fiduciary responsibility to the advisor. Thus, while the plan sponsor still has a duty to select and monitor the advisor, he has passed the fiduciary duty to the advisor. Fiduciary duty. i.e. The advisor chooses the actual investments in the plan.
- Financial Advisor – Some plans also have someone who gives participants investment advice. Often a broker without fiduciary duty.]
#2 Lower the Cost of Your Investment Options
It is always a good idea to hire an independent ERISA 3(38) fiduciary advisor for your plan, and this will ensure that you will have someone working in your best interest who will take full responsibility for selecting investment options and building model portfolios for your plan (and who will take on a discretionary fiduciary role when managing investments in a pooled 401k or a Cash Balance plan). An ERISA 3(38) fiduciary should be able to select low-cost index funds and build model portfolios for your plan with an average expense ratio of around 0.15% vs. an average expense ratio of anywhere between 1% and 2% for a typical small practice plan. Not all ERISA 3(38) fiduciaries are created equal though, so you need to make sure that your advisor believes in using low-cost index funds and that they are compensated exclusively via a fixed/flat fee.
#3 Improve Plan Design
Is your TPA using the best possible design for your plan? To allow maximum available contribution to owners/partners, does your plan use a cross-tested or a pro-rata contribution allocation formula (a pro-rata formula would result in a significantly higher employer contribution to non-owner employees)? Does your TPA review your plan design periodically to make sure that your employer contribution is minimized? Is your salary set correctly to minimize your employer contribution while maximizing your own? The cost of extra employer contribution from a suboptimal design can be significant, especially for a small practice plan.
For a group practice 401k plan, can every partner select their desired level of profit sharing contribution, or is it ‘all or nothing’? Is your group practice plan a profit sharing only plan? It is always better to convert this type of plan to a 401k plan because you can maximize your plan contribution with a lower salary and also have the ability to do Roth salary deferrals and catch-up contributions for those over 50. Making sure that your plan design is optimal for your practice can allow you to make higher contributions at a lower cost, and including the best available features (such as Roth 401(k) contributions and in-plan Roth conversions) will allow you to use the plan as a perfect tool for long term retirement and tax planning.
#4 Use Open-Architecture Platform vs. a Bundled Platform
In a bundled platform it is impossible to replace/remove providers who either don’t perform or are too expensive because everything is integrated into a single platform. Open architecture platform on the other hand allows you to select the best providers (including ERISA 3(38) fiduciary, TPA and record-keeper) and providers can be removed and replaced when they are not doing their job. Also, a bundled platform does not have adequate checks and balances as all of the parts are working for the company that hired them, not for you. It is very important to select independent providers, especially the TPA and ERISA 3(38) fiduciary who will be looking out for your best interest and who are not compensated by third parties. In most cases you can get better pricing (and better services) by selecting each provider separately rather than going with a bundled provider, and using open-architecture providers will also let you significantly reduce (and even eliminate) asset-based fees.
#5 Correct (and Prevent) Fiduciary and/or Administrative Breaches
Having your plan audited by the IRS or DOL can potentially lead to costly penalties and fines, and will require you to take corrective action to fix any fiduciary and/or administrative issues, so why not do it proactively at a fraction of the cost? While much touted excessive fee lawsuits are still rare (though they are on the rise for smaller plans as lawyers are getting the hang of it), there are many other errors – as simple as an incorrectly filled out form 5500 – which can raise red flags for the IRS, and catching plan errors is getting much easier as everything is now computerized and automated. If your plan is flagged for one error, all of the other potentially significant fiduciary and administrative breaches will come to light, often resulting in hefty fines.
Developing and implementing a prudent fiduciary process is a big part of avoiding fiduciary and administrative breaches. Work with your ERISA 3(38) fiduciary and your TPA to create a blueprint for plan governance, and assign roles and responsibilities to all plan providers and plan trustees. Errors often happen because of lack of communication between plan providers and the plan sponsor, so always make sure that plan providers are on the same page and are talking to each other and to the plan trustees about any potential issues. Your ERISA 3(38) fiduciary should create and implement an Investment Policy Statement for your plan, and your TPA should review all parts of the plan periodically (including your plan’s brokerage windows, especially if your plan allows multiple providers) for fiduciary and administrative breaches, and provide ongoing monitoring to ensure that the plan sponsor is abiding by the terms of the plan document and that the plan is operating in compliance with all applicable laws and regulations. Having proper fiduciary and compliance oversight will eliminate any potential issues with the IRS going forward, and will significantly reduce the risk that your plan will be audited and fined.
[Editor's Note: Konstantin Litovsky, owner of Litovsky Asset Management, is a long-time WCI partner and an expert in designing low-cost small practice retirement plans. However, this is not a sponsored post. This article was submitted and approved according to our Guest Post Policy.]
