Seth Swenson, MBA

Many doctors are simply not saving enough money. A late start to saving for retirement due to years of school and training combined with low retirement plan contribution limits creates the potential for an underfunded retirement portfolio. Many doctors also build their practices, assuming that they will one day sell them and use this financial gain to retire. Unfortunately, this may not be enough money to maintain the lifestyle that they are accustomed to. 

It is generally considered safe and recommended to take retirement money distributions of no more than 3.5 to 4 percent as this will maintain a retirement account portfolio balance without drawing it down too quickly, and perhaps even allow it to grow. This means that a $1 million portfolio will provide $35,000 to $40,000 per year. Savings of $3 million or more may be necessary for many physicians.

Physicians who want to adequately fund their retirement must consider a cash balance plan. Like a shot of adrenaline, a cash balance plan can inject the funds necessary to stimulate weak retirement savings.

A cash balance plan is a type of qualified retirement plan that typically is layered on top of a combination 401(k)/Profit Sharing Plan. It is a defined benefit pension plan with similar characteristics to a defined contribution plan such as a 401(k) plan. For example, like a 401(k) plan, the participant sees his or her own individual account balance. Additionally, the cash balance plan allows for a portable account balance so upon departure from the company the participant may roll over the balance into another qualified plan such as an Individual Retirement Account (IRA).  

Participants are promised a quantified benefit at retirement; this may be in the form of an annuity or a lump sum.  At age 62, the payable annuity amount is up to $225,000 per year, or a lump sum amount up to $2,877,495.  

A cash balance plan allows medical practice owners to contribute money annually to participant accounts on top of the money that has been contributed to a 401(k)/Profit Sharing plan. This company “pay credit” is a percentage of pay, usually 5 to 7 percent, or a specific dollar amount. The annual contribution can range from $55,000 to more than $300,000, depending on the individual’s age and income. Additionally, participant accounts are guaranteed an annual interest crediting rate from the invested money. This rate may be fixed or variable and is typically tied to an index, such as the 30-year Treasury Bond. Cash balance plans are designed to be in operation for a minimum of five years and a maximum of 10 years. 

Seven major benefits of cash balance plans

1) Multiply retirement savings: Doubled or even quadrupled annual retirement plan savings are possible. A 401(k) plan allows contributions of up to $19,000 per year plus an extra $6,000 per year “catch up” for individuals 50 years old and over. Profit sharing allows up to an additional $37,000 for a total of $62,000 per year. A cash balance plan allows an extra $55,000 to $336,000 of deductible savings.
	
	2) Tax deduction: A medical practice can deduct all contributions made for employees. As individuals, medical practice owners and partners may deduct dollar for dollar the money invested into a cash balance plan. Typically, this can be much larger than even the homeowner's mortgage interest payments deduction.
	
	3) Tax deferral: Money is invested tax deferred and may ultimately be rolled into an IRA account where it will continue to grow tax deferred. 
	
	4) Tax savings: At a 40 percent tax rate, the savings can range from $22,000 to $136,000 per year. This is money that would have gone to the IRS in taxes, but instead it is invested to grow, tax deferred. 
	
	5) Attract and retain employees: Cash balance plans are very attractive to current and future partners and employees. When a cash balance plan is implemented, retirement plan participation improves. 
	
	6) Protection from creditors: As a qualified retirement plan, the cash balance plan assets are protected from creditors. This includes protection from bankruptcy proceedings and civil lawsuits.

7) On-time, comfortable retirement: Cash balance plans allow significant annual contributions from $55,000 to $340,000, depending on variables including age and income. They allow physicians to catch up and save an adequate amount of money for a comfortable retirement.

*401(k) $19,000, $6,000 catch up for ages 50 yr.+, $37,000 profit sharing. **High end of contribution range.

During their careers, physicians expertly provide care for their patients while often neglecting their own financial health. A cash balance plan will put more of their hard-earned money to work for them, instead of into the hands of the IRS. By the time retirement comes, these physicians will have enough savings to last all through their retirement years. 

 is president of Orchid Wealth Management in Palo Alto, CA. He may be reached at 

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Physicians who want to adequately fund their retirement must consider a cash balance plan.

A shot of adrenaline for your retirement savings



Marginal tax rates determine how much you will pay in taxes according to your taxable income. Your taxable income determines your tax bracket, which is based on the highest tax paid, which is your marginal tax rate, or the rate that one pays on the next dollar of income. Keep in mind not all income is paid at the highest rate.
The tax rates for 2018 have changed, slightly leaning on a 3 percent reduction overall compared to 2017 for all brackets.
What you will need to consider during 2018 is if and how to move your taxable income into a lower bracket to save on taxes. Guidelines have changed if you are a physician employed by a hospital or own your practice. Each entity has its own rules on what itemized deductions can be taken off its taxes. The standard deductions have doubled for everyone, but might not make up for limitations on itemized deductions.
If you think you might be able to deduct yourself into a lower tax bracket, work with an accountant and your business manager to anticipate any adjustments you can make to lessen your 2018 tax burden.



