The Investment Scientist

How I helped a doctor set up a 401k plan

Posted on: September 29, 2011

Setting Up a 401k Plan

Dr. Smith is a client of mine. He is a facial plastic surgeon with a booming solo practice supported by five non-essential staff members. His staff turnover is very high; no one stays more than three years. This has allowed him to contribute the maximum amount to his SEP IRA without contributing anything to his employees (Note that by law working three years out of the last five years is the eligibility requirement for SEP IRA participation.)

In our recent regular progress meeting, he told me that he was pondering setting up a 401k plan for his employees. There are three reasons why it’s time for him to have a 401k plan:

  1. Some of his employees will have worked for him for more than three years. If he contributes 25% of his earned income to his SEP IRA, he would have to do the same for his eligible employees. That would break his bank. The two alternatives are 1) to let go of employees who worked for him for more than three years or 2) to contribute nothing to his own SEP IRA. Both are not appealing to him.
  2. He plans to hire a physician in the coming year. By all account, this will be his first essential hire. Having a 401k plan will definitely help with recruitment and retention of talent.
  3. A 401k plan simply provides better asset protection in the event of a malpractice lawsuit or bankruptcy.

Looking for a quality third-party administrator

The 401k marketplace is a broken place[1]. Small businesspeople left to their own devices often end up with a bundled 401k plan through one of those insurance companies that have a huge sales force. These plans are purported to do everything for you, e.g., administration, record keeping, and investment, at an exorbitantly high cost. A study by Deloitte shows that for plans with less than $1mm in assets, the average all-in fee is 2.37%. That’s why I steered Dr. Smith away from this type of vulture 401k plan.

The first step I took was to search for a quality third-party administrator (TPA). A TPA helps put together a plan and does the annual compliance testing and paperwork. I narrowed the choice down to three candidates: 1) the CPA firm (“SC”) Dr. Smith has been using, which also has a pension administration division; 2) a TPA firm (“QP”) another doctor client of mine highly recommended to us; and 3) another TPA firm (“EF”) that has a stellar national reputation. I did quick due diligent on all three firms and ended up with this information:

SC QP EF
Setup Fee (one-time) $2800 $750 $500
Annual Admin Fee $3500 $1000 $1500
Record Keeping “additional cost” included 0.06%
Investments John Hancock Advisor designed Advisor designed
Custodian John Hancock Mid-Atlantic or Fid Matrix only
Act as fiduciary? No No Yes
Plan up by 10/1[2] Not sure Yes Not sure

Based on this information, I quickly eliminated SC as a candidate since it is really not an independent TPA. It is acting more like a sales agent for John Hancock’s bundled 401k plans.

The second step I took was to set up separate conference calls with Dr. Smith, me, and the two remaining candidates. We learned about two important concepts: a safe harbor 401k plan and a cross-tested profit sharing plan. The combination of these two will give Dr. Smith the opportunity to put more than $50,000 into his 401k plan, while minimizing his per-employee cost.

The final step is to help Dr. Smith make a decision between QP and EF. I will not reveal the winner here. Suffice it to say that Dr. Smith is very satisfied with the result since, with my assistance, he was able to make an informed decision in a very short period of time.


[1] See “Fixing the 401k” by Joshua Itzeo and “Stop the 401k Rip Off!” By David Loeper. Both books are available on Amazon.com.

[2] A safe-harbor 401k plan must be set up by October 1st to allow 2011 contributions.

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4 Responses to "How I helped a doctor set up a 401k plan"

Can you at least reveal what helped you and Dr. Smith make a final decision? While EF appears to be more expensive, it is the only company that acts as a fiduciary, i.e. legally states that it is acting only in the best financial interests of the client. QP seems to be less expensive on the surface, but it could very well steer clients towards more expensive investments and make more money in kickbacks. Excuse me, “commissions” or “advisor fees” or “12-b-1 fees” or whatever is the current name for kickbacks.

Jerry,

He ended up with QP since its rep is very responsive and they could get the plan up by 10/1/2011 which is important to my client.

The fiduciary part is not the most important to him since he has me watching for him. However, if you do not have a fiduciary advisor watching for you, I highly recommend using EF instead.

Best regards,
Michael

Can you provide the names of the two third party administrators (TPA), QP and EF, or provide a short list of reputable TPAs

Call me 202-449-8468 or schedule an appointment with me: http://www.mzcap.com/scheduler.htm

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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