What do you think? Have you implemented a retirement plan for your practice? What pitfalls did you encounter? Did you follow Litovsky's recommendations? Why or why not? Comment below!
I agree that for a single participant plan, a solo 401(k) makes sense–as long as there isn’t a potential permanency requirement issue.
If there is a permanency requirement issue, and here I maybe disagree with WCI, I think a single participant plan needs to look at a SEP especially if the employer is an S corporation. And in spite of the Roth impact…
Also observe that for really small plans with a few employees, a Simple-IRA often works well because no one but the owner cares about the higher elective deferral and the bigger match… and because the plan costs eat up incremental benefit of the higher elective deferral and the bigger match available in a 401(k).
I completely disagree, a singe participant plan is the best reason to have a solo401k. How is less taxes and higher contributions the wrong thing to do?
You mean permanency of the business?
Tell me about the situation where you see a SEP being better than a solo 401(k) for a single participant plan. Aside from less paperwork, I see precious few advantages especially when weighed against the disadvantage of potentially lower contributions, no Roth option, and pro-rata issues with a Backdoor Roth IRA.
I agree that once you have employees, it’s complicated and there are times when less attractive plans like a SIMPLE-IRA might be the right plan.
Sorry. I wasn’t clear…
But to try again: If someone runs a one employee business and always will, I’m totally on board with using a single participant 401(k) plan. And for all the reasons WCI and EnjoyIt mention.
The issue I tried (unsuccessfully — sorry!) to highlight is that your 401(k) plan needs to be permanent. And that means if you hire another employee you’re going to need to replace your old free 401(k) plan with a new, surely more costly 401(k) plan to meet that permanency requirement.
Here’s a blog post I did that talks a little about the permanency requirement…
http://evergreensmallbusiness.com/hidden-small-business-pension-plan-costs/
But the thing with something like a SEP is that you have that three year work requirement with the SEP so you’ve got a bigger window within which to establish having meet the permanency requirement.
Final comment: I’m not saying a SEP is superior. I’m saying (or maybe only *tried* to say) that you want to look at the SEP too if you’ll hire employees because of the extra costs you’ll encounter if you’re forced to move to a multiple-participant 401(k) plan.
Not necessarily. I’ve addressed this problem here:
https://www.whitecoatinvestor.com/improving-the-vanguard-individual-401k-with-a-customized-plan
You can set up a ‘solo’ 401k as simply a 401k with one participant from the get-go without having to make ANY changes.
And it does not have to be very costly either. The cost is all relative – if you are getting a superior product, it is obviously going to cost a bit more than ‘free’, but you will have a lot more flexibility to do certain things with it that you can’t do with a ‘canned’ solo 401k from major providers.
For one thing, doing Combo plans requires a custom plan document anyway, so one would have to setup exactly the type of plan I described in the link above. It is not for everyone – for many docs doing a basic solo 401k on a platform offered by Fidelity, Schwab or Vanguard would work just fine, but for others, solutions are available to address all of the potential future changes they are going to make, and all of this can be done cost-effectively.
Kon, sorry. I don’t understand. Are you saying you guys find you don’t need to worry about the permanency requirement?
Read the blog post you linked to and, admittedly, read it fast… but I didn’t see anything about the permanency thing.
Two more quick comments to provide context…
1. What I see. as someone working with small businesses, is situation where someone starts as solo operator, sets up a solo 401(k) and then thinks they can just terminate that once they hire a new person… Interested to hear if any practitioners think differently. But I’d be super nervous about that professionally just because of the risk that the plan (and past contributions) would unwind.
2. Obviously, this is a scale thing. The actual costs of running a ‘real’ 401(k) pension plan get amortized over the participants who want a higher limit than is available in something like a Simple-IRA or a couple of Simple-IRAs (for two spouses). If you’re paying say $5K for one person , pretty uneconomical. If you’re paying $15K to get 30 people above those Simple-IRA limits, that seems pretty economical.
Ahh…I see. An additional advantage for a SEP.
I use SEPs all the time, because in between starting a practice 401k, there is usually a window when a practice owner can do a SEP without including employees. So if the goal is to use a short-term plan, a SEP is definitely better than a 401k in that regard because of its flexibility and low cost. But that’s all it is – a transition plan, not a permanent long-term plan, given other disadvantages (asset protection for solo 401ks is better than for SEP, and so are the features such as allowing backdoor Roth and in-plan Roth conversions, etc).
OK just saw this. I think we are pretty close to being on the same page.
I believe another option is to start a second corporation when hiring employees. This allows two separate business with their own retirement plans.
