With so many uncertainties in our economy and the rising cost of providing benefits, many employers are phasing out retirement plans or reducing contributions and matches. As a result, experts are rethinking their recommendations to physicians for retirement planning for both their personal finances and for their employees.
“From an investment perspective, we are recommending more flexibility in retirement portfolios. Portfolios don’t have to be 100 percent stock. There are other assets,” says Don Lutomski, CFA, CMA, a wealth management consultant with Welch Hornsby & Welch in Birmingham. “We try to allocate resources toward risk management and the overall retirement goal, making sure we dedicate allocations to mitigate risk as well as to take advantage of opportunity.”
Lutomski says that many physicians who provide retirement plans for employees are trying to decide whether or not it is cost effective to continue the plans. “They should look at the cost of contributions for employees versus the money a physician can contribute personally to the plan,” he says. “They have to consider current tax rates, but must consider future tax rates as well.”
Demographics of the people represented by a retirement plan must be taken into consideration, says Phil Anderson, ERISA consultant for Welch Hornsby & Welch. “Currently in basic profit-sharing plans, contributions are a set amount for all groups,” he says. “Under the right circumstances, you can integrate the contributions with Social Security to skew contributions toward higher paid employees.”
Anderson adds that cross testing plans can allow practices to allocate larger amounts to higher paid employees. “You can set up contribution groups with a different benefit structure for each group,” he says. “You must test across all groups and all must get a fair share based on age, compensation, and retirement date. If it tests out, you can skew it significantly toward higher paid employees. But if you have older participants in a non-highly compensated group, it can create problems with allocation. You must look at demographics before setting up one of these plans.” It is fairly easy, Anderson says, to prepare contribution projections for these arrangements to see if it is a good fit for a particular group.
Both Anderson and Lutomski say that if the goal is to increase contributions to a maximum level for the physicians, a cash balance plan also could be considered. A cash balance plan is a hybrid of a defined benefit plan and a defined contribution plan. “The contribution limits in a cash balance plan can be significantly higher,” Lutomski says. “For instance, if a doctor makes a substantial salary, he or she may be able to get more than $100,000 in additional contributions, depending on the demographics. That can be a tremendous tax deferral.”
Lutomski points out that if a physician practice has a large number of staff employees and only a few physicians, you need to weigh the cost and benefit to the physicians who are making the contributions. “Let’s say you have two physicians and 25 other plan participants to make contributions for. If you, the physician, maximize contributions from a legal standpoint and perform required testing and you can’t contribute enough for yourself to offset the cost, it may be best to discontinue the plan.”
Anderson stresses that there are other intangibles to consider before deciding to discontinue a plan. “How tough is the competition for employees in your area? What type of benefits will it take to keep trained people in your practice?” he says. “If you need a plan in order to be competitive, look at how you can maximize benefits to the physician and make the most cost-effective contributions to employees.”
Lutomski also points out that it can be beneficial for a physician to contribute to a benefit plan because it provides asset protection in case he or she is ever sued. “There are a lot of moving pieces in the decision to provide retirement plans, and it is wise to rely on an accountant, an attorney, and an investment advisor to help make the decision that is right for each particular case.”
While some physicians are cutting plans altogether, others are just reducing contributions or cutting the match. “Some physicians have become gun shy about the market, and if they are too aggressively invested in equities, they may be looking for an alternative,” Anderson says.
Others may be looking for alternatives because their revenues are being squeezed on all fronts. “They are anticipating a higher degree of revenue reductions under the new health care reform bill, and physicians also are in the targeted class for a tax rate increase,” Lutomski says. “Many feel they can’t afford to contribute as much to retirement plans because the ‘pie’ is changing. Some are contemplating making changes even if they haven’t done so yet.”
Anderson says the uncertainty about future costs makes it hard for doctors to plan for the financial future, both personally and in their practices. “Many physicians are spending money now to hire attorneys and consultants to help them figure out what they need to do,” he says.
Physicians can plan for the future, Lutomski says, by reading as much as they can about the new health care legislation and what regulations are included. “The future of health care is not 100 percent defined yet, but physicians should be informed about the legislation to have an idea of the expectations facing them in the future.”