How a quirk of pension law can save thousands for clients
When it comes to retirement planning, doctors and dentists have uniquely tricky circumstances. They may earn princely sums once established, but the long, costly academic road required to get them there can throw their preparation off by a decade or two. That leaves a truncated period of time in which to accumulate the nest eggs they’ll need to maintain their lifestyles in retirement, says Joe Gordon, managing partner at Gordon Asset Management in Durham, N.C.
But Gordon, who has specialized in launching and managing retirement plans for small business — particularly medical offices — for more than 30 years, has a solution that benefits both his high-income clients and his own firm.
Pension law allows companies to stack cash balance pensions on top of 401(k) programs, he says. In the right circumstances, that can allow the owners of small businesses to sock away tens of thousands of additional dollars in tax-favored plans every year. This strategy saves his clients thousands of dollars annually in income taxes.
Gordon’s firm profits in two ways. First, it serves as a pension plan fiduciary and consultant, earning a razor-thin margin for oversight of plan assets and design. In the process, the firm builds relationships with the principal executives in the plan, offering flat-fee planning services to those who want them. When these high-income clients retire and roll millions of dollars of accumulated assets into IRAs, Gordon is ideally positioned to become their go-to adviser, and charge the more substantial standard fees for wealth management.
“When you run a 401(k), you are renting those assets,” Gordon says. “But eventually those people are going to retire and roll that money somewhere. You want to be there when they do.”
“When you run a 401(k), you are renting those assets. But eventually those people are going to retire and roll that money somewhere. You want to be there when they do.”
Chasing down the deal
Gordon has operated two parallel businesses in one shop for most of his working career. He’s also been working with doctors and dentists since the early 1980s, when as a fresh-faced 22-year-old, he hustled through hospital hallways trying to sell life and disability insurance — the only job he could get in those days, he says. Executives at banks and investment houses told the new college graduate that while they were impressed with his passion, he looked too young to be taken seriously. “Come back when you’ve got some gray hair,” they told him.
Selling insurance still isn’t an easy job, Gordon says, but he has located an underserved clientele in medical professionals. Doctors and dentists spend so much time in school and residency programs that they often have spouses, children and a mountain of debt before they secure a steady job. That puts their retirement picture in peril.
“A young doctor’s only asset is the ability to earn money. If that’s taken from you, you’re screwed,” Gordon says. “I called it ‘defensive financial planning.’ If you don’t have your defense down, you can get blown up. I got them as much coverage as possible.”
The 401(k) plan was a new concept in the ‘80s. Convinced that no one would take him seriously unless he became an expert in his niche, Gordon resolved to learn more about these self-directed pensions by joining the American Society of Pension Professionals and Actuaries. There, he says, he “learned how to run plans without blowing your client’s boots off.”
The industry was full of bad actors in the ‘80s and early ‘90s, Gordon adds. Where plan administrators must now disclose what they charge, the fees embedded in 401(k) programs were not transparent, which allowed brokers to sell high-cost plans to their unsuspecting clients. Gordon decided to set up his own administration business, charging straightforward fees that were clearly disclosed to customers.
“A young doctor’s only asset is the ability to earn money. If that’s taken from you, you’re screwed.”
“We would compete by telling people that we charge fees; we are fiduciaries; and it’s cheaper,” he says. “They would tell us, ‘No. These other people are free.’”
By helping potential clients understand how their current plan was hiding high fees, Gordon quickly amassed a stable of 60 companies that entrusted their 401(k) plans to him. But when the technology boom demanded system upgrades and websites that could be accessed by all employees, he felt that he was spending every dime on keeping mainframes and servers up. He sold out to a tech firm in the late ‘90s, staying on as a regional vice president. But in the 2000 bear market, the once-flush tech company got crushed. Gordon decided to go back out on his own.
One problem: He had a non-compete agreement that prevented him from launching another 401(k) administration firm for three years. The tech company didn’t mind if he provided planning services to the firm’s 401(k) clients, however. That was all Gordon needed.
“Telling me I could work with the owners on wealth management was like letting the cat guard the henhouse,” he says. “By 2001, I was back with a boutique business.”
Selling the stack
Now Gordon manages 170 retirement plans and has $1 billion in assets under management. The firm’s growth is partly attributed to stacked pensions: a combination 401(k) and cash balance plan that’s ideal for small professional businesses that want to allow their owners to save substantially more than ordinary retirement vehicles would allow.
The plans are a little complex, requiring actuarial calculations to determine just how much can be contributed to each employee’s account. There are also some heady discrimination tests that most companies solve by being a bit more generous with contributions to worker pension plans. That can boost the company’s cost of operating a retirement plan from about 4.5% of payroll to 7.5%, Gordon says. The main selling point is that the owners might be able to recover that cost in personal tax savings, which can make these plans a win-win for both employees and business owners.
Where a 50-year-old would normally be limited to contributing a maximum of $59,000 annually to a 401(k), by stacking a profit-sharing 401(k) with a cash balance plan, this individual may be able to save an additional $140,000, Gordon says. Assuming a combined state and federal tax rate of 45%, that additional contribution cuts this individual’s income tax bill by $63,000.
“If you’re earning $500,000 a year but spending $600,000, this isn’t going to work for you,” he says. “But if you make $500,000 and can live on $250,000, you really have to look at this.”