5 Things Medical Plan Sponsors Should Consider Doing with Your 401(k) Right Now
The current market climate presents a unique opportunity for medical plan sponsors, specifically those where the owners of the practice also own 50% or more of the plan assets. With many years of experience here are the 5 tips for success with 401(k) plans:
In a properly diversified plan, we often find assets that have appreciated in value such as treasury funds. It may make sense to harvest these gains and replace lost value in equities or other compressed asset classes. The discipline of rebalancing can produce higher dollar returns for a given percentage return so that when and if the market returns to previous levels, the account balance will be greater than it was at the end of 2019 when corrected for cashflows.
2. Add a Defined Benefit Plan
For practices that are 10 years or more, adding a defined benefit (DB) component can supercharge the benefits of an existing 401(k plan. This increases the amount of tax deferral available and offers a powerful benefit to employees on the front lines of the pandemic. By ensuring a positive future for your employees and yourself, you create a better work environment.
3. Freeze Defined Benefit/Cash Balance Plan Benefits
Consider freezing benefits under your Defined Benefit/Cash Balance Plan. This action will give you more options for funding the plan in 2020 by capping the current benefits in your plan at 2019 levels. To be effective for the 2020 plan year, a freeze amendment must be adopted prior to any employee reaching 1000 hours of work for the year. Once things improve, you retain the option to revoke the freeze by re-amending prior to year-end. You will still be able to fund contributions at a high level under the maximum deduction rules, and activate the full benefit increases for 2020.
The CARES Act also provides relief for defined benefit and cash balance plans by including a delay in contribution deadlines. Specifically, any contribution due in the calendar year 2020—including quarterly contributions—now has a delayed due date of January 1, 2021. Note that the employer must pay interest on delayed contributions, from the original due date to payment date, using the effective rate of interest for the plan for the plan year that includes the payment date.
If you have not yet funded your 2019 contribution, this will provide some extra latitude to generate cashflow at this stressed time.
4. Consider Adding a ROTH 401(k) Conversion Feature
Sponsors often have the option to modify their plan document to add a ROTH conversion feature to your 401(k) account. This feature is helpful because it allows participants to control when they pay taxes on their retirement savings account. When converting funds to a ROTH 401(k) account the individual decides how much to convert and the dollar amount that they convert is then added to their taxable income for the year in which they convert the funds. In turn the account allows tax free growth of the value. Which can lower your tax rate in retirement—especially if you anticipate being in a higher tax bracket in retirement. There are many specific rules and requirements governing ROTH conversions therefore, we highly recommend consulting with a registered investment advisor and your record keeper for specific instruction.
5. Look at Fund Selections for Distress or Poor Performance
As the plan sponsor, you selected the mutual funds and investments available in the plan. You must remember the fundamental goal is to give participants the ability to properly diversify their portfolios in a cost-effective manner. Now is a good time to look at the extent to which target date funds and “safe” investments protect value during market downturns. In our years of experience, we have seen many funds with value slippage that was unexplainable. Others “broke the buck” and were insolvent until to Fed bailed them out. These are funds that a good fiduciary would review to ensure compliance with the plan investment policy statement. Camelotta Advisors implements this process on behalf of our medical clients. We also prepare investment policy statements which are a required fiduciary step of 401(k) plan sponsors.
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Camelotta Advisors has 15+ years of experience managing individual 401(k)s as well as the 401(k) plans for employers. We specialize in getting the best fund allocation for our clients’ 401(k) plans through our wholistic and tailored wealth solutions. If you have questions regarding your 401(k) or your business’ 401(k) plan, please get in touch with us today.
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