by Brian Hufford, CPA, CFP
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With the winds shifting toward higher income taxes and hurricane-force investment challenges, it is time for you to seek shelter for your savings in the safest environment: a qualified retirement plan in which you control the investment choices. Let me pose five pairs of situations to test whether your retirement arrangement will weather the present storms:
1) Plan Environment: I save for retirement with retirement products: Simple IRA, brokerage firm 401(k)s, or insurance company offerings vs. I have a custom-designed retirement plan for my practice that addresses retirement savings goals.
Your retirement plan environment should offer two major freedoms: the freedom to have a custom-designed retirement plan for your practice that provides maximum tax deductions, and also allows the freedom to invest among the entire universe of investment choices — not just a small group of mutual funds. Instead of adopting a sponsored plan offered by an insurance company or brokerage firm, you should have a custom plan in which you and your spouse are trustees. You are a plan fiduciary whether you adopt a sponsored plan or have a custom plan. So why not have all the freedoms associated with a custom plan arrangement?
2) Plan Design: I haven't had a custom-designed retirement plan study that illustrates cross-tested 401(k) plans and paired-plan arrangements vs. I have received a custom retirement plan study that illustrates the higher tax deductions offered by cross-tested 401(k) plans and a paired-plan arrangement.
The retirement plan environment has become extremely complex, requiring advisors who have knowledge of the economics of dental practice along with actuarial expertise to implement paired-plan arrangements. A paired-plan arrangement combines the advantages of 401(k) plans with the larger deductions offered by cash balance plans. This allows dentists to create deductible savings of $150,000 or more per year. A custom plan arrangement and plan design study are intended to assure that you have the best outcome in high deductions with low and reasonable staff costs.
3) Plan Costs: I am not confident that I have the lowest available costs for plan administration and investing, including hidden costs in product offerings vs. I am confident that I have the lowest available costs for plan administration and investing, and there are no hidden costs.
Under proposed Department of Labor regulations, plan sponsors soon will be forced to disclose all direct and indirect costs in retirement plan arrangements. Many dentists think that because they don't have to write a check related to plan costs that they are in a low-cost environment, when in fact, the hidden costs in mutual fund expenses and annuity products create an unfavorable high-cost environment that is hidden from participants. These proposed regulations will allow dentists to comparison shop costs without the hidden costs of many brokerage arrangements.
4) Plan Administration: I don't have adequate assistance to answer questions raised by my staff related to plan participation, benefits, vesting or other plan provisions vs. I have adequate assistance from a professional plan administrator to answer staff questions about my retirement plan.
In addition to an initial plan design that is a custom-fit for achieving your retirement goals, it is important to achieve custom administration that addresses issues such as participation in the plan, plan loans, rollovers, vesting, and employment termination. This is certainly not an area for one-size-fits-all. With administration consulting, you can better fit the various plan options to suit your needs and those of your staff.
¿ Plan Investments: I choose my investments from products: mutual funds or insurance products offered by the plan sponsor vs. My investment portfolio is designed by a fiduciary investment advisor to achieve my retirement goals.
The big area of differentiation in investing is based on the motivation of the advisor. Is the advisor coming from a brokerage environment or a fiduciary environment? Advisors from the brokerage or insurance environment do not have to put the client's interests before their own nor do they have to disclose hidden costs. Fiduciary advisors must put clients' interests before their own and work to keep costs low.
Save more taxes and save more in the extraordinary current environment offered in the qualified retirement plan tax code.
Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Contact Hufford at (888) 470-3064, or at [email protected].
