I am writing this post to shed a little light on what a Keogh plan is. Physicians at Southern California Permanente Medical Group (SCPMG) are given the option to invest in a Keogh by automatic deductions from gross paychecks. This is separate from the 401k option and different from the pension plans offered by Kaiser Permanente. Let’s get into the weeds of the SCPMG Keogh plan held at Charles Schwab.
What Is A SCPMG Keogh Plan
A Keogh plan is a type of retirement plan specifically for SCPMG, it’s a defined contribution plan (DCP). However much you contribute to this plan is what you can withdraw upon appropriate retirement age (60).
If you lost money in your investments over the years, then you’d have less to take out and if you made money on your investments, then you would have more.
The terms defined contribution and defined benefit are thrown around a lot. They are referred to also by DCP and DBP, respectively. Simply put, your traditional pension plan is a defined benefit plan, and these are becoming incredibly rare as our economic backbone is becoming less and less reliable.
Defined contribution: based on what you contribute (401k, IRA, etc).
Defined benefit: based on a set benefit amount determined by your employer (traditional pension plan).
You’ll rarely see the word Keogh used, it’s mostly referred to by professionals and the IRS as a qualified plan. Note, the term qualified plan is simply an umbrella term for any retirement plan that qualifies for the criteria set out by the IRS.
A Keogh plan is a plan that an employer or partnership can establish to set more money aside for their highly compensated employees. It’s not much different from a SEP IRA.
How Much Can You Contribute To Your Keogh Plan?
Regardless of how much income you earn as a partner at SCPMG, you are limited to 25% of up to $210,000 of your gross income (for 2017). And since many of you are also contributing to a 401k, your total retirement contribution for 2017 cannot exceed $54,000.
As I am updating this in 2022, the contribution limit is $61,000.
So, in 2017, if you max out your 401k with KP to the tune of $18,000, then you have another maximum of $36,000 that can be deducted from your paycheck (total of $54k) and stuck into that Charles Schwab Keogh plan of yours.
If you aren’t contributing to your 401k, then your benefits department will let you set aside up to $54,000 into your Keogh plan if you opt to have this deduction – as long as you earned at least $210,000. If you earned only $150,000 because you’re part-time or a slacker, then you would only be able to set aside $37,500 (25%*$150,000).
Your Fund Options In A Keogh Plan
SCPMG doctors have their Keogh held at Charles Schwab, a brokerage house. Usually, their 401k is held at the same institution. For the most part, the 401k and Keogh accounts have the same investment options – but they aren’t exactly similar.
You have 25 funds to choose from in the Keogh plan. That’s a decent list, not too big or too small. CS has included plenty of Vanguard funds. VG has funds with the lowest cost (lowest expense ratios) and is known to be a trustworthy company.
Vanguard Target Date Funds
Let me try to explain what a target fund is. Basically, a VG groups a few of its popular mutual fund products into one fund (which is why it’s sometimes called fund-of-funds) and they adjust the proportion (asset allocation) for you as you get older in age.
Their strategy is to make the portfolio more “conservative” as you get older. For this service, they are charging you a slightly higher expense ratio. Index funds aren’t “free”, the company that created them charged you an expense ratio yearly. You can find these fees on the fund’s prospectus.
When you invest in these target funds, you can get a ratio of:
- US bonds
- International bonds
- US stocks
- International stocks
Supposedly, this is a diversified portfolio. The only change from one target fund to the next is the ratio of the funds I mentioned above.
The image below shows where you can find the annual cost of your fund. This is a snapshot from Vanguard’s website.
I compiled a list of the target funds which are available in the SCPMG Keogh plan. You can read quite a bit about them on their prospectus summary (linked to by clicking on the fund) or by going to Vanguard’s website and learning more about target funds.
Large Company Stock
If you prefer mutual funds, which invest mostly in larger companies then the funds below are the right option for you. I can’t recommend what you should put into your portfolio, it depends on your risk tolerance and your investment philosophy.
The very last one on this list, the Vanguard Social Index fund, supposedly invests in funds that are socially and environmentally responsible.
|USEQF – BTC US Equity Market Index Fund|
|JFRNX – Janus Forty N|
|VHCAX – Vanguard Capital Opportunity Adm|
|VFTNX – Vanguard FTSE Social Index I|
So we just talked about large companies. Well, here are options for small or mid-cap (cap=capitalization). The theory is that these are likely to return more on your investment but are more volatile.
|159H – Cambiar Small Cap Value|
|DFQTX – DFA US Core Equity 2 I|
|180J – Robeco Boston Partners Small Mid-Cap Value Fund|
|VSCPX – Vanguard Small Cap Index InstlPlus|
International & Global
You might be interested in investing in funds outside of the US. Maybe you aren’t happy that we have artificially kept interest rates low, flooded the economy with a ton of currency and that we are way overextended on borrowing.
These are the options that you have below. Remember, if you invest in the target funds which I mentioned above, then you will have exposure to international funds as well.
|RWIGX – American Funds Capital World Gr&Inc R6|
|CCYIX – Columbia Acorn International Y|
|DODFX – Dodge & Cox International Stock|
Rest of the Hodge Podge
I didn’t know how to categorize the rest of these so I included them last. The Wellington seems to be invested mostly in dividend-paying funds, great for someone who wants to be positioned in a dividend strategy.
