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


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.

Find out more about Michael Zhuang and our other Practice Notes bloggers.

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