Yeah, that definitely doesn’t work. Here’s reference to an IRS pdf that explains:
https://www.irs.gov/pub/irs-tege/epchd704.pdf
No, that’s illegal. That’s exactly why retirement plans are full of landmines. Controlled and affiliated group rules are very important to follow, or else penalties can be severe.
We have Administrative fees (Adviser fee, Fiduciary fee, Recordkeeping, custodial fee = 0.51% AUM) And investment expenses (these are the ERs of funds).
Every year our administrative fees has come down as we have complained about high fees.
Break down is Adviser fee (0.15%) , Fiduciary fee (0.15%) , Recordkeeping (0.15%) , custodial fee (0.06%) = 0.51% AUM
The plan has roughly 18 million in for our business. Its surprising why record keeping and custodial have to be AUM based. And I thought Adviser was same as fiduciary.
How does our fees compare to similar plans around? Despite my repeated talks with group they dont want to change.
I basically invest in target date funds so I pay all these fees for very little work.
May I recommend finding a better alternative and then presenting it to the group showing they can get the same funds with lower fees somewhere else is money in their pocket.
Most people hate change, but showing exactly how much money the plan is throwing away every year in fees can be eye opening enough to make them accept the change. Cutting your fees in half would cut $46K a year from the plan expenses.
Trust me I tried. I went to Vanguard for small business and had them quote. It was like 0.2% for everything and that didnt convince them
I think our plan is about half that. 0.2% in fees. It’s got a lot more money in it than yours.
The largest the plan, the bigger the advantage of flat fees (like Litovsky recommends) over an AUM fee.
Not a problem at all. Here’s what our plans look like:
Record-keeper: flat/fixed (5 bps custodial fee that can be paid out of cash flow, not out of plan’s assets – this is the lowest I found for a top notch platform and customer service).
TPA: flat/fixed
ERISA 3(38) fiduciary: flat/fixed
Expense ratio of funds: Average of 0.15% for managed portfolios, from 0.05% and up (lowest cost Vanguard Admiral shares, all index or passively managed funds, with ZERO revenue sharing).
So with $16M you can save millions over time by just going with all fixed-fee providers.
While the plan fees you have might be considered ‘reasonable’, there are things beyond fees that are also critical, such as compliance and fiduciary process to make sure that non-HCE employees are taken care of. As far as compliance, brokerage windows are a significant headache as well.
The point is to be able to help all participants build retirement savings via proper plan design, access to appropriate investments, all while getting administrative, fiduciary and compliance oversight over the plan from your plan providers. If the plan is not managed for the best interest of plan participants, that would warrant a thorough review and recommendations to change providers would be made based on a whole set of facts, not just because a lower fee can be obtained (which by itself can be one of the drivers to do a thorough fiduciary and compliance review).
Excellent article. Thanks to this website and bogleheads I found a low fee, fiduciary plan. Now if only I could get my wife’s large employer to switch as well…
It is not always easy to do so. If your wife is a partner in a smaller practice, she can discuss this with other partners and at least give them some sort of proposal that shows that they all would be better off. What we typically do is get the interested parties together and discuss their goals and what’s available on the market. A plan should be custom-designed for each practice for optimal results.
The key is to work with providers who are NOT trying to sell anything, and who always act in the best interest of the practice. This way they will know for sure that what they are getting is the best plan money can buy. This is not always possible because often plan providers have a personal relationship with the practice owners, but that by itself is a fiduciary breach by the plan sponsor because all providers of plan services should be selected based on their quality and cost, and they should be independent so that they are able to provide unbiased advice.
Can you recommend a Third party plan administor? Thank you
These companies all have associations with TPAs.
https://www.whitecoatinvestor.com/retirementaccounts/
We have over 650 clients in dentistry alone, among our client base at AB401k now. A steady 25-30 per month added, month after month after month
Hi James,
Only here to help compare. With AB401k. No setup fee, no participant fee. Only employer cost $400 per quarter.
Total investment related fees 0.50%. Includes average fund expenses, recordkeeping, and 3(38) fiduciary advisory fee with 1-1 advice to participants on demand, as often as needed.
No doubt that lowering your fees is an excellent advice.
For basically everything. Great topic.
I wish this article spoke about what options are out there that are popular that aren’t the author.
We looked at this a few years ago and a lot of bogleheads recommended https://www.employeefiduciary.com
Are they still good?
Definitely low cost. Only issue I’ve heard bad about them is from their competitors who describe their approach as “cookie-cutter.” But sometimes cookie-cutter is okay if all you need is a cookie.
