Replace PS Plan with SEP-IRA

[Guest kmurp]

My physician group is starting to think of setting up an SEP-IRA to replace our profit sharing plan. We currently contribute the maximum allowed to all of our employees, but we wish to simplify the administrative requirements and cost associated with maintaining our current plan. The SEP seems to allow for full investment flexibility and we could eliminate costs to the P.C. for plan administration. In addition, the lower paid employees support much of this cost through 12-b-1 fees to the plan advisor who also directs investments. We feel that we could then, lower both the corporation and the individuals costs (those with larger $ amounts go with self directed accounts and get lower fees from their money managers than the people who are stuck with the mutual funds).

Anyway, if we do this, it would seem to make the most sense if we terminated our current plan which has been in existence for decades and is the product of a consolidation of a profit sharing and money purchase plan. Can we easily terminate the plan and allow participants (all are fully vested) to roll into IRAs? It may not be worth the headache as we have many terminated employees still in the plan, loans, insurance policies etc etc. It seems attractive though, as our group is likely to shrink over the next few years and we are looking to minimize overhead and siplify as much as possible.

[Bird]

No responses...mmm

FYI, most participants on this board are third party administrators, and most (like myself) probably winced when reading your post...e.g.

"my physician group..." [do you have a TPA and why aren't you asking them these questions?]

"the lower paid employees support much of this cost through 12-b-1 fees to the plan advisor... (those with larger $ amounts go with self directed accounts and get lower fees..." [yikes! almost certainly a discrimination problem there]

"...we have many terminated employees still in the plan, loans, insurance policies etc etc." [yikes, yikes, yikes - red flags on all for those of us with takeover experience]

To answer your question - yes, a SEP should have lower administrative costs. No reporting, just calculate the contribution and deposit it and you're done. But the "right" plan for you is based on a lot of factors. If you simply want to maximize the employer's contributions on behalf of employees and minimize administrative costs, the SEP will do that. But if you want to offer a comprehensive retirement program, and maybe not maximize the employer contributions made for employees, then you should consider a safe harbor 401(k) (employer and employee contributions permitted). Be prepared for a (competent) TPA to give you some bad news about fixing problems in the existing plan.

[Guest kmurp]

Well.... I don't know what a TPA is, but we do pay someone to advise us on the Structure of the plan, prepare and revise the IPA and provide education to the participants etc. Perhaps the TPA is the Newport group? The SDBA accounts are a legacy of our 60 year old group. The docs who have been in the longest and therefore have the most $ have always gone to whomever they wished for investment management. This option is and has been available as well for the lower paid employees. We wish that there were not SDBA accounts all over the place as it complicates things and adds some cost. Try parting a doc with millions managed by a boutique firm in Manhattan for 30 ears from that advisor! We felt that we were deficient in providing investment advice to many in the plan so when we closed the money purchase plan and merged it to the profit sharing, we hired someone to choose funds and provide education as needed. He needs to get paid, hence the 12-b1. The bad part is that these fees also offset some of the plan's admin. costs. The rest of the costs are borne by the corporation and hence the docs. I think that there is only 1 insurance policy, it dates back many years and these things are no longer allowed to be done. My understanding is that our local hospital does the same with their retirement plan in allowing the administrator to offer funds in which they (the administrator) gets a kickback which makes the cost to the hospital zero.

It just seems to me that since we have our heart in the right place-we give even our lowest paid employees the same % in retirement as the highest (sometimes more), we should not have to be worrying about compliance issues etc. Hence some of the desire to say "to hell with it" and let everyone have their IRAs and not have to worry about education investment choices, documentation etc. We will also save money.

There is a worry about whether or not the assets of an IRA can be vulnerable to a malpractice suit in NY.

[Bird]

TPA = Third Party Administrator. Usually the one doing calculations and allocating gains and losses and keeping track of things in general, and ultimately preparing the tax return, Form 5500. Maybe or maybe not doing document preparation.

(If your accountant does all that stuff then you have problems that you don't know about.)

Another thing to keep in mind is that those with loans can't roll them to IRAs if the plan is terminated, and will have to either repay them or be taxed on the balance at the time other assets are distributed.

I'm not recommending you go one way or the other; we have a general idea of what is there but someone more familiar with your plan should be able to guide you in this process, hence the question about a third party administrator.

[Guest kmurp]

Thanks for your comments. You are right, of course. An internet message board, even one populated with experts like this one, is not the place to find definitive information on our unique situation. If we decide to pursue this further, we will pay the appropriate experts to get the proper advice. By the way, I am sure that we have a TPA; I just don't know if it is the Newport Group or AST; Both are involved in our plan, as well as the investment advisor. All of these folks have, I would think, a vested interest in seeing our qualified plan remain in place as they will all lose our account should we go the other way. I guess then that I don't know who to talk to about this or where I could find an expert unbiased opinion. Where would we go for this?

[Bird]

I didn't mean to imply that you were wrong to post the Q here; it just seemed unusual that you wouldn't be asking this of someone who was familiar with your situation - and whom you trusted (maybe that's the problem).

The bottom line is, your premise of using a SEP-IRA instead of a qualified plan isn't so bad, if you are indeed maximizing contributions for the employees, and want to keep doing that, and also get away from all the recordkeeping involved with the existing investments. I think you might want to ask your existing people if they can tell you why you should not do it, and then come back here with those answers. Ultimately you might want a second opinion from a local pension consultant - just like getting a second opinion from an MD, you don't know if the second one is worth anything or not. I'd probably start by asking some other professionals who they use and if they are happy.

[Bird]

I just saw this - might help if/when you want to get a second opinion:

ASPPA member search tool

ASPPA = American Society of Pension Professionals and Actuaries