When it comes to choosing a retirement plan option for yourself and your practice, plan management, maintenance, and remaining compliant with IRS regulation will undoubtedly be a factor in your decision-making. Why subscribe to an overcomplicated plan if there are no benefits that counterpose the extra time and money investment needed to manage it?
As we discussed in our previous article, "Retirement Plans in the Dental Practice", 401 (k) s are popular qualified workplace retirement plans that allow employees to contribute pre-taxed income to their individual retirement accounts and, in some cases, even receive an employer match up to a certain percentage point. Both employer and employee can contribute to the plans and both receive tax benefits.
However, 401 (k) retirement plans are also known for:
- Being highly regulated by the IRS to avoid discrimination favoring more heavily compensated employees
- Having stringent reporting requirements (Form 5500 and Form 1099)
- Requiring complex plan outlines to set up and maintain
- Multifaceted and ongoing maintenance requirements
In short, if the tax and savings benefits don’t outweigh the time or money needed to manage these plans, it might not be right for your practice. Because, at the end of the day, dentist owners have one of two choices: to handle the administrative work themselves or hire someone else to do it, and the former is wildly unrealistic (not to mention risky due to the number of moving parts and IRS regulations required to keep all the wheels moving compliantly).
If you want to run a 401 (k) plan in your office, you’ll need to hire someone to manage the day-to-day maintenance needs of your retirement plan such as designing the retirement plan documents, preparing benefit statements, keeping up-to-date with compliance regulations, allocating contributions to participants, and preparing annual returns. Competence and attention to detail are of utmost importance in these matters, so choosing the right person to perform these duties should not be taken lightly.
And since daily trades of mutual funds or exchange-traded funds affect distributions to participant accounts, which must be updated with gains, losses, dividends, and/or capital gains after trades are made, this job is a day-to-day responsibility, not a task that can be left to be performed quarterly or annually.
Third Party Administrators and Payroll Provided TPA Services
Some dentist-owners will turn to a Third Party Administrator (TPA) to handle the above tasks, while others will take it one step further and integrate their payroll and TPA services through major providers such as Paychex and ADP. The pitch from the payroll companies is that they make the process “seamless” and eliminate the need to hire an additional TPA.
For a practice owner with their hands full and little knowledge of TPA duties, this can sound quite appealing. Why not integrate these services, streamline your outsourced tasks, and call it a day? Sounds easy, right? This is exactly why they tend to be so popular. But, when it comes to matters such as these, it would be imprudent to equate popularity with quality.
Just because these companies boast being widely used, doesn’t mean your interests are protected.
Why? Whether you decide to use a TPA from a retirement solutions company or bundle your TPA services with your payroll services, you are ultimately responsible for the plan being created, maintained, and monitored correctly.
If your TPA doesn’t perform their job properly, you will be the one at fault and held liable.
You, as the plan sponsor, are subject to repercussion for errors made by your TPA. If they don’t process transactions, allocate contributions, prepare the proper forms, keep plan documents up-to-date, or complete compliance testing, you will be the one on the hook should things go awry.
Not only would these mistakes fall squarely in your lap to correct, but will likely cost quite a chunk of change to ameliorate. When all is said and done, it is your wallet that will be affected if plan details aren’t managed properly.
Inconsistency Can Lead to Incompetence
Furthermore, payroll TPAs are known for having high workplace turnover, which means you could potentially work with a number of different administrators over a short duration of time. While this may not sound too injurious on the surface, this inconsistency can lead to incompetency with your practice. Each new administrator who takes over your plan will need to become deeply familiar with a number of different plans in a short period time, the odds of which are slim, especially for an administrator with a heavy work load. The result is that details risk falling through the cracks, costing you more money and more stress.
Communication is Essential
The TPA role is also a responsibility that requires frequent and meaningful contact with the you, the plan sponsor. TPAs need to keep abreast of important dates and deadlines and notify you when it is time to fulfill time-sensitive requirements. They will also need to work closely with you to retrieve and confirm data points for annual discrimination testing requirements. Payroll TPA services, however, do not offer this type of guidance and risk returning faulty compliance testing results for your plan.
Fund Lineups vs. Investment Advice
While payroll provider TPAs offer a choice of investment options from a “menu” of choices offered to clients, they are not fiduciaries and they are not qualified to give investment advice. That means, they are neither responsible for making well-suited suggestions nor liable should their suggestions lead to losses suffered by plan participants. It is not their responsibility to help you choose investment options.
Using a Wealth Manager or Financial Advisor to Manage Your 401 (k)
Another option available is to hire a financial advisor who will either (a) work in conjunction with your TPA service or (b) handle all the responsibilities as 401 (k) administrator themselves.
Financial advisors are not only able to handle the TPA responsibilities described above, but can offer fiduciary investment advice on behalf of you and your employees. More often than not, dentist-owners will use the same advisor for their own wealth management services to ensure their interests are protected and aligned for maximum personal and professional financial success.
Leaning on your financial advisor for 401 (k) management can help to eliminate the problems dentist-owners encounter with the payroll provider TPAs.
401 (k) plan management is complex and time-consuming., but finding the right person or service to handle your practice’s plan can provide peace of mind and cost savings year over year. If you are a dental practice owner looking for retirement solutions for your practice, the advisors at Harbor West would be happy to speak with you about your options. We specialize in helping dentists find sound financial footing for both themselves and their practice.
This information is provided for general purposes and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the information, please consult your Financial Advisor for individual financial advice based on your personal circumstances. Neither Harbor West nor Geneos Wealth Management, Inc. provide tax or legal advice. Harbor West is a division of NorthEast Community Bank. Securities and advisory Services offered through Geneos Wealth Management, Inc. FINRA/SIPC Investment Advisory and Financial Planning Services offered through Geneos Wealth Management, Inc. Investments are not FDIC Insured. Investments are not deposits of the financial institution and are not guaranteed by the financial institution. Investments are subject to risks including loss of principal.