When it comes to investing, what is the dentist's role in helping their staff manage their money? What should they do, and what should they avoid? We spoke to 3 financial experts about how dentists should invest in their team's investing.
You train your team on how you want to deliver care and what you need from them to keep the practice running efficiently and effectively, and in return, you compensate them. But once you pay them, do you ever discuss their plans, aka, what they will do with their money? Today we look at how a dentist should invest in their team's investing and how it can be good for both of you come tax day.
Honestly, neither dentists nor their teams are interested in discussing the details of the team members’ personal finances. However, as an employer, providing employees with retirement savings plans and other benefits, and encouraging participation is an appropriate way to weigh in on how your employees manage their money.
Some dental practices might not have an official retirement savings plan. However, not having one means missing many benefits for the practice stakeholder and the employees.
The most crucial benefit in the present labor market is that retirement plans attract and retain talented employees. Keeping your team benefits the practice in the consistency of patient care and relationships and reduces the onboarding expenses associated with new employees. Per the Internal Revenue Service (IRS), the business benefits in these other ways, too:1
However, the team gets a lot out of this, too. The most significant benefit is planning for the future and improving their financial security during retirement. As interest accumulates, even small contributions become significant retirement savings over time. In addition, per the IRS, employees also benefit in these ways:1
In addition, some employees might be eligible for a saver's credit. The saver’s credit is a tax credit for low- to moderate-wage earners that save for their retirement.2
So, How Should You Be Involved in Your Team's Investing?
There are a few ways for a dentist to encourage, educate, and advise their team members about managing their money that doesn't get them in trouble with liability or cross the lines of their professional employer-employee relationship. Matthew White, Advisor for White & McGowan, says putting a retirement savings plan in place, as well as an advisor to manage it, is important for any dental practice.
"What a dentist can do to help employees is set up a plan that allows them to contribute and receive an employer match," White says.
Giving the team resources to plan for retirement and providing an employer match signals that retirement planning should be a priority. Also, White explains having resources in place to help the team shows that the dentist cares if their team is successful in their efforts to plan for the future. White say most dentists are very generous with their teams and often speak up in the rollout about the importance of compounding growth in retirement accounts and how it can grow into meaningful income for the family over time.
Bruce Bryen, CPA, CVA, and a principal in the firm of Baratz & Associates, agrees that having something available is essential, particularly for keeping good employees. In some cases, the practice could lose good employees to an opportunity at another dental practice where employees have access to a retirement savings account.
"Then, it's too late to keep the person," Bryen says.
Austin Lee, CFP®, is the founder of Lee Financial Group, LLC, a financial planning company that serves dentists and other professionals in the healthcare industry. Lee says finances are a significant stressor for many employees and many people feel it takes too much time to figure out.
As a result, many people avoid thinking about it, taking the "ignorance is bliss" approach to retirement savings. Many people figure by working hard, their financial situation will take care of itself. Therefore, Lee says if employers help them by providing a resource that makes financial education and planning easier and less time consuming, it improves employees' engagement with the business.
Lee says that in addition to a retirement plan, dental practices should explore health savings accounts (HSA) that employees can use in conjunction with a high-deductible health plan or a Flexible Spending Account (FSA) benefit, both of which can be used to pay for healthcare costs, including dental care and vision care, and other health-related expenses.
"Employers can help contribute to that as well. If an employee does contribute to it, the employer can match or put in a fixed amount for that," Lee says.
In addition, Lee thinks providing education resources regarding taxes is essential. Employees who understand the tax implications for retirement savings might contribute more to their retirement plan. Also, seeing how their contribution grows can help, too, Lee explains. Online calculators can demonstrate what a regular contribution today, even if it is a modest amount, could look like in 20 or 30 years.
"Show that calculation as a goal for them to try to reach that point," Lee says.
White & McGowan is a comprehensive financial planning firm for physicians and dentists. White recommends that dentists do not try to administrate the retirement plan themselves. A third-party can provide the practice’s employees with a compliant investment plan.
One compliance concern is plan testing requirements. If dentists contribute the maximum contribution to their retirement plan, guidelines require the dentists to contribute a certain amount to all non-highly compensated employees as well. These details have specific requirements and deadlines that are dependent upon many factors and calculations. Working with a third-party administrator that functions as an actuary and recordkeeper for the plan will ensure the dentist is following ERISA (Employee Retirement Income Security Act of 1974) rules and regulations.
For example, when it comes to safe harbor 401k plans, the company contribution is either a match or a nonelective gift, White explains. The company can decide to do a higher match or nonelective contribution, but the employer must make a minimum contribution to pass safe harbor testing, he says.
"The nonelective contribution required is made to all eligible employees whereas the matching contribution is only made to the employees that contribute a portion of their income from their paychecks. The minimum nonelective contribution is 3% of wages to all eligible employees, and the minimum matching contribution required is a dollar-for-dollar match up to 3% and 50% on every dollar up to 5%, which works out to a total match of 4% for employees contributing 5% of their pay," White says.
If implementing a 401k plan, the maximum amount an employee can defer is $20,500 for 2022. However, owners can also make an employee contribution as well, and defer up to $20,500 for 2022. White says the formula an owner chooses will be based on the plan's objectives. For example, if an owner hopes to save as much as possible on a pre-tax basis through a combination of 401k employee deferrals, profit-sharing contributions, and cash balance plan contributions, but wishes to contribute the least amount possible to employees, the nonelective 3% contribution will reduce the owner's outlay of cash to employees when compared with the expenditure required if using the matching formula.
