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Kaiser Permanente SCPMG Keogh Plan

Learning About SCPMG’s Keogh Plan

The reason I am writing this post is 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 a separate entity 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 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 into this plan, is what you are able to 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 in order 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

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.

Annual IRS Retirement Contribution Limits SEP-IRA

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 opted 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, that’s a decent list, not too big and not too small. CS has included plenty of Vanguard funds. VG is recognized as having funds with the lowest cost (lowest expense ratios) and known to be a trustworthy company.

Vanguard Target Funds

Let me try to explain what a target fund is. Basically, a VG groups a few of their popular mutual fund products into one fund (which is why it’s sometimes called fund-of-funds) and they will 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 every year. You can find these fees on the fund’s prospectus.

When you invest in these target funds, you are able to get a ratio of:

  • US bonds
  • International bonds
  • US stocks
  • International stocks

Supposedly, this is considered to be quite the diversified portfolio. The only thing that generally changes 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.

VFT15TP – Vanguard Target Retire Trust Plus 2015
VFT20TP – Vanguard Target Retire Trust Plus 2020
VFT25TP – Vanguard Target Retire Trust Plus 2025
VFT30TP – Vanguard Target Retire Trust Plus 2030
VFT35TP – Vanguard Target Retire Trust Plus 2035
VFT40TP – Vanguard Target Retire Trust Plus 2040
VFT45TP – Vanguard Target Retire Trust Plus 2045
VFT50TP – Vanguard Target Retire Trust Plus 2050
VFT55TP – Vanguard Target Retire Trust Plus 2055
VFT60TP – Vanguard Target Retire Trust Plus 2060
VFTITP – Vanguard Target Retire Trust Plus Income

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, Vanguard Social Index fund, supposedly invests in funds which 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

Small/Mid Cap

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 would 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.

VWENX – Vanguard Wellington Admiral

180D – Standish Mellon Fixed Income Fund

180C – Interest Income Fund

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. You have to first figure out 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 theoryand invest in a mix of low-cost index funds of mostly stocks and some bonds.

Out of the mix of 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 then 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 not able to find what the fees are 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 you extra fees for taking your money outside of 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.

Charles Schwab SCPMG Keogh Document

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 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, law suits 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.

10 replies on “Kaiser Permanente SCPMG Keogh Plan”

It’s made far more complicated than it needs to be. The brokerage houses which sponsor these plans have a lot of paperwork to maintain, in their defense it’s a pain in the ass. It’s a solid retirement vehicle, overall. Just remember that 401k+Keogh=$54k (for 2017).

They wouldn’t offer it if they didn’t make a killing. . . and they certainly do. The Keogh, in my opinion, is a total racket. It really is bordering on criminal. The best part is, knowing this, you can’t do a damn thing about it. You are contracted for the life of your employment at KP?!

They purposely create fund options that will underachieve. Meanwhile, they have a couple decades to use our money at will. Even the least risky allocations outperform these retirement date funds. They know it too. They built it that way. Return the lease amount deemed acceptable to us, and rake in the money on the way they’d really have you invest if you mattered to them.

These professionals, and KP, should put us in a position to Thrive. The only one’s thriving in this relationship are KP and CS. Why do they get away with this ?

Whatever

You have the option of opting out of Keogh from the start. However, a Keogh is nothing more than sharing the profits of a corporation with it’s highly paid employees so I don’t see how it would hurt a physician to opt into it. However, you are making a much more important and global point as to whether it’s wise to work for Kaiser Permanente and from my own experience I have to say it’s a terrible idea.
You are only allowed to work for them and nobody else which means they own your hide and you are covered by a conditional malpractice insurance. Your income is solid but what’s the point if Kaiser retaliates against an employee and makes you a poor hire for other companies.
All that said, if you are someone who is going to work full-time for the rest of your life and you can play by all the rules then it’s hard to beat Kaiser Permanente as an employee.

By the way, if you have a Keogh, you don’t have to only invest in the funds they offer.

You can have a PCRA and invest in other things. For example, I have leveraged products like TQQQ and MORL.

Valid point. You can even use your Keogh to invest in individual stocks. I had a PCRA and still do since I still have my Keogh. Sadly they won’t let you ever take the money out of CS even when you part with SCPMG. But the PCRA can be a little complex and there is a small fee to invest your money through the PCRA.

Anyone know of a way to get out of the keogh while still employed by KP? I need my money back and it seems your election is for life. Seems implausible.

It’s your money so if you are vested in it – which you should be – you can withdraw it and pay the penalty on it. I don’t see how they could keep you from doing that. It’s not a pension and it’s not even a cash balance plan. You’ll pay traditional income taxes on the money and a 10% tax penalty. Charles Schwab will likely withhold an automatic 20% before distributing the money to you so that they can cover any potential income taxes you may not pay but that money will be returned to you when you go to file income taxes.

Yeah, you actually sign an enrollment form saying you cannot change you elections once made. So for the remainder of your career, you are vested in the amount you made by no later than 6 months after you start employment (though the contribution starts when you make partner at 3 years). I am told by colleagues that it has to do with some law but I’ve been pouring over IRS law and don’t see anything to that effect.

It’s not an IRS matter. The plan documents are drawn up by Charles Schwab. To keep things in their favor, and since really nobody else in the US offers a Keogh, it’s made exceedingly onerous so that they can continue to profit off of your money in the account. That’s why I wasn’t allowed to withdraw the money once I left SCPMG. The IRS said it’s okay but CS said it wasn’t. So I had to either have CS recharacterize the money as no longer tax-advantaged and pay a ton of taxes or I could leave it with CS and forgo the taxes. It created a huge headache for me and I couldn’t get any info from CS beforehand and obviously there was no issue on the IRS side.
Once you’re locked into that Keogh you don’t have any other options as far as renegotiating the deal.

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