It's about time—the greatest tool that a medical practice can use is time—that is, time within a retirement program. It is never too late, nor is it ever too early to implement a plan. Other than routine procrastination, there are many reasons that a business may hesitate to make the move. This article addresses some of these common concerns and provides practical remedies.
Myth No. 1Social Security and employer-sponsored pension plans will provide adequate income during retirement.
This is highly unlikely, especially for individuals in higher income brackets. Our current Social Security system, although somewhat successful in the past, is under severe actuarial pressure to keep pace with demand. In short, by giving out more benefits to recipients than they paid in, and coupled with the increase in the average American's life expectancy, the system is projected to go broke around 2030.1 Of course, there is major discussion for proposed reform. Prudent employers and employees may not want to bank on this source, a possible Social Security income supplement, as an exclusive retirement income stream. Fortunately, there are several well-designed and inexpensive retirement vehicles that employers may sponsor for employee's private savings. Much of the responsibility for saving for retirement will now be passed on as a responsibility of the individual investor. In recognition of an individual's need to save for retirement, Congress has again viewed favorably upon plans such as 401(k)s, SEP, SIMPLE, and Profit Sharing during the tax reform of this past summer, 2001.
If a small business installs a retirement plan, then the employer must make a contribution or match to the plan.
Most small business retirement plans do not require an employer deposit, and in fact, only a smaller percentage (approximately 25% of companies with fewer than 50 employees), have an employer contribution or match. Although plans such as a 401(k) permit an employer match, these deposits are typically written into the plan document as flexible contributions (annually) at the discretion of the employer. If the employer announces a specific match before the beginning of the plan year (or at any time during that plan year), then they are committed for that year; however businesses that are uncertain may forgo this decision until the plan year end, and they are never required to make a match in future years (unless previously selected and specified by the plan document). Some retirement plans such as the newer SIMPLE plans require an employer deposit. The formula should be reviewed in detail prior to plan installation. In addition, defined contribution plans have top-heavy testing requirements, which could result in a nonelective employer top-heavy contribution.
Retirement plans are expensive and not of primary interest to employees.
In fact, retirement plans are inexpensive compared to the effect of not attracting and retaining quality employees. Members of the medical profession are finding that one of the greatest expenses regarding personnel is in interviewing, hiring, and training for specialized positions. Maintaining a low attrition may be much less expensive in the long-term, as weighed against the costs of lost employees. Because more and more businesses are offering plans, employees will commonly ask during an interview, “Do you offer a retirement program?” while they compare with potential employers who do offer an attractive plan. Figure 1 shows statistics illustrating the significance that employees place on workplace retirement plans.
The employer must pay all costs of a retirement plan.
Instead, with most products, the employer may pass all of the plan costs, including record keeping fees, to the plan participants, thus incurring a $0 cost. More and more businesses find a high demand by employees for a retirement program, and employers are looking for methods to offer this expected benefit with little or no cost to themselves. Participants may experience some or all of the fees as “investment reduction,” if the employer elects this accounting. Often, the employer will opt for a maximum base fee that they (the employer) would pay, and then any other costs would be passed on to participants. A per-participant fee range may be $15 to $40, with $25 being the most typical. Fees will vary with each product, and some do not have the flexibility to allow expenses to be billed to participant accounts. For that reason, employers should review billing methods by the provider prior to product selection.
If an employer profit-sharing deposit is made, then all employees must receive the same percentage.
A New Comparability Profit Sharing Plan is a relatively new type of plan that allows an employer to allocate discretionary or flexible profit-sharing contributions based on each employee's age, compensation, and/or job classification. A new comparability plan permits the employer to divide eligible employees into two or more groups and make different contributions (by percentage or dollar amount) to each. It is an ideal plan for older, higher-paid business owners who want to receive the lion's share of the contributions. An example of classifications might be as follows: Group A—owners/partners (favored, receiving 65% of the contribution), Group B—officers/VIPs (receiving 25% of the contribution), Group C—all others (receiving 10% of the contribution).
An unvested amount in a former employee's account must be redistributed among remaining participants.