A Limited Liability Company (LLC), Personal Service Corporations, other partnership, or S corporation may choose to be taxed as a “pass-through business.” It becomes a pass-through because it doesn’t pay taxes itself as a corporation, but instead passes profits on to the owner, who pays taxes based on his or her own individual rate. Many physicians have pass-through businesses. Most small businesses organize as a pass-through entity or as a business owner who files a Schedule C.
Pass-through businesses have new rates with the 2018 Tax Code. For C corporations, there is a flat tax of 21 percent, whereas in the past the tax was a progressive 15 percent to 39 percent. For those with personal service corporations, the new rate is a flat 25 percent. Pass-through entities have ordinarily been taxed at the individual level after separately stated items are “passed through” via form K-1.
The pass-through income deduction is 20 percent of your share of W-2 wages that the business pays you up to $157,000 for single filers (who are single, married filing separately, head of household, or qualifying widow(er) with dependent child) and $315,000 for joint filers (married filing jointly). Above these thresholds and up to $415,000, the deduction is the greater of 50 percent of W-2 income or 25 percent of W-2 income plus 2.5 percent of the cost of tangible depreciable property.
Specified service corporations have a phase-out for higher income earners. In 2018, the phase out of the 20 percent deduction begins at $157,000 for single filers off their allocable share of business income.



The 2018 tax plan has many changes that can affect you and should be examined with the advice of a licensed tax professional. There are many options and potential pitfalls that can happen in adjusting your income to qualify for a lower tax bracket.
Seth Swenson, MBA, is president of Orchid Wealth Management. Send your financial questions to medec@ubm.com.

Prepare now to minimize this year's tax bill.

Understand, prepare for 2018 tax changes 

	Most people understand the benefits of refinancing their home loan or student loan. By lowering the annual interest rate, the owner of the home is able to reduce the loan payments and achieve greater leverage and purchasing power. Over the life of the mortgage, the savings in interest payments can be tremendous. 

	However, when it comes to investments such as mutual funds and exchange traded funds (ETFs), most people bury their heads in the sand and cringe at the thought of figuring out how to reduce their investment’s annual expenses. This can be a huge mistake.

	Assuming that an investor invests an average of $20,000 per year in their retirement plan, the $151,049 in lost savings in portfolio 2 would require an extra 7.55 years of work. Assuming the investor’s lost savings were $306,550, as in portfolio 3, it would take that person an extra 15 years of work to make up the difference.

	Fees can be the difference between an on-time retirement and a delayed retirement. They can even mean the difference between reaching your financial goals and not reaching them.

	Many physicians have experienced large amounts of debt such as mortgages, car loans, practice loans and student loans. The illustrations above show how investment fees are similar to the interest rates on loans.

	Much like the interest paid to a banker, mutual fund fees are money you are paying to enrich the mutual fund company and the broker-dealers selling the funds. Lowering your investment fees is similar to lowering your loan interest rates. It means that you will pay less and keep more of your hard-earned money.

	Physicians enjoy their careers and love helping their patients. However, there may come a time when the physician would like to do something else, such as change careers, hobbies, travel or philanthropy. Physicians want to know that they have a high likelihood of reaching their target date for retirement and their financial target. The chance of reaching these goals is increased when fees are kept to a minimum. Conversely, the chance of not reaching these goals is heightened by paying higher (unnecessary) investment expenses.

	Passive funds (index) vs. actively managed funds

	Index funds generally have lower expense ratios than actively managed funds. This is because they do not have to pay a team of people to actively manage the fund by selecting the underlying investments. The investments are simply selected based on the index they are tracking. Index funds do not typically have loads of any kind. Additionally, the turnover ratio in an index fund is usually quite low, around 5% or lower. The Vanguard S&P 500 Index fund is an example of an index fund, with no loads, no 12b-1 fees and a very low expense ratio. 

	Actively managed funds have higher expenses since they have a manager, a management team and analysts selecting investments for the fund. Additionally, there are typically 12b-1 fees that are paid to the broker-dealers that sell and market the fund.

	These extra fees are passed along to you, the investor. The turnover ratio on an actively managed fund can sometimes be as high as 100%.

	Passively managed funds and actively managed funds can both be excellent investments. Fees are one aspect of the decision to invest in a mutual fund or an exchange traded fund. Passively managed funds have lower fees and lower turnover and have a lower cost hurdle to overcome. It is also known that over time the majority of actively managed funds have difficulty outperforming index funds. 

	Some experts believe that because actively managed funds have higher expenses to overcome, the fund managers are prone to taking extra risk in order to achieve better returns. Actively managed funds can be excellent investment choices and the fees can range considerably. So they should be well researched.  

	“Refinancing” your investment portfolio may be as important as refinancing your home mortgage loan. Just as there are lower lending rates, there are typically lower expenses available with investments such as mutual funds.

