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SEP IRA vs. 401k at a non-profit

Home Retirement Accounts SEP IRA vs. 401k at a non-profit

  • Avatar chemgurl 
    Participant
    Status: Other Professional, Spouse
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    Joined: 07/30/2019

    I worked as a senior chemist in the pharmaceutical industry for nearly seven years and enjoyed a generous 401k program with 6% match. Two years ago I left and started working as a scientist at a non-profit which was a very positive move for me resulting in better work life balance! I now have a SEP IRA where at the beginning of every calendar year our board votes to put 10% of our salary into the fund.

    Our organization has 22 employees and our executive director is hesitant to do something other than the SEP because of fees. I am super grateful for the 10%, but miss being able to contribute more. I am maxing out my Roth IRA every year. Curious if anyone in this group is in a similar situation and if so how do you handle it?

    I have been looking into some low fee 401k programs such as For Us All and Guideline.  My executive director has stated that this is a very low priority for him, but I want to do all my research before I try to present some alternatives to the SEP IRA.  I think in the long run it could benefit all of the people I work with.  Thanks!

    #235115 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2136
    Joined: 06/24/2016
    I have been looking into some low fee 401k programs such as For Us All and Guideline.  My executive director has stated that this is a very low priority for him, but I want to do all my research before I try to present some alternatives to the SEP IRA.  I think in the long run it could benefit all of the people I work with.  Thanks!

    Click to expand…

    Guideline.com has a cheap and easy safe-harbor plan.

    What is the “cost” of it, other than having to make high contributions for each employee?  SEPs are supposed to be pretty cheap and easy, as well, other than having to give the same percentage to all employees.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #235124 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8134
    Joined: 01/09/2016

    The typical reason that businesses with employees don’t use a SEP is that the business is responsible for the full retirement plan contribution. However, if fees are what causes your director to balk, why not lobby for a higher match for the SEP? This would be the better benefit for employees as they don’t have to contribute anything and your employer can match up to 25% per year.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #235223 Reply
    Liked by spiritrider, Tim
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 926
    Joined: 01/09/2016
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    I worked as a senior chemist in the pharmaceutical industry for nearly seven years and enjoyed a generous 401k program with 6% match. Two years ago I left and started working as a scientist at a non-profit which was a very positive move for me resulting in better work life balance! I now have a SEP IRA where at the beginning of every calendar year our board votes to put 10% of our salary into the fund.

    Our organization has 22 employees and our executive director is hesitant to do something other than the SEP because of fees. I am super grateful for the 10%, but miss being able to contribute more. I am maxing out my Roth IRA every year. Curious if anyone in this group is in a similar situation and if so how do you handle it?

    I have been looking into some low fee 401k programs such as For Us All and Guideline.  My executive director has stated that this is a very low priority for him, but I want to do all my research before I try to present some alternatives to the SEP IRA.  I think in the long run it could benefit all of the people I work with.  Thanks!

    Click to expand…

    While SEP is somewhat simpler than a 401k for a solo participant, when it comes to bigger organizations, SEP is more of a problem for the following reasons:

    1) Each individual has to open their own account and manage it on their own.  This is hardly an easy task for most people.

    2) Most SEPs actually allow participants to open an account pretty much anywhere, unless it is explicitly spelled out in the plan document that this is not allowed.  If you can’t open a Vanguard SEP account, that would be a problem precisely because of high fees if the SEP is run by a firm that’s not acting in your best interest.

    3) SEP is not very flexible.  With a 401k you can still vote to have 10% profit sharing contribution, but individuals can also make salary deferrals.  Also, what if they decide to vote on 0% profit sharing?  You still want to have a plan where you can fund part of it yourself.

    4) SEP does not allow catch-up contribution, while a 401k plan does allow $6k catch up for those over 50.

    5) SEP does not work well with ‘backdoor’ Roth IRA, while a 401k does.

    6) It is easy to mess up an individual SEP account because participants can take money out of the plan and there are no controls to prevent them from breaking the rules.

    That said, 401k plan does have costs associated with it which are higher than that for a SEP, however, if the firm managing the SEP is charging high AUM fees and has high expense ratio investments, that is also potentially a big cost paid by all of the participants.

    If you want to have a 401k with profit sharing that is customized to your needs, last thing you need is Guideline and other service providers of the similar (low) caliber.  They can’t even do customized profit sharing design, and I wouldn’t trust them with plan administration.  What you need is a 401k plan with an independent Third Party Administrator who can provide compliance and plan design advice.  This costs more, but is worth every penny if you want a customized plan.

    I doubt that your executive director will want to do anything at this point because this would be a big change for you in terms of how the plan works, but I think that the net result can be positive both in terms of contributions and lowering plan fees.

    The issue is that unless the director has skin in the game (and large investments in the SEP) they won’t see the value of removing AUM fees from your accounts. It is actually very easy to visualize how much more costly AUM fees are in retirement accounts using a calculator that I’ve specifically developed for this purpose:

    Retirement Plan Cost Calculator

    You can actually generate a pdf with a side by side comparison to see how much you can save in fees by switching to a lower cost service provider. Just make sure that you are comparing apples to apples – there are plenty of providers similar to Guideline which are low cost, but also very low service, and you must evaluate the types of services your plan would need (such as customized design, which would necessitate hiring your own TPA).  I prefer open architecture approach where you pick the best of everything – a low cost record-keeper, a TPA, and possibly an ERISA 3(38) fiduciary.

    More information on how to reduce your plan fees/expenses can be found here:

    How To Reduce Your Practice Retirement Plan Cost

     

    Kon Litovsky, Principal, Litovsky Asset Management | Konstanti[email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #235551 Reply

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