A 401(k) is not only a valuable tax benefit for you as a business owner, but also a great employee benefit that can be used to retain high-quality staff for your dental practice.
Dental industry 401(k)s rank in the top five (overall) retirement plans by industry,1 so you’re likely already at a good starting point. However, it's still important to check in regularly to make sure your plan is equipped with the most modern features suited to your practice and staff. Having the best 401(k) options in place will allow your plan to work for you year-round and permit you to focus on what matters most—growing your business.
When reevaluating your current plan or setting one up for the first time, here are four key measures to take into consideration.
1. Improve your plan design
To make sure your 401(k) plan is actually delivering financial and practical results for your practice, there are a few important features that every employee will want:
Easy signup—Employees should know exactly where to sign up for the 401(k) plan. It should also be easy for them to learn the types of investments they can choose from without having to consult you or call a customer support center. All of this should be configurable through your 401(k) administrator website. If not, it might be time to consider a more user-friendly provider.
End-to-end online management—Today’s employees are accustomed to doing everything online, including 401(k) planning. The ability to choose investments, view reports, have access to online investment education, and automatic rebalancing are just a few of the features that will help you stand out from your competitors and show your employees that you care about their financial futures.
Low, transparent fees—A transparent fee structure helps your employees feel comfortable making financial decisions and planning their long-term 401(k) investment strategies. In fact, the Departmetn of Labor Fee Disclosure Act requires fee transparency.2 Your employees can feel confident their savings will not be depleted by fees, and as the employer, you can feel confident there is a high ROI on this employee benefit
As a benchmark, your 401(k) plan should offer fund options with an expense ratio of less than 0.50%. Funds that are higher by even just 1% can lead to hundreds of thousands of dollars in lost retirement savings.
2. Increase participation rates
Reviewing participation rates to make sure you’re within the industry standard provides a simple performance benchmark for your plan. If participation rates are not high, it may be because you’re not offering the features of a robust plan, including a contribution match, automatic enrollment, and access to easy-to-understand information about your plan.
Offer a contribution match—A 2017 Pew studyfound that eight in 10 employers offer an employer contribution match.3 Plans with a match have higher participation rates than those without one. The same Pew study found that participation across millennials, gen X, and baby boomers was 16% higher with plans that offered a match. This tax-deductible incentive your practice contributes makes your benefits package even more competitive and provides more value to the employer and employees than a bonus of equivalent cost.
How much should your plan’s match be? According to US New, the median match is 4% of employee pay.4 It ranges from less than 3% at the bottom 17% of plans to over 6% at the top 16% of plans.
Implement automatic enrollment—Automatically enrolling employees into a retirement plan can have a dramatic effect on participation rates. The 2017 Vanguard small business edition survey reports that plans with automatic enrollment saw rates of 82% while those with voluntary enrollment saw only a 57% participation rate.5 Of course, a disclosure is necessary before automatically enrolling employee. Your 401(k) administrator can help with this.
3. Review employer and employee fees
Review your plan fees on a regular basis to make sure all fees are reasonable and that you’re using everything you’re paying for. This practice can help bring to light any unnecessary costs.
Here are the average costs of some common fees. Depending on the provider, some of these are charged to the employer, employee, or both. Be sure to ask about who’s being charged for what.
Fund fees—From 1996 to 2017, equity fund fees have dropped from 1.04% to 0.59%, according to a 2018 ICI Research Perspective report.6 Paying more than 1% for a fund has become less common. Check that the funds in your plan offer reasonable fees. High fund fees can contribute to reduced participation rates.
Recordkeeping—Recordkeeping fees consist of account administration and management. According to the 2017 12th annual NEPC defined contribution plan and fee survey, these fees currently stand at 0.41% and seem to have plateaued after hitting an all-time low.7
Advisory services—Many plans are moving to robo-advisors, which charge 0.25% to 0.50% and in some cases cost nothing.
12b-1—These fees are used mainly to cover the marketing of the funds and, notably, commissions for brokers. They typically fall between 0.25% and 1% (the maximum permitted of a fund's annual net assets).8 Unfortunately, these fees are often seen as kickbacks because fund managers are essentially incentivized to recommend certain expensive funds (which may not be in their client’s best interests). Ideally, there should be no 12b-1 fees in your plan. If there are, this is a great reason to reconsider your current provider and look for a better fit for your practice.
Keep in mind that as your plan grows, you have more power to drive down fees. Periodically check with your plan provider about possible discounts based on your plan’s size.
4.Prep for IRS non-discrimination testing
Annual non-discrimination testing (NDT) measures the distribution of benefits across your employees and is performed at the beginning of each year.9 Ideally, your plan provider should monitor throughout the year for any issues that arise and inform you. This monitoring ensures you’re not at risk for failing the test when the time comes.
To have the most accurate test you should review your plan’s census that contains employee details. One of the most important parts of the census is the reporting of highly compensated employees (HCEs) and non-highly compensated employees (NHCEs). Given the typical ratio of office and administrative staff to dentists at many small dental offices, you may be at particular risk of failing. Your 401(k) provider should offer assistance in monitoring and resolving any issues leading up to the annual testing.
Final thoughts
If you don’t regularly review your 401(k) plan, you might be falling short on providing a valuable benefits package and losing time and money that could be used elsewhere. Remember to take into account your business goals and employee needs and offer a 401(k) plan that takes advantage of low fees, automatic features, and online investment advising that is well suited to the needs and budget of your dental practice.
Most importantly, using all of the features 401(k) plans offer not only gives your employees the best opportunity to save for their retirements, it will help your practice stand out with top talent in the field.
References
1. http://www.judydiamond.com/wp-content/uploads/JDA-401k-Benchmark-Report_2018rev.pdf
2. https://www.dol.gov/agencies/ebsa/key-topics/retirement/retirement-plan-fee-disclosures
3. https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/02/retirement-plan-access-and-participation-across-generations
4. https://money.usnews.com/money/retirement/401ks/articles/2018-07-17/how-to-tell-if-you-have-a-lousy-401-k-plan
5. https://pressroom.vanguard.com/nonindexed/How-America-Saves-SBE-2017.pdf
6. https://www.ici.org/pdf/per24-03.pdf
7. https://www.nepc.com/press/nepc-corporate-defined-contribution-plans-report-flat-fees
8. https://www.investopedia.com/terms/1/12b-1fees.asp
9. https://humaninterest.com/blog/non-discrimination-testing-ndt-the-basics-of-401k-compliance/
