New 401(k) setup: Profit sharing and fund selection

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rittersport
Posts: 3
Joined: Thu Jan 05, 2017 3:01 pm

New 401(k) setup: Profit sharing and fund selection

Post by rittersport » Thu Jan 05, 2017 3:13 pm

Hi Bogleheads -

My first post! I'm setting up a 401(k) for a 4-physician group, who may hire an additional 0.5 FTE person later this year. We've set up a Safe Harbor plan with match (100% of 3%, 50% of next 2%) and I've picked some investments, preliminarily. We're working with Employee Fiduciary.

Two questions:
1) We'd like to have the option of making a profit sharing contribution, and I'm not sure which formula to use - mostly wondering about New Comparability (Defined Groups or One Group Per Participant) versus Integrated. We are all 4 HCEs but our new hire would not be. We'd like to be fair to her, for sure, but would love to see if we can max our partners' accounts if we do well.
2) What do you think of the fund lineup below? Definitely a bit of redundancy, but they let you choose up to 40 and it's hard to stop after 8 if you don't have to... :)

Thanks so much for your thoughts!!

VMRXX Vanguard Prime Money Market Fund Admiral 0.10%
VBTLX Vanguard Total Bond Market Index Fund Admiral 0.06%
VTSAX Vanguard Total Stock Market Index - Admiral 0.05%
VFAIX Vanguard 500 Index Fund Admiral 0.05%
VEXAX Vanguard Extended Market Index Fund Admiral 0.09%
VTIAX Vanguard Total International Stock Index Fund Admiral 0.12%
VTINX Vanguard Target Retirement Income Fund 0.16%
VSBSX Vanguard Short-Term Gov’t Bond Index Fund Admiral 0.10%
VTABX Vanguard Total International Bond Index Fund Admiral 0.14%
VBIRX Vanguard Short Term Bond Index Fund Admiral 0.08%
VAIPX Vanguard Inflation Protected Securities Fund Admiral 0.10%
VIGAX Vanguard Growth Index Fund Admiral 0.08%
VVIAX Vanguard Value Index Fund Admiral 0.08%
VTWNX Vanguard Target Retirement 2020 Fund 0.16%
VTTVX Vanguard Target Retirement 2025 Fund 0.16%
VTHRX Vanguard Target Retirement 2030 Fund 0.16%
VTTHX Vanguard Target Retirement 2035 Fund 0.16%
VFORX Vanguard Target Retirement 2040 Fund 0.16%
VTIVX Vanguard Target Retirement 2045 Fund 0.16%
VFIFX Vanguard Target Retirement 2050 Fund 0.16%
VFFVX Vanguard Target Retirement 2055 Fund 0.16%
VTTSX Vanguard Target Retirement 2060 Fund 0.16%
VDADX Vanguard Dividend Apprexiation Index Admiral 0.09%
VHDYX Vanguard High Dividend Yield Index 0.16%
VFTSX Vanguard FTSE Social Index 0.25%
VTAPX Vanguard Short-Term Infl-Protected Securities Index Admiral 0.08%
VGSLX Vanguard REIT Index Fund Admiral 0.12%
VSMAX Vanguard Small Capitalization Index Fund Admiral 0.08%
VSIAX Vanguard Small Capitalization Value Index Fund 0.08%
VSGAX Vanguard Small Capitalization Growth Index Fund 0.08%
VIAAX Vanguard International Dividend Appreciation Index Admiral 0.25%
VIHAX Vanguard International High Dividend Yield Index Admiral 0.30%
VEMAX Vanguard Emerging Markets Stock Index Admiral 0.15%

lazylarry
Posts: 486
Joined: Sat Apr 04, 2015 10:35 pm
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Re: New 401(k) setup: Profit sharing and fund selection

Post by lazylarry » Thu Jan 05, 2017 10:36 pm

rittersport wrote:Hi Bogleheads -

My first post! I'm setting up a 401(k) for a 4-physician group, who may hire an additional 0.5 FTE person later this year. We've set up a Safe Harbor plan with match (100% of 3%, 50% of next 2%) and I've picked some investments, preliminarily. We're working with Employee Fiduciary.

Two questions:
1) We'd like to have the option of making a profit sharing contribution, and I'm not sure which formula to use - mostly wondering about New Comparability (Defined Groups or One Group Per Participant) versus Integrated. We are all 4 HCEs but our new hire would not be. We'd like to be fair to her, for sure, but would love to see if we can max our partners' accounts if we do well.
Welcome to the forum! Unfortunately, I don't have enough experience with profit sharing funds though others on the forum do. My guess is that New Comparability would be best given the flexibility and size of your business.
2) What do you think of the fund lineup below? Definitely a bit of redundancy, but they let you choose up to 40 and it's hard to stop after 8 if you don't have to... :)
I think there are a lot of good funds. How old are the physicians and when do they plan to retire? What is their desired/current AA? Through that, I think it'd be simplest to set up a 3-fund portfolio with VBTLX, VTSAX, and VTIAX.
My profile: https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=86026 | Virtua lBogleheads® Blog: https://virtualbogleheads.wordpress.com/

bsteiner
Posts: 4530
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: New 401(k) setup: Profit sharing and fund selection

Post by bsteiner » Thu Jan 05, 2017 10:46 pm

rittersport wrote:... We'd like to have the option of making a profit sharing contribution, and I'm not sure which formula to use - mostly wondering about New Comparability (Defined Groups or One Group Per Participant) versus Integrated. ...
What does your actuarial firm recommend?