They are just a recordkeeper. Here are some articles for you about what a small practice plan really needs:
https://www.whitecoatinvestor.com/how-to-run-a-successful-retirement-plan-for-a-medical-or-dental-practice/
http://litovskymanagement.com/2015/07/small-practice-retirement-plans/
If you have a multiple partner practice and a complex profit sharing plan with non-HCE employees, what you need is a TPA, a record-keeper and an ERISA 3(38) fiduciary. They each have their own roles, but getting the best of each provider can save significant money and get you the best plan money can buy. Educate yourself as much as possible because if you have complex needs, a low cost provider that does not do what you need is not going to solve your problem.
EF does not have a track record for providing compliance and plan design services, and neither does it have an ERISA 3(38) fiduciary who works exclusively for you. There are record-keepers out there that are even better (and some are lower costing for smaller practices).
So my advice is to first sit down with someone who’s not selling you anything, and discuss your retirement plan needs. They should be able to work with you to design a plan for you that’s the best value for the money.
I got a quote form them about 5 years ago and it wasn’t bad, but it was very cookie cutter. That didn’t seem bad at the time, but now that I’ve had a TPA that will work and rework the profit sharing part of the 401K, I wouldn’t do it any other way. There are so many options to run through that it really needs someone who will put in a little extra time each year.
We have a small plan right now though, less than 1M with everyone.. But, it’s a newer plan and not everyone contributes.
Once you hit $1M, asset-based fees start adding up fast. Those who’ve had plans for a while get it: having your own TPA is the only way to go with profit sharing plans. A plan might need to be redesigned depending on what’s happening to the demographics.
Glad this showed up in my fb news feed. I’m a dentist in a group practice and one of my partners has been discussing a combination 401k, cash balance, and 401h plan (the guy calls it a “Super-K”). I’m suspicious of the fees: $7500 start-up, $8850 maintenance, which does not include record keeping. Record keeping can be covered by the 401k fees ($850 per participant + $35 each above nine + 20 basis points on investments). If we use their investment advisory instead of self-directing the investments, they charge 1.99%. The fees overall sound outrageously high to me, especially after seeing employee fiduciary’s fees, but my partner thinks the guy is great for some reason.
What is a reasonable fee range for these services? Who are some good, low-cost providers other than Employee Fiduciary and Vanguard?
I’ve got an article coming up soon on 401h plans. A defined benefit cash balance plan, with or without a 401h, carries a little higher expenses than a 401(k)/PSP.
I wouldn’t pay anyone 1.99% for anything.
That might be interesting to make a list of low cost providers, but it’s a pretty short list. Other than the author, EF, Vanguard (if they offer what you want), and one other I can’t recall the name of right now, I can’t think of any.
if I were taking the lead, the conversation would have been over the second I saw 1.99%.
Regarding the 401h: I’ve read it can only be used for healthcare expenses in retirement. This guy claims if you use the money for non-healthcare expenses in retirement, the only penalty is you have to pay taxes, which would make it identical to a 401k. That sounds too good to be true. Is it?
No. It isn’t too good to be true. That’s the way it works. If you’re going to pay the additional expenses required for a cash balance plan in addition to your 401(k)/Profit-sharing plan, might as well get a 401h as part of it. But I wouldn’t pay a 2% advisory fee to get one. I’d just invest in taxable.
Well lets see…..not sure how America’s Best 401k would be not on the list. This past week we just passed our 400th dentist client. At $1600 per year and $24 per participant annually I’d suggest that is very economical for Complete administration and recordkeeping. No setup of conversion fee.
The debate of asset based fees and fix for 3(38) investment manager services can go on and on. While flat fees are noted multiple times in this thread the Actual flat fee Amount charged though is never noted. That is material to the conversation as well.
For a startup plan or small plan..while we have a 0.30% annual advisory fee, not until the assets reach $100k does that equal $300. On a $1 million plan that equals $3000. How long will it take for the average plan To reach $1 million?
If by comparison from the get go an advisor charges $2400 to $4800 annually, that would be one heck of a lot of money spent the first few years needlessly, that could have been used for deferrals or annual contributions. The story has two side and cannot just be centric on the comment “asset based fees add up over time”. Fees of any types add up over time.
Yes, these fees are a bit high, but what you should be doing is figuring out whether such a plan is exactly what you want. If it is, then you can easily find much lower costing options. I think that for a small practice admin should be between $4k-$6k a year, and startup should be around $4k or less. And of course, you should be able to get someone to manage both plans for a fixed fee, not AUM fee (and use low cost investments in both plans, which is not a given either).
We work with 401k and Cash Balance plans, and the first step is to make sure that such a plan makes sense for your practice, because Cash Balance plan is a complex plan, and you should understand all of the intricacies before starting it. We typically do a thorough design study because not all practices should start a combo plan right away – sometimes it pays to wait to start a CB plan, and that’s an individual practice decision.
