Does Your Dental Practice 401(k) Plan Need a Good Flossing?
A dental practice’s retirement plan often represents the second biggest accumulation of wealth for the owners of the practice. In some cases, the retirement plan’s value to the participating dental professional may meet or exceed the value of the practice itself. As the practice grows with time, it is extremely important the owners evaluate retirement plan options that can further build this valuable source of wealth before they choose to retire. Failure to perform ongoing maintenance can lead to plan decay. In this article, I will highlight three opportunities to maximize retirement plan features and help build wealth.
Starting a 401(k) Plan in the Early Years
Case Study 1. – Dr. Lois P. Ceriski DDS founded her practice in an up and coming suburban neighborhood three years after graduating from dental school. At that time, she was the sole practitioner. She was supported by a hygienist and an office manager/receptionist. During the practice’s second year, she established a company 401(k) with the help of her payroll service provider. The plan start-up and ongoing costs were “free” according to her payroll company representative.
The seductive value of the word “free” is well documented. In the case of a payroll provider retirement plan, what you don’t see may hurt you. Retirement plans offered by payroll providers may be structured using high cost mutual funds that provide fees to the payroll company or subsidiary. Also, payroll providers don’t usually assign a financial advisor to monitor the plan for you. The “Plan Sponsor”, in this case, the dental practice, should hire an advisor to make sure that the plan is appropriate for practice’s employee population. If the practice fails to hire an advisor, not only does it risk supporting a high priced plan, it also assumes the liability for educating the employee workforce.
If you choose 401(k) provided by your payroll company, it is important that you hire an advisor to monitor costs and performance. The advisor would also be responsible for employee education which may reduce your liability as well as human resource headaches.
Adding to Your Retirement Plan as Your Dental Practice Grows
Case Study 2 –- Over the years, Dr. Ceriski’s practice expanded due to her excellent reputation in the growing Sunbelt city. She became President of the local regional dental association which further expanded her visibility. As a result, two established local Dentists decide to merge their practices with hers and became partners. She was also able to hire some new graduates from the state dental school to establish a succession plan when she and her partners decided to retire from the practice. The practice’s support staff bloomed to 15 hygienists and office managers. All three dentists were over fifty years old, while the remaining employees were no older than forty. This effectively created three payroll tiers within the organization: partner Dentists, newly graduated Dentists, and hygienists/office support. The Company’s 401(k) plan remained the same.
What is a “Cross-Tested” Plan?
Retirement plan provisions do not allow business owners to maximize their contributions at the expense of their employees. However, a successful practice structured like Dr. Ceriski’s growing business, may provide an opportunity to customize the design of the 401(k) plan so the partners can accumulate significantly more retirement savings. One plan option that may apply to her current situation is a “Cross-Tested” plan. According to FuturePlan, a large 401(k) plan design firm, a cross testing feature
“divides employees into groups based on objective standards. A group can be as small as an individual employee, which provides an employer with the greatest amount of flexibility. The IRS allows a greater percentage of the profit-sharing contribution to be allocated to a certain group, typically owners, versus other groups. This allocation method is permissible because contributions are tested on a benefits basis and younger employees require a smaller contribution to achieve the same benefit at retirement than someone who is closer to retirement.”[1]
Cross-testing recognizes that younger employees have the more years to increase their retirement savings than older employees. With proper plan design. Dr. Ceriski and her partners may be able to significantly increase their retirement savings due to receiving a higher level of company profit sharing allocations.
[1] FuturePlan company literature
Growing Your Retirement Account When Facing Retirement
Case Study 3 – Dr. Ceriski had reached a point in her life where she was actively evaluating her retirement options. The practice was performing very well and profits had increased substantially over the last few years. It was time to move on. Unfortunately, she reviewed her exit strategy with her financial advisor, a CERTIFIED FINANCIAL PLANNER™ professional, who did not believe that had sufficient savings to support her active lifestyle in retirement. He reviewed her financial plan and determined that there was a high likelihood that she would run out of money before she reached her life expectancy. She looked at her 401k balance and asked how she could boost her retirement savings in the next few years. How could she get off the treadmill?
Cash Balance Plans
Dr. Ceriski should evaluate whether the addition of a Cash Balance retirement savings plan made sense for the practice. Brent Henningson, FSA, EA and CEO of Saber Pension and Actuarial Services defines a Cash Balance Plan as a type of retirement plan that allows for large deductible contributions
“that grow tax-deferred and can be rolled over at retirement. A Cash Balance Plan consists of annual pay credits that grow at a predefined rate. Each year, a specified pay credit is given to everyone in the Cash Balance Plan. The predefined pay credits often differ among participants in the Plan. For example, owners generally receive very large pay credits and non-owner employees receive relatively small pay credits.”[1]
These plans can be combined with a 401(k) Profit Sharing plan or a Solo 401(k) to significantly increase retirement savings in a short period of time. At retirement, the funds can be rolled into an IRA.
Each of these three scenarios require a strong team to bring them to implementation. Ideally, your team should consist of tax advisor who recognizes the great tax savings benefits associated with these plans. The remaining team members should include a financial advisor who is familiar with custom retirement plans and a Third Party Administrator (TPA) with strong plan design experience. With such a team in place, the dental professional may significantly improve the odds of retirement saving success.
Please contact me if you need a trusted team member.
Advisory services offered through Capital Analysts or Lincoln Investment, Registered Investment Advisers. Securities offered through Lincoln Investment, Broker Dealer, Member FINRA/SIPC.www.lincolninvestment.com
West Coast Financial Group, Inc. and the above firms are independent and non-affiliated.
Tax advice is not offered through, nor supervised by Lincoln Investment or Capital Analysts