Some advisers work for a flat fee while others are on commission, which may lead them to push certain plans over others, says Hertz. “It’s important to find someone who will educate you first, then talk about the options. It shouldn’t be about the sell, it’s the education and understanding what you are trying to do.”
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Brand-name plan providers, such as Fidelity or John Hancock, can make things simple to set up, but they are not always as cost-effective as they may first appear, says Warren Ward, CFP, president of WWA Planning & Investments in Columbus, Indiana, who has been creating custom retirement plans for small businesses for 26 years. “Those tend to be expensive, not so much in upfront cash, but in annual expenses that may be more than 3%, when you can find similar plans for around 1%.”
Ward says it’s also important to understand the limitations of what the plan provider can offer. An insurance company, for example, might have a range of plans with no or low costs, but generally cannot give advice on which plans to choose because they are not licensed to do so. Education for the physician and the employees may also be limited in low-cost plans, with the salesperson referring investment questions to a company website.
The most common options
The retirement plans most commonly offered by medical practices include individual retirement accounts (IRAs) and 401(k) options.
There are two types of IRA plans that are common in medical practices: simplified employee pension (SEP) and simplified incentive match plan for employees (SIMPLE), according to Curry. These plans normally work well if a practice consists of just the doctor or a doctor and one or two employees.
According to the Internal Revenue Service (IRS), under a SIMPLE IRA, physician-owners can:
- Contribute up to $12,500 per employee with an additional $3,000 for employees over age 50; and
- Offer employees in the plan a contribution by either matching employee contributions 100% of the first 3% of compensation, or contribute 2% of each eligible employee’s compensation.
For the SEP IRA, the IRS states that it must be funded entirely by the employer, but it has no annual funding requirements. Owners can contribute up to 25% of compensation, but that cannot be more than $54,000 in 2017, and the contribution to all employees must be the same percentage of salary as the owner.
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Thus, if the physician-owner puts 15% of her salary into the SEP IRA, she must contribute 15% of plan participants’ salaries into the SEP IRA as well.
“With the SEP or SIMPLE plans, generally the benefits need to be given equally across the board,” says Curry. “Most doctors want to give some benefits to their employees, but it’s their blood, sweat and tears and their neck in the noose when it comes to risk, and they’d like a higher percentage of the benefits. You can’t get that with a SEP or SIMPLE plan.”
The 401(k) plan is the best-known option for retirement benefits, and often a good fit for medical practices. “The 401(k) is usually where you want to go, even if you are a small practice,” says Ward. “There are simpler choices for sure, but they are not as flexible, and for not much more money, you can get a 401(k) that can encourage employees to stay longer.”