And of course, it goes without saying that you should not pay any asset-based fees for asset management. We charge a fixed fee for 401k/CB ERISA fiduciary services, and many companies don’t even act in a fiduciary capacity when they touch pooled investment money (which is a very bad deal to begin with).
As far as ‘low cost providers’, you mean record-keepers. There is way more to retirement plans than a record-keeper. Those are platforms on which you have individual accounts and can select investments.
This is absolutely the last piece of the puzzle, as I mentioned above. A TPA and an ERISA 3(38) fiduciary who charge fixed fees will be an asset to any plan because most doctors/dentists have complex plans by virtue of having profit sharing (which requires special types of designs that can be done well by qualified TPAs).
A record-keeper does not provide you with advice or design services, and neither does it take care of compliance, which can be important if you have non-standard plan needs. So EF, Vanguard/Ascensus are not particularly useful if you can’t get good advice. And while I have plans with Ascensus, and also with Vanguard/Ascensus, without your own TPA and ERISA 3(38) fiduciary you will be out of luck as far as getting the best/low cost investments, fiduciary oversight and plan design services. These are the most important aspects of your plan.
As long as you can find someone in a fiduciary capacity who will help you build a plan from various components (open architecture approach), that’s good enough, and looking for just the bare-bones providers to save a few bucks isn’t the best idea for more complex plans.
As dentist I think our plans are a little tougher to do as we have employees. I think with WCI’s ER group they are all docs, so that makes it much easier. With employees, if you have a decent sized group, you could have 20+ people that you have to match funds with and give some cash balance and profit sharing to. It get really complicated.
In our case we had 3 different groups run proposals and then went back to each and said it was good, but had them each make some changes. Once we got the options I ran the worst case scenario as far as what it would cost me as an owner if everyone participated and went from there. So far, no where near everyone that can participate does, so it has been a good thing from a cost standpoint.
Have Employee Fedicuary and Konstantine run some options for you, then run them yourself to check and compare it to what your partner has. A second or third opinion never hurts, especially if you are talking about millions of dollars over your working career.
Yes indeed, dentist plans are tough. I find that many dentists might not even want a 401k with profit sharing, and might be happy setting up a SIMPLE to start with. It takes some analysis on my part to make sure that a 401k with profit sharing is a better plan than SIMPLE for a particular practice, and often we just have to send them to Vanguard to open a SIMPLE because of the cost of profit sharing can be excessive.
Through my W-2 employer I am maxing out my 401(k), profit-sharing, Safeharbor, and cash balance plan. I also receive about $30,000/year in 1099 income on a side business. What options/what would be the best retirement plan for the 1099 income (solo401k, SEP IRA, etc)?
Solo 401(k), especially if you’re also doing a backdoor Roth IRA.
Thanks. I get confused on how my W-2 retirement plans affect my solo 401(k). If I am maxing out the $53,000 contributions through my W2 employer (employer+employee contributions), how much can I contribute tax deferred into my solo 401(k), assuming my income is $30,000 for the year?
A little less than $6K. And remember the limit for 2017 is $54K, not $53K. You get a separate $54K limit for each unrelated employer, but only one $18K employee contribution no matter how many employers.
Thank you. This is very timely as we just met with our advisor. It is not clear how much money we are paying, since we are not fee-based. Instead they get their money via ‘revenue-sharing’ from the funds. I think we would benefit from a change to a fee-based model, but this has not happened for a number of reasons. Any suggestions? In particular, how can we find out how much the current system is costing us? I have asked, but there is little transparency.
The problem is that the fund providers only do revenue sharing for crummy investments that otherwise wouldn’t be used. So while your fees might not be too high, your investments probably suck.
If you own the business, time to bring in a second opinion.
This is pretty bad, actually, because revenue sharing can be significant, and because there is a fiduciary liability issue for the plan sponsor. However, these fees should ALWAYS be disclosed. Your fee disclosure should spell out exactly how much your adviser is getting. If you can email me your fee disclosures, I might be able to find out what you are paying. Sometimes these are hard to read, but you should be getting all of this information in writing.
You absolutely do not want to work with an adviser who recommends funds based on the amount of revenue sharing they pay. Of all of the funds in my plans fund menus, there is not a SINGLE one that pays a cent in revenue sharing. There is a reason why the best funds don’t pay revenue sharing – their cost is so low to begin with that you will save money by switching to using such funds vs. any funds that pay revenue sharing (whose expense ratios have to be higher just to pay the revenue sharing).