There is another commonly overlooked nonvested forfeiture option which credits the employer's contribution and thus reduces the actual amount the business must pay as a match or profit sharing deposit. This selection may be done via the plan's adoption agreement, and works well for employers who may have attrition or for those who are not as interested in maximizing overall plan deposits as they are with reducing the employer net out-of-pocket.
Loans must be offered to plan participants.
Only some types of plans, by design, may offer loans (such as 401(k) and Profit Sharing plans), an even with these types, loans are an option, a privilege that the Trustee may select to offer for participants. On occasion, the loan feature may become unattractive to the employer who finds that employees are “abusing” the privilege by loaning out maximum permitted values without regard to the primary intent of the plan. Because the qualified plan is a benefit primarily for provisions of retirement income, businesses that find themselves in this predicament may consider a nonretirement plan (such as a payroll savings plan) in addition to the retirement program. With these supplemental plans, employees will have an alternative to borrowing half of their much-needed retirement balances.
With SIMPLE plans, there will always be an additional expense to the employer (versus flexible employer deposits in other plan types).
The operative word here is “additional.” SIMPLE plans require either an employer match (paid only to those accounts of participants who make elective deferrals) or a profit-sharing deposit (to all eligible employees); however, this amount does not necessarily have to be an additional amount for which the employer has not budgeted. Instead, with careful planning, the employer may negotiate this additional amount during the hiring of a new employee and/or during the annual employee review. For example, in preparation to hire a new employee at $25,000 compensation, an employer may instead offer a salary of $24,250, and also a retirement benefit with a required 3% pre-tax match. If the employee elects to save $750, then the employer will contribute a match in that same amount, with dollars already budgeted. Also, a bonus, which may have otherwise been paid in cash, may be adjusted or “shared,” with a partial amount deposited as an employer SIMPLE plan contribution.
There is no way to avoid the Average Deferral Percentage testing, which affects higher paid employees in a 401(k) retirement plan.
Plans known as safe harbor 401(k) retirement plans offer an employer incentive to match approximately 4% of an employee's elective deferral. If the employer has already intended to make an annual matching (or profit-sharing) contribution and does not mind the required deposit, safe harbor plans are the ideal way to avoid Average Deferral Percentage Testing and thus permit maximum savings by the highly compensated employees.
It takes a long time, a lot of work, and a comprehensive analysis to establish or change a retirement plan.
Although a careful analysis is important prior to implementation, the whole process of installation can take no longer than a week. If necessary, a plan can even be established in just a few days. A professional representative is critical in this process. The procedures of years ago, which required a schedule lasting several months, are no longer the case. With online enrollment materials, fund performance figures, and Web-based investment analysis tools readily available to plan sponsors, the process can move along efficiently. Most retirement plan providers offer an all-inclusive set-up package that incorporates a new (or review of the existing) plan document, enrollment/education meetings for eligible employees, and assistance with fund education by a licensed registered representative. For technical considerations, during the selection and design of the “best” retirement program, consult your retirement specialist.
Retirement plans sponsored by a medical practice can provide the cornerstone for the owners and their employees' financial stability in later years. Dedication among employees begins with the retirement plan foundation, a commitment, and genuine interest in employee longevity. Installing a solid plan means that both groups then benefit from the common interest of a retirement nest egg. Plan now, play later. Time is of the essence, and there is no time to postpone dreams of later years.
John M. Novak has specialized in the 401(k) and retirement plan marketplace for 14 years, after having joined MassMutual in 1986. He is an Investment Advisor Representative and Registered Representative of MML Investors Services, Inc., a subsidiary of MassMutual. Supervisory Office: 1414 Main Street, Springfield, MA 01144-1013, tel: (413) 737-9400. Mr. Novak may be reached at (610) 766-3014; JMNovak@finsvcs.com1. Note: Source is The 2000 Annual Report distributed by the Office of Public Affairs, published by The Urban Institute, a nonprofit, nonpartisan, economic and social policy research organization in Washington, DC. Recent projections indicate that the Social Security trust fund, which in effect depends for solvency on payroll tax revenues of current workers to finance current retirement benefits, will be exhausted by the year 2030 as the last of the baby boomers enter retirement.
