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By David Arnold, Guest Writer

My spouse is a physician and recently started her own practice. After a few months, a CPA advised us that it was time to explore starting a 401(k) for the practice. The CPA firm recommended a local advisor who could set up a 401(k) and manage it for the practice, which has less than 10 employees. After setting up a call with the advisor and listening to their pitch, there was one thing that jumped out at me buried at the end—65 basis points for Assets Under Management (AUM). I did the math and saw that after all their fees, a $1 million portfolio would cost over $13,000 annually with a near-linear cost of $30,000 annually for a $3 million portfolio.

This fee seemed to be pretty high, and I struggled with the $17,000 increase in cost for the same amount of service at both portfolio values.

Being an avid White Coat Investor listener with an MBA, I took on the project to find the best solution. I started with the WCI recommended tab, spoke to other physicians and dentists locally, and asked for recommendations from the WCI social media community. Thank you all for your input. In the end, I interviewed around a dozen different 401(k) providers and learned two things. I would need to choose a balance between the level of service and the cost. I also learned that those listed on the WCI recommended tab were in that sweet spot.

Note: like every other post on this blog, this one is for educational purposes and does not constitute tax, legal, or accounting advice.

Determining What Options to Evaluate

The first step of finding the right 401(k) plan for the practice was determining what options to evaluate between the different plans: 401(k) with/without profit sharing, Roth vs. traditional contribution allowed, defined benefits plan/defined contribution, in-plan conversions, integrated with the existing payroll system, etc. Due to the number of employees, a solo 401(k) plan was not an option. Not all providers offer all services or the ability to customize. The next step was determining how much work would the practice want to take on vs. outsourcing it. This involved identifying who would act as the record keeper, the TPA (Third Party Administrator), and the investment advisor.

Compare List of Services

After a few conversations with 401(k) administrators, I realized I needed a spreadsheet to compare a list of services. Providers were evaluated on the following:

• Fiduciary status
  • Legal obligation to act in the best interest of the plan participants and the practice
• Integration with existing payroll service
  • If it does not integrate with your existing payroll service, you will be required to send an Excel spreadsheet each pay cycle listing the individual participants’ compensation
• Full service/one-stop shop
  • Would additional parties need to be involved and depended on throughout the year?
• Advisor type
  • Robo advisor vs. an actual person
• Setup fee
  • Ranged from $0 to a fee dependent on the number of participants to a flat fee
• Yearly maintenance fee
• Record keeper + TPA fee
• Average investment cost
  • Based on the funds provided in the plan and their respective expense ratio
• AUM fee
  • Can range from $0 and up
• Total fee on $1 million and fee on $3 million
  • Models can range from $0 to a standard fixed-rate AUM to progressively lowering tiers
• Max out 401(k) with profit-sharing option and/or the ability to add a cash balance plan
• Roth contributions and in-plan conversions/non-hardship rollover withdrawals
• Cost per user
• 3(16) services administrator: would generally take over some or most of the day-to-day management of your retirement plan. The level of involvement would depend on the scope of services agreed upon, but some of the more common services include:
  • Determines eligibility, correction of errors, and corresponding with plan participants
  • The involvement of the 3(16) admin depends on the scope the plan sponsor agrees to so there will be services it may or may not provide
  • Annual notice preparation and delivery
  • Review testing results
  • Form 5500 signature and submission
  • Loan review and administration
  • Hardship distribution review and administration
• ERISA 3(38) investment management fiduciary: responsible for designing and maintaining the investment selection for your retirement plan and assumes fiduciary liability for it. Using an ERISA 3(38) fiduciary provides the plan sponsor the greatest protection when it comes to fiduciary liability stemming from investments offered in the plan. The level of involvement depends on the provider/advisor, but below are some of the services we will be receiving through our arrangement:
  • • Plan design consulting
    • Create and maintain an investment menu
    • Create and maintain asset allocation models
    • Participant investment advice
    • Quarterly monitoring reports
    • Annual review of the plan
    • Assist with researching/selecting service providers
• Provide financial coaching sessions for staff
  • Providers ranged from no coaching to annual coaching to one-on-one coaching sessions
• Can the plan owner pay the 401(k) provider fees outside of the tax-advantaged account with business funds?
  • Some plans will mandate their fees be deducted from the money invested in their tax-advantaged accounts, while others will allow for the business to pay the plan’s fees from the business directly. This has two benefits:
    • Allows for a business-related tax-deductible expense
    • Fees do not impact the investment funds' compounding growth. For those maxing out their tax-advantaged account, paying fees with the finite contributions may not be desirable

Each conversation with a plan provider can take up to an hour to listen to what they offer and for them to answer all of your questions. Each pitch is a little different, and taking notes in a standardized Excel sheet as you listen allows for an “apples to apples” true comparison in the end. Creating an Excel spreadsheet with the above-mentioned criteria will help you drive the conversation and get the information you need, as opposed to allowing them to pitch to you what they view as important and gloss over other topics. The first conversation may seem daunting, but by the time you have your second or third meeting, you will be a pro at it and start to form an opinion of the key differentiation factors.

Everyone’s financial goals and needs for their practice are different. In the end, after evaluating a dozen 401(k) providers, FPL Capital Management (iQ401k) provided the best balance of service and cost for the practice.

Determine Retirement Plan Priorities

It is important to determine what is a priority for you in your plan. The old saying goes: “Good, Fast, Cheap: You can only pick two.” The same is true when selecting a 401(k) plan. That might be a turnkey solution at a higher financial cost, a more time-intensive solution at a reduced cost, or a balance with a robo advisor-managed plan at a large firm. With FPL Capital Management (iQ401k), there was a full-service turnkey solution, providing financial advising to employees and excellent customer service, at a fair price. FPL wasn't the cheapest and it isn't the most expensive, but it did provide a great level of service and allow for the practice to focus on providing patient care while the financial experts focus on providing financial care for the employees.

If you need extra help with planning for retirement or have
questions about the best way to save your money in tax-protected accounts, hire a WCI-vetted professional to help you figure it out.

If you have your own practice, how did you select a retirement plan? What other questions could you ask when interviewing providers? Who did you ultimately end up selecting? Comment below!

[Editor's Note: David Arnold, MS/MBA, is a corporate trainer who enjoys running and spending time with his family and Australian Shepherd. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]

The post The Criteria to Evaluate Before Running Your Own Practice Retirement Plan appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

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By: Lauren O'Brien
Title: The Criteria to Evaluate Before Running Your Own Practice Retirement Plan
Sourced From: www.whitecoatinvestor.com/401k-criteria-to-evaluate-for-practice-retirement-plan/
Published Date: Fri, 11 Aug 2023 06:30:06 +0000

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