Also, as fiduciaries you can’t possibly work with someone like that who is most likely not even a fiduciary, because a fiduciary (especially an ERISA 3(38)) would NEVER use funds with revenue sharing (as that is just bad practice and a conflict of interest). As plan sponsors you have to make sure that the funds are selected based on a certain set of criteria (documented in an Investment Policy Statement for your plan), and revenue sharing is NOT the one criteria which as plan sponsors you should base your fund selection on.
HiCola,
May I suggest you call Vanguard institutional services and say “we want to contract directly with Vanguard for our 401k plan.” When I switched over our medical practice 401k, that is what I did. You may not need an advisor, and I would encourage you to do it directly with Vanguard. Our Vanguard fee is negligible in relation to our plan assets, and it is fixed. My expense ratio is .05. This is one of the most common questions I get, and therefore I prepared an essay entitled “The Anatomy of an Optimal 401k Plan.” To be honest, you might not need to hire anyone, as Vanguard has everything protocoled out for you! In my view, it is a slam dunk program, and I use it to help recruit new physicians to our medical practice. The 401k is not something that is emphasized among candidates, however it is one of the most important part of the compensation of any physician. We default the staff and doctors into the Vanguard target retirement fund for their age, but they can change it anytime into any Vanguard fund. The money gets invested as soon as it hits the bank, and the profit share is put in EARLY in the year, not later. Good luck.
This is not accurate. I work with several Vanguard and Vanguard/Ascensus plans. They do not have good quality TPA services for custom-designed plans and they do not offer ERISA fiduciary services. As a plan sponsor, you are a fiduciary and you are responsible for the actions of your plan providers. A well managed plan should have someone in charge in a fiduciary capacity who will take care of not only the doctors but also of the rank an file employees:
https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/meetingyourfiduciaryresponsibilities.pdf
Many doctor plans are rather complicated in their design and operation. In fact, I’m working with one such plan right now, and without a TPA and an ERISA 3(38) fiduciary, the plan sponsor would have to do all of the work themselves because Vanguard is under no obligation to act as a fiduciary for the plan (and Vanguard uses Ascensus as the record-keeper, which can be done directly while bypassing Vanguard in the first place). There are just too many issues to consider with an existing plan that has been around for a while, and many such issues require significant professional involvement by a TPA and possibly even by an ERISA fiduciary. So I wouldn’t advise every doctor plan to contact a bundled provider with no fiduciary obligation and no capacity for compliance and plan level error fixing as a default solution to all doctor plans.
Vanguard is a bundled platform, and while you can select low cost funds on their platform, Vanguard will not do it for you as their default choices are Investor Shares and not Admiral Shares. Also, I would argue that defaulting to target retirement funds is a bad idea for multiple reasons. For one thing, younger doctors might not want to have 90% of their money invested in stocks. In any case, all of these decisions have to be documented in an Investment Policy Statement for the plan. There are many existing plans with complex brokerage window arrangements, and such plans require professional help that Vanguard can’t (and won’t) deliver. They are also not capable of doing high level cross-tested designs if your practice has non-HCE employees.
So in light of all of the above, my recommendation to hire your own TPA and your own ERISA fiduciary still stands. With the help of these two professionals you can indeed have the best plan available cost-effectively, and while your fiduciary adviser might recommend you to go to Ascensus for record-keeping services (which is what we do in some cases, as they are one of the better record-keepers out there), going to a record-keeper should be the last part of the plan installation puzzle.
I think a target retirement fund is an easily defended default choice. Is it perfect for everyone? Of course not. Is it better than what someone who is going to get the default would do on their own? Almost surely. Defaults used to be money market funds. I think target retirement funds are better defaults.
Of course, it can be defended, but only if you can document (as a plan fiduciary) that you have 1) picked TDFs based on specific merits spelled out in an IPS and 2) educated plan participants on the TDF on a continuous basis. I know that Vanguard/Ascensus defaults people into TDFs, and so do many other plans. I just don’t think this is a good idea for many reasons.
Participants are not educated enough about TDFs, and fund allocation changes, and significantly so, without them understanding all of the intricacies of such funds. I would not default into target date funds. I prefer to default into static risk managed allocations instead (‘managed portfolio’ option, using retirement plan speak). For one thing, I can build a better diversified portfolios than Vanguard’s TDFs are (which include some asset classes as ‘safe’ which are anything but, specifically the foreign bond fund which they use just like it was US bond fund). But I also think that not everyone wants to have 80% exposure to the stock market, and most participants are simply clueless about this, especially NHCE staff. So I’m always much more careful about this in plans with NHCEs.