"If an owner has no intention of contributing to a cash balance plan and only wishes to contribute to a 401k and profit-sharing plan—a maximum of $61,000 for 2022—then the matching formula may require the lowest outlay of cash to employees in a scenario where very few employees decide to contribute. If only one eligible employee contributes to the 401k plan, the owner is only required to match that employee's contributions based on the matching formula," White says.
Some dentists choose a profit-sharing plan on top of that so they can contribute more. However, White says it also requires contributing more for a match that should be shared with all employees.
A practice that wouldn't offer a plan is often concerned with the cost of having one, per White. However, he thinks if dentists understood the tax savings involved, they would see that it does not cost as much as they think. So, he often explains to dentists in terms of choices about who gets their money.
"I tell them, 'If your tax savings on that sum is similar to your outlay of cash in terms of employee matching contributions, then wouldn't you rather that go to your employees as an incentive or as compensation rather than it going to the IRS?'" White says, adding that dentists can also position it as a compensation increase. "It's all a matter of, 'What is the major tax benefit for me, based on the amount I'm contributing, and what is the total cost to employees? And is the tax savings greater for me personally than the cost?' That's what it boils down to."
Bryen agrees that once dentists understand they can either hand over their earnings to the IRS or their employees, they would rather offer a retirement plan to their teams. In some cases, the dentist has a tax burden of 50%. Bryen explains that offering most retirement plans can reduce that dentist's tax burden. Even if they can't, they don't cost more than that. Most dentists are generous with their teams once they understand that.
However, Bryen explains that there are numerous benefits for the dentist or practice stakeholder, too, especially over 5 years. With 40 years of experience in the area, Bryen specializes in retirement planning design and income and estate tax planning. By upgrading the retirement plan, the dentist can contribute more, sell the practice faster and retire sooner. Plus, the practice can retain its staff, improving the patient experience and keeping its community of referrals.
"Yes, you pay them more, but the patients know them and like them. The staff makes them feel comfortable there," Bryen says. "Losing an employee could hurt you in the long run by giving up stability the office has always had."
What to Avoid Regarding Your Team's Investing
White advises against trying to run one of these plans independently. Third-party administrators for the practice's retirement investments are essential in this effort—and White says sometimes third-party advisors won't even want to take on a retirement plan because the requirements are so burdensome. White says the technical specifications are more than dentists will likely want to manage. Moreover, if they aren't managed properly, there are consequences.
"Ultimately, dentists will miss something, and when they do now, they're possibly going to get in trouble for it," White says. "The guidelines are very strict, and if you operate outside of those guidelines and you aren't making accurate contributions to employees, or you are making them at the wrong time, or you're delayed in those contributions, or you are delayed in filing a Form 5500, there are penalties. So, rather than bearing that burden, we encourage dentists to trust us to run the program."
Bryen thinks an individual, ten-minute conversation during work hours rather than a group setting is an appropriate way to start the conversation. Sometimes, the group setting roll out can prevent staff members from asking questions. Bryen thinks this could be an opportunity to discuss their earnings, their prospects, including how they can make more, and their long-term plans. Moreover, it is an opportunity to discuss the plan options the practice has for the employee. Finally, Bryen thinks it is essential to let employees know if alternatives are available with the practice.
"If there is something in place, the employee should know, and if they don't, there is something wrong with communication at the practice," Bryen says.
However, Bryen cautions dentists not to recommend investments or push employees into fiduciary relationships, even if the push is intended to help the person. Instead, they should limit their conversation to saying they have experts who can help the employees.
"They need to keep their two cents out of it," Bryen says, adding that specific recommendations also open the dentist up to liability should something go wrong. "It makes it too personal, and the employee doesn't want the dentist to know about their financial life. The dentist can discuss the retirement plans offered, and then the employee can take it from there."
Also, Bryen says that dentists should be indiscriminate about who they talk to about investing in their future. It might seem like the more highly compensated employees, like an associate dentist, would not need the conversation, but they might. The inverse is true also; an employee that doesn't make as much as others might be more financially savvy than the dentist thinks. Getting the team thinking about their financial future shows that the dentist is interested in them and cares about their future, which is essential for employee retention in today's employment climate.
Bryen says that an employee handbook could list the practice's financial planning vehicles. However, smaller practices might not have a manual. Having these individual conversations can substitute for that. Then, dentists should refer the employee to a third-party representative to handle the details.
Providing online resources can help, too. Lee says many websites provide the building blocks or ideas of how employees can manage money. For example:
Lee agrees that dentists should avoid giving financial advice. Instead, dentists can reach out to financial planning subject matter experts and allow them to provide overviews of financial planning opportunities with employees either in individual or group meeting settings.
For example, the human resources benefits representative can give a high-level overview of the benefits package and programs that are not as well-known, like education reimbursement. A certified public accountant could come in with advice about tax preparation. A financial planner could talk about budgeting, dollar-cost averaging and asset allocation, retirement planning, and other things to get the team thinking about what is available and what the employee needs to do to take advantage of these opportunities. Lee says when people think long term, they save more and are more engaged in their future career path.
"Having those conversations with either a financial planner or a CPA triggers ideas and questions and allows them to be a little more engaged," Lee says. "The last thing you want is for the team not to understand the benefits the practice offers. Having that knowledge and that communication helps employers and employees alike."