Charlie Steingas provided the following article. Epple Financial Advisors can help business owners implement a cost effective solution for their retirement plan and to help the business owner meet their fiduciary duty. Contact us to learn how we can help:
As a dentist and a small business owner you probably work with many different trusted advisors who help you run your business. You count on these advisors to keep you aware of changes and make sure everything is running smoothly. Your attorney makes sure you are aware of any legal changes affecting your business that may need attention, your accountant helps you plan tax strategies to minimize the amount you are giving to Uncle Sam each year, and you get advice from experts about new dental technology and safety measures to improve your practice.
Generally dentists seek out these advisors when they need help, but if your company sponsors a 401(k) Plan you will probably be approached by financial advisors seeking to earn your business. And if you don’t sponsor a plan, they will be looking for you as well because you probably should have a plan. The top 3 reasons financial advisors will be contacting dentists who sponsor a 401(k) Plan are:
1. New Fee Disclosure Rules – In 2012, the Department of Labor will be requiring all companies with involved with your 401(k) plan to inform both plan sponsors and plan participants of all of the compensation they are receiving. Such compensation may be payments from mutual funds to offer their fund as a choice in your plan, payments from a recordkeeper to a Third Party Administrator to encourage the use of their recordkeeping platform, or payments from a payroll provider for bundling all of your company’s services together. You (with the providers help) will also have to tell your employees how much of that money is coming directly out of their accounts.
Some financial advisors are currently figuring out which companies and funds charge the highest fees and will probably be contacting you if your plan is paying those high fees or investing in those funds. You should be interested in this call for three reasons; first, you probably have the largest balance in the plan and are paying the majority of those fees, second, there are some lawyers out there who will get those lists as well and could convince your employees to sue you for breach of fiduciary duty, and third, if your employees find out that you are using their 401(k) money to pay a company from which they are getting no advice or service, you may have some HR issues that won’t be very pleasant. Hopefully your plan is currently well positioned with companies that charge fair and honest fees.
2. Higher Expected Tax Rates – I live in Minnesota, which is not only the Land of 10,000 Lakes, but currently we are the Land of the Top 10% Tax Rates for small business owners and I don’t expect that to get better any time soon. Currently most dentists are in a combined federal and state tax bracket of over 40%. The bad news is that with the looming budget crisis, the 40% is expected to increase to 50% or 60% starting in 2013. The good news is that one of the few tax deductions still available to small business owners is to contribute to a tax qualified retirement plan such as a 401(k) Plan or Defined Benefit Plan. Large businesses have the problem of large payrolls which makes large contributions for owners more difficult, but many small business owners can receive 80% – 100% of the contributions going into the plan for themselves.
As a dentist, you are probably earning more money and paying taxes in a higher tax bracket now while you are working than you will be when you retire and possibly move down to Florida (or some other state with no income taxes). One of the biggest benefits of having your money in a retirement plan is that, for the most part, you can choose when to pay your taxes. The government will force you to start paying some taxes in the year after you turn 70 ½, but with the ability to convert pre-tax money to Roth money which is never taxed again, you are able to pay taxes in the years you are in the lowest tax brackets.
While your current 401(k) plan assets may be small, you are an ideal candidate for a well-informed advisor who can help you figure out how to grow those assets with substantial contributions to any combination of 401(k) plan, profit sharing plan, and/or cash balance plan. Most (but not all) advisors are compensated based on the amount of assets they are managing, so the more tax money they can help you save, the more money both of you will have in the end.
3. 401(k) Managers Have Outperformed Other Asset Managers Over the Past 3 Years – One of the battles financial advisors are always fighting is the urge of investors to take money out of the market with things aren’t going well. Almost any financial advisor you talk to will tell you to do exactly the opposite because the goal is to buy low and sell high. Unfortunately that is usually easier said than done because most of us are risk-averse people who don’t want things to go from bad to worse especially when it comes to our investments.
Because 401(k) plans generally require participants to keep their money in the plan until they no longer work for the company, most of the money in 401(k) plans remained invested in the market after it crashed in 2008. Not only that, but many participants and employers continued making contributions to their 401(k) plans which made the recovery even better for them than for the general investors who panicked and took money out of the market or didn’t continue contributing.
Some financial advisors or asset managers love to talk about how well they have performed in the past. When they start noticing the above average returns over the past 3 years when the market dipped and then drastically recovered, they will be calling you to tell you about it.
So what does all of this mean to you as a small business owner with little time to worry about your 401(k) plan? It means that instead of just continuing with the status quo and hoping everything will be fine or paying an expert to help you with your fiduciary duty, someone who has done the research will be calling you instead of you having to call them.
If you already have a financial advisor, he or she has probably already discussed some of these things with you and if not, he or she better watch out because somebody is coming along soon who will.
Charlie Steingas is the owner of Cash Balance Actuaries, LLC, an actuarial firm specializing in retirement plans for small businesses. He is a member of the Northern Dental Alliance (NDA), the American Academy of Actuaries (MAAA), and the American Society of Pension Professionals and Actuaries, and is a trusted advisor regarding many retirement plan issues to accountants, attorneys, and financial advisors, as well as directly to his clients.
To get a complimentary retirement plan design or to have your existing plan looked at for free, visit NorthernDentalAlliance.com or CashBalanceActuaries.com. You can also speak directly with Charlie by calling him at (952) 500-8696.