How to Set Up a 401(k) Plan for a Small Medical Practice

October 29, 2011

Physicians working on their own or in a small practice are alone responsible for their financial well-being in retirement, so a 401(k) is a good idea.

A whopping 87 percent of solo medical practitioners do not have a 401(k) plan. As a result, many of them are not saving enough for retirement.

This is a serious problem that many physicians have been sweeping under the proverbial rug. Unlike doctors working at hospitals or larger practices, those working on their own or in a small practice are alone responsible for their financial well-being in retirement.

Without a 401(k) plan, these practices are missing out on some great benefits:

• A 401(k) plan is a great recruitment and employee retention tool.

• A 401(k) plan is a great tax planning tool. With a profit-sharing component, a 401(k) plan can be designed to maximize the principal doctor’s contribution and tax deduction, while limiting contributions to non-essential employees.

• A 401(k) plan is a great asset-protection tool.

Looking for a good TPA

The 401(k) marketplace is a broken place. Small businesspeople left to their own devices often end up with a bundled 401(k) 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 hidden cost. A study by Deloitte shows that for plans with less than $1 million in assets, the average all-in fee is 2.37 percent. Stay away from them!

The first step in setting up a 401(k) plan is to search for a quality third-party administrator (TPA). A TPA helps put together a plan and does the annual compliance testing and paperwork.

Recently, a doctor client of mine asked me to help him do just that. I narrowed the choice down to three candidates: 1) the CPA firm (“SC”) he 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) a TPA firm (“EF”) that has a stellar national reputation. I did quick due diligent on all three firms and ended up with this information:

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 401(k) plans.

The second step I took was to set up separate conference calls between the doctor, me, and the two remaining candidates. Here are some issues to consider at this step:

• Can the TPA explain ERISA (the law governing 401(k) plans) in layman’s terms?

• Is the TPA responsive and courteous?

• Will the TPA provide timely support as the principal doctor interacts with his employees.

• Will TPA provide investment plan design?

The final step is to help him make a decision between QP and EF. I personally favor EF since it acts as a fiduciary, but my doctor client picked QP because it was very responsive and could get the plan ready by the Oct. 1, 2011, deadline. I could accept his decision since, unlike a bundled 401(k) plan, if you are not happy with the TPA, you can replace it without affecting the overall plan.

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