Kon,
We do everything in the linked article you quote above. Vanguard charged us a nominal fee to have the admiral class expense ratio, but that fee is negligible in relation to our plan assets. Granted, they did not give us the admiral share class by default. I reviewed one plan where a physician for over 10 years was defaulted into a money market fund. Although “safer,” his purchasing power is destined to decline over time and he did not want a money market, but assumed the plan assets had a reasonable default option. After the required education, some of our participants do switch to a different investment, but at least they have a reasonable default if they choose nothing. To be clear, for a DIY, calling Vanguard directly and having them come down for their boiler plate presentation is reasonable. However, I certainly do agree as you have eloquently written about the need for a TPA/Fiduciary depending on the involvement of the physician champion, CPA firm, complexity of the medical practice, etc…Our goal is to have ultra low costs with a set up that encourages few, if any, behavioral mistakes by the participants. That goal has been achieved for over 10 years, and the result is essentially that of the market over the past 10 plus years. Compliance is a top priority and is achievable with the appropriate resources.
If you have only non HCE participants, this might work, but in my experience, compliance issues and fiduciary issues are significant enough to warrant an ongoing advice from a TPA and an ERISA fiduciary, especially those who have specific experience in working with medical and dental plans and who know the types of issues that come up with such plans.
The problem is that all plan sponsors are quite clueless about what issues they might have with existing plans, and a record-keeper is under no obligation (and in fact would not even attempt) to discover any issues with the plan. Therein lies the problem. Even for a startup plan, we see quite often that after some time doctors (without fiduciary and administrative oversight by qualified advisers) can easily turn the plan into a landmine.
One recent plan we are working on is just a tiny plan – not even two dozen docs and a handful of staff, yet, they had to go through voluntary compliance to fix admin issues, and they required an ERISA attorney to fix multiple other issues with the plan. And this is not trying to scare anyone – this is the reality. Small plans don’t have the benefit of good advice, and saving a few bucks by going with a record-keeper but without advice is really a bad idea all around because it is really easy to screw up a plan. Just add some brokerage windows to it, and you’ll see how easily this plan can become a compliance nightmare.
And again, it does not matter whether you work with Vanguard or Ascensus. Neither is a fiduciary, neither is obligated to provide you with any advice, so regardless of how savvy the doctors are about actual investments, fiduciary and compliance issues should be left to those who understand them well. Everyone thinks that it is the fees in the plan that lead to lawsuits, but frankly, most of the audits and penalties come from compliance and fiduciary oversights not related to high fees. I’m actually working on another article specifically addressing the types of issues faced by small medical and dental plans to provide some context. It shouldn’t cost much to hire the best help available, but the benefit can be tremendous.
What are the compliance issues with a brokerage window? Are they so significant that plans should not have a brokerage window? (We have a brokerage window, and it is popular with at least some of the participants)
Oh boy, I’m writing another article just on this topic. This is a huge can of worms, especially if you have multiple providers. Yes, in any of our new plans, we do not allow brokerage windows, they are not necessary if you have a menu of low cost index funds. You just don’t need them. The problem comes from having older plans which started out as brokerage only plans that have many different brokerage window providers, and this is just a nightmare to deal with.
For example, if brokerage windows are not titled properly, they can be seized by creditors because ERISA does not protect them, which it would if they were titled properly in the name of the retirement plan. How’s that for a nasty surprise? Then there are fees paid out of such windows. Then there are prohibited transactions inside such windows. Then there are benefits, rights and features issues. The list goes on and on. It is a field day for ERISA attorneys. If you have only a single brokerage window (say Ameritrade) offered inside a plan, you still have to make sure that all of the rules are followed (especially if you’ve had the plan for a while, and many outside advisers are offering services to participants via those brokerage windows).
So as I mentioned before, I would always recommend having an ERISA 3(38) fiduciary and a TPA with significant compliance experience (who can also do voluntary compliance filings) on staff, because it is much cheaper than having an ERISA attorney on staff. You might need to bring one in to clean up the mess (if that’s necessary at all), but having continuous oversight over your plan operations will ensure that problems are resolved ideally prior to them becoming an issue.
We have a large 200+ participant plan with about 15 or so partner physicians. I was advised by recordkeeper to put the “Mega Backdoor Roth” package i.e. after tax non Roth and in-service conversion, needs 60%+ participation from the people in the Plan. Never heard this before. True?
While having in-plan Roth conversions is a good idea, allowing after-tax contributions is probably a very bad idea for your specific plan. Not only can this potentially blow up the plan design, but you might not want to allow on demand distribution into a Roth IRA of after-tax assets (at least not until there is clear guidance from the IRS on this specific topic). In many cases if you have lots of NHCEs, after-tax contributions do not work for such plans, but we’d have to look at your specific plan to determine whether that would be the case.
