Curry says advantages of a 401(k) include a higher contribution limit and flexibility that allows physician-owners to put more money in the plan for themselves than for their employees.
The IRS contribution limit for 2017 for 401(k) participants is $18,000 annually (2018 limits were expected by the end of October). The employer is not required to make any contributions to employees, but the average contributions of those earning $120,000 or more in the practice are limited by how much lower-paid employees are contributing. This is why many employers offer to match some percentage of employee contributions—to encourage participation by all employees.
In addition to his 401(k), Ellis implemented a profit-sharing plan, an option growing in popularity, according to Dan Harding, chief executive officer of Los Altos, California-based Retirement Administration Inc. A profit-sharing plan can help maximize contributions for owners (up to $35,000 per year) and highly compensated employees while minimizing them for other employees.
“Practices in which the group targeted for larger contributions consists of older individuals who are more highly compensated than other employees would find this type of plan ideal,” says Harding.
What to know about 401(k) plans
When choosing a 401(k) plan, Ward says it’s important to understand the plan’s fees and administrative costs. A turnkey plan from a large provider might not have upfront costs, but could include higher administrative fees, while a custom plan set up through a financial adviser might cost a few thousand dollars but have lower ongoing costs.
A good adviser will help determine what mix of funds best meets the plan’s goals, which may not always match those of individual employees. “Everyone is going to have their personal opinions about what the plan should offer by way of features—loans, matching contributions, as well as investments,” says Curry.
A plan need not cater to every employee’s personal choice, but should instead focus on the physician’s goals and what the competition is offering, she adds.
Hertz says employee education is another important consideration. If employees don’t understand the plan it won’t help with retention efforts, so find out how much education assistance is provided for employees. A good plan will offer education that focuses on both understanding the value of saving for retirement and helping them make appropriate investment choices.
“It can be a real process to help the staff understand the value of the retirement plan,” he says. “Many folks value what they are paid on an hourly basis more than the added value of a retirement plan.”
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Hertz says letting experts handle the details is probably the best option, rather than trying to do it in-house. “There is tremendous risk that will be assumed if a practice administers a plan,” he says. “There are many compliance pieces that range from employee notices to annual filings, and certain plans require very specific reports be filed with the [Department of Labor] and with the [Employee Retirement Income Security Act.] Taking administration out of the hands of those that don’t do that on a day-to-day basis and putting it in the hands of experts is worth the cost.”
Once a practice chooses a plan, it can take three to six months to set up, because there is a fair amount of administrative work required to get started, says Hertz. These early stages are important to make sure the plan is set up correctly and that everyone understands the benefits.
“Be sure to get good, expert help and educate yourself, and take the time to understand the great value you are bringing to your employees,” he says.
The options available today are many, but Ward says anyone intelligent enough to get through medical school is capable of making a good decision on a retirement plan.
“It would be in their best interest to save for their retirement and keep the staff loyal and do it within the law so they don’t get sued,” says Ward. “The default is always something easy, but for some time invested going through all the options, they can get something that they and their employees will get a lot of benefit out of it. They don’t need to learn pension law to do that.”