The last two are “fixed income”, they are likely invested in CD’s or bonds or something of the sort. I haven’t looked at them, I have no interest in them. Though these might be great for someone who wants an incredibly conservative portfolio that’s even more shielded from market fluctuations.
What Should You Invest In?
I think this is a common enough question, and I’m sure you’ve noticed that everyone tries their best not to answer that question, which is a bit silly but also has a reason.
You can’t start with the question of what to invest in. What risks you are willing to take, whether you want to invest at all, how much work you are willing to put into researching your investments and what you will do when your investments drop in value? You need to know how soon you need your investments and how secure your job is.
Do you want to do what most financial advisers are recommending? Well, then you want to follow the modern portfolio theory, and invest in a mix of low-cost index funds of mostly stocks and some bonds.
Out of the mixed funds I see on there, it seems that the Vanguard Target Funds are among the best options. Generally, these have high expense ratios, but because they are offered as institutional funds, their costs have been drastically cut for SCPMG doctors – you only pay 0.06% to hold the 2060 Vanguard Target Fund.
How much Is Your Keogh Costing You?
We already talked about the expense ratio. So if you have $100,000 invested in the Vanguard 2060 Target Fund, you’ll pay 0.06% per year or $60 per year. Yes, the math is correct, that’s: 0.0006*100,000=60.
What are the fees for the Keogh plan held by CS? I couldn’t tell you. Yeap, after all the drama we had in 2008 from shady bankers getting away with risky investments and lack of transparency, I am still unable to find the fees for CS to manage our Keogh plan.
Managing Your Keogh Outside Of Charles Schwab
What if you prefer to be mostly invested in REITs or invest in junk bonds (no comment), how do you do that within your Keogh? Well, we’re gonna get into the 2 options you have with your particular Keogh plan, which you wouldn’t have with 401k’s and most IRA’s.
There is so much jargon used in the financial industry purely for the sake of confusing the end-user. Charles Schwab gives you 2 option for self-managing your investments, get ready to be be confused.
Options 1: You open a private Charles Schwab account, called a PCRA (Personal Choice Retirement Account). How much does this option cost? No idea.
Options 2: You can open an ESDBA (External Self Directed Brokerage Account). In this option, you can take your Keogh money and transfer it (roll it over) to a limited list of brokerage houses. Again, the advantage here is that you’ll get an even bigger list of investment options.
For option 2, I actually found a little blurb about costs, read it for yourself. Naturally, they will charge extra fees for taking your money outside the Keogh plan. In CS’s defense, a Keogh is a pain in the ass to set up, which is why very few brokerage houses offer it.
FYI, back when I was employed at SCPMG, I chose this ESDBA option which was a nightmare to set up. CS “mistakenly” turned my application into a PCRA. How convenient, since with a PCRA the money would stay at CS.
I wouldn’t recommend investing outside of what you see in your Keogh unless you know something that others don’t. It’s too much work and there isn’t enough transparency to safeguard you against fees.
Your Keogh After You Leave KP
A Keogh is a fantastic investment vehicle and the funds offered within KP’s Keogh are among the best. I wanted to say that first before going on to say that Charles Schwab is simply an incompetent business when it comes to customer service and much like KP’s benefits department, the representative know very little.
I put in a little over 5 years at SCPMG and according to all IRS documentation and even the Keogh documentation on the CS website I should be able to take my Keogh with me but rolling it over into an IRA.
I did exactly that, I rolled my IRA into my personal Vanguard because I wanted to have greater control over which funds to invest in.
About 2 years after doing so, I received a letter from SCPMG saying that I had performed an unauthorized transaction. I wasn’t able to roll the Keogh over unless I had spent 15 years at SCPMG. They went on to say some other garbage in the letter which wasn’t accurate.
Sure, I could contest this, write a letter to the IRS and battle it over the next 2-5 years. The problem is that the IRS has complete dictatorship over such decisions, and they will follow the path of least resistance. With the tax code getting more and more complicated, I’m not sure if I can blame them as congress battles tax laws day in and day out.
If I didn’t return the money from my Vanguard IRA back into my Keogh then CS would report to the IRS that I essentially took an early distribution which means a 10% penalty plus fines that I would owe to the Keogh administrator and income taxes owed on the nearly $100,000 that I rolled over.
The Massive Advantages Of A Keogh Plan
This is a quick blurb about why you should take advantage of tax-advantaged retirement plans.
Lower your income taxes. By setting aside money in your Keogh, which gets deducted from your gross paycheck, you are reducing the number of dollars on which you can be taxed.
Let your money grow tax-free. When your money is invested in a Keogh plan or any other qualified plan, then the money grows tax-free. You can buy and sell all you want, get dividend returns and not get taxed a single penny on your positive returns.
Your assets are protected from creditors. Most States will allow you to protect retirement assets from debt collectors, lawsuits or any other external forces.
The money is yours wherever you go. Even if you leave Kaiser, the money in your Keogh is yours. Pay attention to “vesting” rules. I am not aware of any for our Keogh plan but it’s not uncommon for employers to enforce a couple of years of work before they let you “vest” (own) your retirement plan.
It’s 8/2022 as I update this document and my Keogh’s value is $180,000 and I am still unable to move it out of CS.