Once upon a time retirement was easy. A dentist spent a career building up a great practice then sold that practice to the next generation of younger dentists and retired comfortably on the proceeds. Those were the days.
Thanks to baby-boomer demographics and the increasing cost of education there will only be 2 dentists graduating for every 3 dentists retiring in the future.1 Thanks to soaring health care costs and pressures on social security, the cost of a comfortable retirement may exceed the value of the average dental practice.
Small business owners are increasingly expecting a workplace retirement plan to provide part of their retirement income. Eighty percent expect to get at least some of their retirement income from a workplace retirement plan in addition to income from selling their business.2 In fact, nearly 20% of small business owners expect to get most or all of their retirement income from their workplace retirement plan.3
Like other small-to-mid-size businesses, a workplace retirement plan is becoming more important to dental practices. However, there are several types of workplace retirement plans, including: SEP-IRA, SIMPLE-IRA, and 401(k); and there are several different ways a retirement plan can be set up, including profit sharing, employee contribution, and employer match.So, how does a dental practice decide on an appropriate workplace retirement plan? Here are some considerations that can help.
Consider your needs and priorities:
First and foremost, understand your practice’s needs and priorities. An appropriate plan type and/or plan setup depends a lot on what’s most important to your practice. Realizing that determining the type of plan for your practice will be your responsibility, you should ask yourself a number of questions. For example, are you more concerned with attracting and retaining the best employees? Or is maximizing the amount you personally can save for your retirement a more important consideration. (See insert bottom page 10: Key Reasons for Offering a Workplace Retirement Plan.)
Determine an appropriate type of retirement plan:
The most common retirement plans can be thought of in 2 categories: plans for sole proprietors and plans for businesses with employees. Most dental practices have full-time employees. For those practices, SEP-IRA, SIMPLE IRA, or 401(k) plans are options. If your practice doesn’t have fulltime employees beyond your spouse, you can set up a SEPIRA or Self-Employed 401(k) plan.
Some important questions in determining an appropriate plan type are:
- Does the practice have full-time employees?
- Will the practice be able to (or even required to) contribute money into employee’s accounts?
- Will employees be allowed to contribute to the plan?
- How much tax advantaged savings is possible in the plan?
- How much will the plan cost, to the practice and to you and your employees as participants in the plan?
- How much administrative responsibility will be involved for your practice?
There is no magic formula for finding an appropriate plan. However, there are a couple of basic trade-offs between retirement plan types. Generally the greater the number of contribution types offered by a plan and the greater number of plan features the more the cost and administrative responsibilities a plan will have. Also, the more service and support that you and your employees receive the more a plan will cost. (See sidebar: What’s the Right Retirement Plan Type for My Practice?)
Another thing to consider is the future. If you expect your practice to grow or plan to add employees you might want to opt for a more robust, plan now.
Retirement Plan Design Considerations
Some retirement plan types won’t require as many choices to be made from a plan design perspective. Other plan types could be more flexible and may provide you more options.
Some plan design factors to consider:
- Employer match: will your practice match contributions of your employees? Various match amounts and formulas exist, but as a general rule an employer match will help to maximize the amount you and your employees can save. And remember, contributions your practice makes on behalf of your employees may be a deductible business expense.
- Eligibility: How long will new employees have to work before they can participate in the retirement plan? Consider your employee turnover rate when determining your plan’s eligibility requirements.
- Vesting: How long will it be before employees are vested in the contributions that the practice has made on their behalf? If an employee leaves, they are entitled to all of the money they have contributed. However, your plan can specify an appropriate vesting period for certain contributions that your practice makes on behalf of plan participants.
- Loans and withdrawals: Some 401(k) plans allow employees to borrow from their retirement plan account or make withdrawals under certain circumstances. Although employees often like these options, they can add to the administrative responsibilities for your practice.
- Investment options: Some plans require the employer to select a range of investment options for the plan. Others leave all investment choices up to the individual participants in the plan.
There are a number of other considerations for selecting and implementing an appropriate workplace retirement plan.
Be sure you understand all the costs involved in your plan. You need to understand the costs that your practice will pay, including set-up fees and ongoing administration fees. You also need to understand and distinguish between plan level costs, generally payable by the practice and participant-level costs payable by participants in the plan. Some plan providers allow you to structure the plan so that certain plan level expenses are partially or wholly paid by plan participants. Also keep in mind that asset-based fees are also part of the total cost of your plan.