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A Retirement Plan for Your Practice

Issue: Winter 2007
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Dentist

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.

Dentist

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.

1. Based on 2006 Sullivan-Schein Survey of dental clients. 2. National Federation of Independent Business-National Small Business Poll-Retirement, Vol. 5, Issue 3, 2005. 3. Ibid. Available only to U.S. dental practitioners. For plan sponsor use only. There are many kinds of workplace retirement plans. When determining which plan may be appropriate for your practice, you should consider all relevant factors including, but not limited to, contribution types and limits, ease of administration, investment options, initial costs and ongoing costs. Fidelity does not provide legal or tax advice and the information provided above is general in nature and should not be considered legal or tax advice. Consult with an attorney or tax professional regarding your specific legal or tax situation.Neither Henry Schein, Inc. nor any of its affiliates are a registered broker-dealer under the federal securities laws. The Fidelity retirement plan products offered under this discount program are offered by Fidelity Brokerage Services LLC, Member NYSE, SIPC, 100 Summer Street, Boston, MA 02110. (c) 2008 FMR LLC. All rights reserved 478385.1.1 0109

Some plans place more responsibility with you and your practice. For example, 401(k) plans place a “fiduciary” responsibility on you and your practice. For employers the size of most dental practices, this responsibility may be quite manageable. In addition, many plan providers will give your practice fiduciary support and to help you meet your fiduciary responsibilities. However, it is important to understand how and what kinds of responsibility your practice is taking on.

The changing nature of retirement and the growing challenges on retirement income, make a workplace retirement plan more important than ever. The thought of setting up or changing a workplace retirement plan may seem a bit daunting, but this can be a manageable and worthwhile effort.

Your Henry Schein Dental Sales Consultant can put you in touch with a representative from Fidelity Investments, or you can contact Fidelity directly at 866-467-0633. Whether you are beginning the process of designing a workplace retirement plan, Fidelity can help you determine if the discounted 401k plan available from Fidelity, under the Schein program, is a viable option for your practice.