You don’t need any participation to do in-plan Roth, but for after-tax to work, yes, you might need a huge number of employees contributing to the plan (and a fat chance of that happening). Given that for medical/dental practices participation rates are rather low, that’s not a good advice to give in the first place. I’d say forget about after-tax contributions, just stick to in-plan Roth conversions.
What would be the the purpose of doing an in-plan Roth conversion without having something other than the regular 401K dollars to convert from?
To satisfy the after-tax non-Roth 60% participation, do the contributions have the be similar? Example: partners contribute the max, while others only contribute minimum i.e. $10.
For after-tax contributions, NHCEs simply have to contribute more into the plan (salary deferrals). Otherwise your plan will become top heavy fast and you would have to kick in extra employer contribution. You might benefit from someone looking at your plan design and figuring out a way to potentially allow partners to make larger contribution. This may or may not be possible with your practice, but it is always worth looking at.
Roth conversions can be done on certain types of assets, including incoming rollovers of IRAs, for example, or can be done as strategic conversions when you are in a lower bracket. This is a complex topic and this is something that we typically discuss in great detail with our clients.
I’ve never heard it before either. Perhaps one of the 401(k) guys can comment.
Kind of sad that > 40% of people at your company aren’t participating at all in the 401(k) isn’t it?
This is very normal for a practice with NHCEs. However, this might also say something about the plan as well. In some plans it might be possible to improve plan participation via education and plan design enhancements.
Not clear wording on my part…
I meant 60%+ participation in the AFTER TAX NON ROTH ROTH part of the Plan, not the entire plan. I frankly have no idea what our overall participation rate is.
So what is the rule? 60% OVERALL plan participation or 60% participation in the after tax non ROTH part?
Right, that’s a separate test for after-tax contributions. So if not enough employees make after-tax contributions, you would have to kick in extra employer contributions (not a good idea). The same goes for profit sharing contributions. If owners want to make extra profit sharing contributions, they would have to give some to the staff. I prefer doing in-plan Roth conversions and potentially doing profit sharing, because you can actually design the plan to minimize employer contributions for the NHCEs if HCEs want to max out. It is a challenge for a larger plan, but it can be attempted.
Do you help setup or administer actuary services for DB Plans as well?
The large eligible participant base really negates the idea of this being an effective one. Works far better in a scenario with small groups where the NHCE buy- in has a better opportunity of being a possibility.
What are some other options in our scenario, speaking generally of course?
No idea without looking in more detail. An enhanced match, maybe some profit sharing, excluding some groups from participating in profit-sharing, hard to say until we look at the whole picture. If you got a brokerage only plan, that’s something to worry about, I’d replace that right away. I prefer looking at the whole picture, not just design or investment options/cost.
To add to your short list, for a solo office and small staff, I had looked at Online401K (too cookie-cutter), and am currently pleased with a Betterment for Business plan – an amazing (independent) TPA does the profit-sharing plan, and the Betterment fee is very reasonable with our small balance (< $1.5M), which we pay pre-tax on behalf of all the participants.
Betterment is not appropriate for group practice plans in any way shape or form as there is no TPA included, no ERISA 3(38) fiduciary and a very cookie-cutter platform that you do not have control over. Betterment is a total mess when it comes to plan administration and compliance, and I wouldn’t recommend this to anyone unless you plan to do all of the necessary work yourself (or have a star TPA to do it for you). And don’t try to roll a plan into Betterment, it would be a total disaster. They can barely manage start up plans, and conversions/rollovers are totally out of their expertise. While they lowered their prices somewhat, with a one size platform like that you get what you pay for.
For some that got in early with Betterment, mainly very small or startups hopefully they will experience no services issues. If January something went haywire and the stopped taking on new clients. We thought it unusual as since then we have been receiving proposal requests from biz owners who said Betterment referred them TO Ab401k. I just ran a proposal on their website and the issues remain. You get this message:
“Thanks for your interest. We currently have a waitlist for plans matching your characteristics and will reach out if we have capacity.”
$56 million plus in Venture Capital and they still cant figure it out.
Are 401k benefits negotiable? For example, if the job doesn’t offer 401k matching, the ability to contribute for a certain time, or has a low matching percentage, can be this negotiated? If not, why?
If this is a large hospital, everyone is in the same boat, and you can’t negotiate this. If this is a smaller group practice, then it is negotiable. Often HCEs who are not partners are excluded from profit sharing, but I don’t believe you can be excluded from Safe Harbor matching. However, some practices might not offer any matching because the plan is not Safe Harbor, so in that case nobody is getting a match. Still others can withhold the value of the employer contribution out of your paycheck if they let you participate in matching/profit sharing. It all depends on the situation and how much control the group has over their retirement plan. Often, this would require custom-designed plans that allow varying levels of contributions, and many bundled providers are not equipped to handle such requests.