123
Posts: 5438
Joined: Fri Oct 12, 2012 3:55 pm

Re: New 401(k) setup: Profit sharing and fund selection

Post by 123 » Thu Jan 05, 2017 11:00 pm

Will the expense rations for the Vanguard Funds actually be the same as the Vanguard direct rates or will Employee Fiduciary be using higher expense ratios?
The closest helping hand is at the end of your own arm.

Spirit Rider
Posts: 12267
Joined: Fri Mar 02, 2007 2:39 pm

Re: New 401(k) setup: Profit sharing and fund selection

Post by Spirit Rider » Thu Jan 05, 2017 11:41 pm

Just come random thoughts. Is this .5 FTE a low cost admin person and other there likely to be other non-HCE additions in the near future?

The reason I ask this is you will pay more in administrative costs (extra testing) for the new comparability method. Both the Salary Ratio and Integration methods are safe harbor. It may cost less or not much more to not get too fancy.

Let's just do a Salary Ratio method. For example, Each HCE receives $200K/year and the .5FTE receives $20K/year (~ $20/hour). Each HCE defers $18,000 and receives a 4% match ($8,000). That leaves $54,000 - $18,000 - $8,000 = $28,000 with 14% as a maximum profit sharing ratio. This requires paying the .5FTE $2,800 profit sharing.

Even with the new comparability method you would probably have to pay the .5FTE a minimum profit sharing of 5% ($1000). So you save $1800/year. However, maybe pay $1500 in additional testing and other administrative costs, for a total of $2500 only $300/year less. I don't know the integration formulas, but maybe the integration method requires her receiving 10% profit sharing ($2,000), but $500 in additional admin costs, also for a total of $2500.

So as usual I took a lot of words to say what Bruce said in a few. You need to ask an actuarial firm what the numbers are.

Topic Author
rittersport
Posts: 3
Joined: Thu Jan 05, 2017 3:01 pm

Re: New 401(k) setup: Profit sharing and fund selection

Post by rittersport » Fri Jan 06, 2017 11:30 am

Wow! Thanks, everyone.

Answers to questions: 0.5 FTE is a physician, but would be a non-HCE because she'd be an employee and not a partner, as the rest of us are (25% ownership each, S-corp).

Employee Fiduciary offers the option of choosing the New Comparability method, then evaluating that vs. integrated and pro-rata methods at the end of the year. If you go with New Comp, the fees are $500 for the additional compliance testing. Integrated and pro-rata do not have associated fees. Given that, I'm thinking I'll go with New Comp for maximum flexibility, but I really appreciate the points from Spirit Rider about the fee essentially negating the benefit. Unless there's a huge disparity, integrated may be the way to go.

ER's are the same as Vanguard direct rates. Employee Fiduciary charges 0.08 basis points for assets under management. I looked at Vanguard 401(k)'s as well, but for a small group of 4 employees, the fees end up being higher per participant until we have >$11 million under management. We've probably only got $600,000 now as a group, since we just started and people's other savings is in rollover accounts. So it's our best bet.

I honestly didn't know that actuarial firms did this. We have a CPA, and I'm one of the physicians - we don't have any administrative support. So I've been wading through 401(k) rules to figure this stuff out. One of our partners initially set us up with an American funds plan with all ERs > 1.1%, so that was my motivation for the conversion. Ugh.

I think most of my partners will dump $$ into the Vanguard Target Date funds. One has an outside CFP, so who know's what advice they'll give. I personally do a 5-fund mix over my other accounts to include 5% REIT and TIPS in my tax-deferred holdings + some Target Date stuff in an old Roth IRA. I don't know if I'll do 3-fund or Target Date in this account. Target Date has a bit more in the way of ER but still very reasonable.

Really, really appreciate the input! I am new and learning more about investing -- I basically just knew enough to do basic AA and know that we were getting a raw deal with American Funds. But I appreciate the wisdom from everyone here!

EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

Re: New 401(k) setup: Profit sharing and fund selection

Post by EMDW » Fri Jan 06, 2017 1:25 pm

Single owner. 4 employees (ages 29-67). Employee Fiduciary. 401K (safe harbor non-elective: 3%) + profit sharing. New comparability method. Graded vesting schedule:
After one year of service: 0% vested
After two years of service: 20% vested
After three years of service: 40% vested
After four years of service: 60% vested
After five years of service: 80% vested
After six or more years of service: 100% vested

Funds available to pick (all vanguard funds):
1. Total stock market index admiral (VTSAX)
2. Total Bond Market Index admiral (VBTLX)
3. Total International stock market index admiral (VTIAX)
4. Prime Money Market (VMMXX)
5. Target Retirement (2020-2060)

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