	Consider getting a second opinion on your investment portfolio from a Registered Investment Adviser (RIA). RIAs are fiduciaries (they must always put the client’s best interest first) and do not get paid commissions from third parties. They are likely to give you objective advice and avoid conflicts of interest. 

	By taking the time to evaluate your portfolio’s expenses and adjusting them accordingly, you may increase the likelihood of reaching your retirement goals on time. Simply reducing your annual investment costs can help you lower financial hurdles and achieve your financial goals sooner and more efficiently. 

	The annual expense ratio is the ongoing fee an investor pays to the mutual fund or ETF company to operate the fund. The operation of the fund or ETF consists of management costs as well as marketing costs. The expense ratio can be found in the prospectus. There, the management fee and the marketing fee (12b-1 fee) are broken out. Expense ratios can range from as low as 0.05% for an equities index fund to 2.50% for an actively managed fund, a huge 2.25% difference. One mutual fund found with the Morningstar Fund screener has an annual expense ratio of 9.64%.

	John C. Bogle referred to turnover ratio as the “invisible cost” in his book, “Bogle on Mutual Funds.” The turnover ratio is a measure of the annual frequency of trading activity (the buying and selling) of investments within a mutual fund or ETF. The higher the turnover ratio, the higher the expense. This dollar amount can be found in the “Statement of Additional Information” (not the prospectus).
	As an example, if a turnover ratio is 50%, then the portfolio is buying and selling half of its portfolio’s holdings every year.
	This means that if a mutual fund has $100,000,000 in assets, then it bought and sold $50,000,000 of assets and it transacted $100,000,000 in purchases and sales. These transaction costs can be considerable.

	Front end loads (sales charges) typically range from 4% to 6%. Back end loads (contingent deferred sales charges and redemption fees) are sales charges incurred when an investor sells shares of a mutual fund. These charges can be similar to front end loads but decrease over time since 12b-1 fees are charged annually and thus the sales charges are paid for over time. All of these fees are paid by investors to the mutual fund company at different times and are dependent upon which share class is purchased. This information is found in the prospectus.

When it comes to investments such as mutual funds and exchange traded funds (ETFs), most people bury their heads in the sand and cringe at the thought of figuring out how to reduce their investment’s annual expenses. 

Refinance your investment portfolio

	Most physicians in America know all about medical malpractice risks, but many are unaware of another type of liability exposure: retirement plan malpractice. 

	As a physician offering a retirement plan such as a 401(k) to employees, you are a plan sponsor and fiduciary to your plan participants. Per the Employment Retirement Income Security Act of 1974 (ERISA), a fiduciary has important responsibilities:

		Acting solely in the interest of plan participants and their beneficiaries

	As a fiduciary, your personal assets could be at risk and could be used to compensate for fiduciary losses. Proper administration of a retirement plan will result in liability exposure reduction and an optimized plan. 

Create an investment policy statement (IPS)

 that is easy to follow. ERISA states that a plan must create a clear, prudent, documented procedure and process for investment-related decision-making in relation to the plan’s goals and objectives for plan investment. This statement would include the processes for selecting and monitoring the plan’s investments. The IPS helps to reduce liability exposure by providing evidence of a prudent investment decision-making process. 

	Once the IPS is created, it should be communicated effectively to plan administrators and plan participants so that everyone clearly understands it. 

 Reduce liability exposure and save on fees by working with a record keeper who uses a fixed, per-participant, fee model and is not being compensated by revenue sharing. 

	These fees can start out at a reasonable level, but over time, as the plan assets grow, the fees may become excessive, thus increasing liability exposure. Fixed per-participant fees help to ensure that costs do not become exorbitant as the plan’s assets grow and the plan sponsor’s liability exposure is reduced. 

Get a second opinion from a fee-only registered investment adviser (RIA)

 who specializes in retirement plans. An RIA is a fiduciary and must put his or her client’s best interests before their own. Because they cannot participate in revenue sharing, they should tend to recommend investments and funds that have lower expense ratios. 

	Benchmarking your plan with what is currently available and possible is the best way to determine if your plan is paying excessive fees. Fees are relative and you can only know if you are overpaying if you shop around. 

Maintain the required ERISA Fidelity Bond

 of no less than 10% of the plan’s assets as of the beginning of the year. ERISA’s minimum required bond is $1,000 and the maximum is set at $500,000. A fidelity bond will help to insure the plan’s assets against fraud or dishonesty on the part of anyone handling the plan’s assets. By not having this fidelity bond, it could signal to the Department of Labor (DOL) and others that fiduciary duties are not being met. 

 Insurance goes beyond the fidelity bond and covers plan sponsors and their legal expenses  if a breach of fiduciary duty occurs.

Most physicians in America know all about medical malpractice risks, but many are unaware of another type of liability exposure: retirement plan malpractice.

Author | Seth Swenson, MBA

Articles

A shot of adrenaline for your retirement savings

Understand, prepare for 2018 tax changes

Refinance your investment portfolio

Are you liable for retirement plan malpractice?