How Little Is Your Retirement Plan Worth?

POLARPX / STOCK.ADOBE.COM

For the hard working dentist, the amount that he or she has saved in the dental practice retirement plan seems like it was worth a lot more just a few years ago. Today, the value of the retirement plan has sunken just like a ship with a hole in it to the bottom of the ocean.

The great idea that the dental CPA gave during 1 of the business conference sessions in the past was terrific, but now seems to be not worth the time and money for the services incurred to formulate the plan, get the IRS approvals and to get the plan up to date with all of the changes that the government has instituted within employer sponsored qualified retirement plans. The dental practice is still doing okay but with harsh inflation on the rise and having been in effect for a number of years, was this all worth it? This article will explain just how important the plan was and the ideas that are available to give it a comeback that it may need because of the declining value of the stock market and the overall economy.

Let’s look at some of the strong support that the retirement plan has given and how it can come roaring back:

Even if the retirement plan is worth what it was 5 years ago, without it being in place, there probably would have been nothing available for the dentist and his or her staff that would afford what the value became because of federal and state income taxes and employee turnover without the retirement plan. Though lower in value, it still is worth quite a bit. What would have taken its place?

Saving on one’s own without the use of a retirement plan would have been much harder because of the heavy federal and state tax on the practice’s earnings and few, if any types of replacement for it. The ability to designate funds on a pretax basis is 1 of the best ways to assist the office staff in accumulating assets and to encourage them to remain with the dental practice at least until the vesting has occurred. Since the plan value is down and each employee’s interest is also down, remaining with the practice will allow the employees to save once again with contributions coming from the dental practice and not from the employees’ own pocket.

Many dental practices today are revisiting their retirement plan formulas to determine the annual contributions to the retirement plans. Some dentists are even enhancing their retirement plans by upgrading the type of retirement plan they have adopted. In many cases, the dentist has changed his or her plan from a defined contribution plan to a defined benefit plan. This change produces increased contributions for the retirement plan with a higher contribution for each employee, including the owner. This type of change allows the owner—as well as the employees—a bigger contribution. In the event that the owner is older than the employees, the difference can be quite large and continue for a long time. This allows the retirement plan to adjust for the losses it incurred very quickly. In the event an employee’s boss does not take this step, he or she is limiting what the employee can recover and the length of time it will take for the recovery to occur.

Many dental practice owners try to take the cheapest way out and don’t want to give their employees anything more.

There are too many dentists who resort to hurting the employees when the stock market sinks and the retirement plans start to decrease in value. After years of contributions on behalf of the employees and himself or herself when the market is down, the owner/dentist may decide to eliminate the retirement plans or to add a retirement plan that has a much lower cost component compared to what just dropped so much in value. There are plans like these and they have names such as Simple IRA, profit sharing plans, and 401k with an employee contribution only.

The dentist/owner hurts himself or herself the most when this occurs because the owner is receiving the largest contribution out of all of the employees. The contribution is based on many things but 1 of the most important is the compensation of each employee including the owner. An example would be if the total salaries of all the employees including the owner was $250,000, and the owner’s compensation was $150,000, the owner’s share of the retirement plan contribution would be 60% based on the compensation formula ($150,000/$250,000). Since there are other items used that are added to the compensation formula, the owner would receive more than 60%. If the owner downgrades the plan from its previous formula, this contribution for the new plan may only be $10,000 total so the owner would receive $6,000+ of the $10,000 and the other employees would receive the difference from the $10,000 minus the $6000. The plan administrators don’t like these plans because so much is being allocated to the owner.

Age is a defining formula as well. If the owner/employee is older than the other employees, it is typical with the formula for these plans to lean heavily on age and compensation to determine each employee’s contribution.

The cost of the adoption agreement for the qualified employer sponsored retirement plan and the IRS approval letter for the plan with all of its employees.

What is that cost? These fees typically cost about $5000 to $7500 to initiate and adopt the plan. The annual administration fees for the preparation of the tax information forms 5500 run about $2500 to $5000 per year. Many of the payroll services are now preparing these forms at cheaper rates than the independent actuaries for whom the fees were previously quoted.