Todd Shryock, contributing author
Starting out with clear priorities will help simplify process of finding the right plan, experts advise
As the unemployment rate creeps lower, attracting and retaining employees can become more difficult because of the increased competition for workers. Practices need to find ways to appeal to potential employees while keeping existing talent happy, and offering competitive retirement benefits is a critical way to do so, ranking second only to healthcare benefits in importance to employees, according to the Society for Human Resource Management.
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George G. Ellis, Jr., MD, a Youngstown, Ohio-based internist and chief medical adviser for Medical Economics, recently implemented a 401(k) plan at his practice. “It’s a retention tool,” Ellis says. “I looked at what the local hospital systems were offering and wanted something that would help me retain my employees.”
While small practices may not be able to offer the same level of benefits as a hospital system or larger physician groups, it’s important to know what competitors offer their employees, says Kirsten Curry, JD, president of Leading Retirement Solutions, a Seattle-based retirement plan provider that works with clients nationwide.
“Having a retirement plan is one way to attract and retain employees, and understanding what others are doing is important so what you are doing is competitive. A retirement plan that meets the savings goals of employees engenders a loyalty to the practice that [can] increase the production and stability of the practice,” she says.
If lack of a retirement plan costs a practice a low-skilled employee, it can be expensive to replace that person. The average replacement cost for a low-skilled worker is between 16% and 20% of the employee’s annual salary, while a highly-educated employee might cost more than 200% to replace,
according to a study from the Center for American Progress.
Sorting through all the retirement benefit options can be daunting, but experts say that by starting with a clear goal, doctors and practice administrators can find a plan that fits their budget and keep employees happy.
While employee attraction and retention are the obvious goals for offering a retirement benefit, physician practice owners can benefit, too.
“As a practice grows, the priorities generally shift and focus more around what changes need to be made to the retirement plan to maximize the benefits to the doctor-owners, not only from a retirement standpoint, but a tax-reduction strategy,” says Curry.
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She recommends writing down all the priorities and rank them. Employee retention may start as the primary goal, but over time, a successful physician may be more concerned with creating a tax shelter, for example.
Or, Curry says, an expanding practice may be more focused on maximizing profitability to fund growth, meaning there is little or nothing to contribute to employee retirement. These goals will determine which plan type is the best fit for the practice.
Once the goals are known and ranked, the next step is to find an adviser who can help set up the plan, says Ken Hertz, FACMPE, a principal with the Medical Group Management Association’s Healthcare Consulting Group. “As physicians look to bring in advisers, it’s important to understand how a financial adviser is compensated,” says Hertz.
Some advisers work for a flat fee while others are on commission, which may lead them to push certain plans over others, says Hertz. “It’s important to find someone who will educate you first, then talk about the options. It shouldn’t be about the sell, it’s the education and understanding what you are trying to do.”
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Brand-name plan providers, such as Fidelity or John Hancock, can make things simple to set up, but they are not always as cost-effective as they may first appear, says Warren Ward, CFP, president of WWA Planning & Investments in Columbus, Indiana, who has been creating custom retirement plans for small businesses for 26 years. “Those tend to be expensive, not so much in upfront cash, but in annual expenses that may be more than 3%, when you can find similar plans for around 1%.”
Ward says it’s also important to understand the limitations of what the plan provider can offer. An insurance company, for example, might have a range of plans with no or low costs, but generally cannot give advice on which plans to choose because they are not licensed to do so. Education for the physician and the employees may also be limited in low-cost plans, with the salesperson referring investment questions to a company website.
The retirement plans most commonly offered by medical practices include individual retirement accounts (IRAs) and 401(k) options.
There are two types of IRA plans that are common in medical practices: simplified employee pension (SEP) and simplified incentive match plan for employees (SIMPLE), according to Curry. These plans normally work well if a practice consists of just the doctor or a doctor and one or two employees.
According to the Internal Revenue Service (IRS), under a SIMPLE IRA, physician-owners can:
For the SEP IRA, the IRS states that it must be funded entirely by the employer, but it has no annual funding requirements. Owners can contribute up to 25% of compensation, but that cannot be more than $54,000 in 2017, and the contribution to all employees must be the same percentage of salary as the owner.
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Thus, if the physician-owner puts 15% of her salary into the SEP IRA, she must contribute 15% of plan participants’ salaries into the SEP IRA as well.
“With the SEP or SIMPLE plans, generally the benefits need to be given equally across the board,” says Curry. “Most doctors want to give some benefits to their employees, but it’s their blood, sweat and tears and their neck in the noose when it comes to risk, and they’d like a higher percentage of the benefits. You can’t get that with a SEP or SIMPLE plan.”
The 401(k) plan is the best-known option for retirement benefits, and often a good fit for medical practices. “The 401(k) is usually where you want to go, even if you are a small practice,” says Ward. “There are simpler choices for sure, but they are not as flexible, and for not much more money, you can get a 401(k) that can encourage employees to stay longer.”
Curry says advantages of a 401(k) include a higher contribution limit and flexibility that allows physician-owners to put more money in the plan for themselves than for their employees.
The IRS contribution limit for 2017 for 401(k) participants is $18,000 annually (2018 limits were expected by the end of October). The employer is not required to make any contributions to employees, but the average contributions of those earning $120,000 or more in the practice are limited by how much lower-paid employees are contributing. This is why many employers offer to match some percentage of employee contributions-to encourage participation by all employees.
In addition to his 401(k), Ellis implemented a profit-sharing plan, an option growing in popularity, according to Dan Harding, chief executive officer of Los Altos, California-based Retirement Administration Inc. A profit-sharing plan can help maximize contributions for owners (up to $35,000 per year) and highly compensated employees while minimizing them for other employees.
“Practices in which the group targeted for larger contributions consists of older individuals who are more highly compensated than other employees would find this type of plan ideal,” says Harding.
When choosing a 401(k) plan, Ward says it’s important to understand the plan’s fees and administrative costs. A turnkey plan from a large provider might not have upfront costs, but could include higher administrative fees, while a custom plan set up through a financial adviser might cost a few thousand dollars but have lower ongoing costs.
A good adviser will help determine what mix of funds best meets the plan’s goals, which may not always match those of individual employees. “Everyone is going to have their personal opinions about what the plan should offer by way of features-loans, matching contributions, as well as investments,” says Curry.
A plan need not cater to every employee’s personal choice, but should instead focus on the physician’s goals and what the competition is offering, she adds.
Hertz says employee education is another important consideration. If employees don’t understand the plan it won’t help with retention efforts, so find out how much education assistance is provided for employees. A good plan will offer education that focuses on both understanding the value of saving for retirement and helping them make appropriate investment choices.
“It can be a real process to help the staff understand the value of the retirement plan,” he says. “Many folks value what they are paid on an hourly basis more than the added value of a retirement plan.”
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Hertz says letting experts handle the details is probably the best option, rather than trying to do it in-house. “There is tremendous risk that will be assumed if a practice administers a plan,” he says. “There are many compliance pieces that range from employee notices to annual filings, and certain plans require very specific reports be filed with the [Department of Labor] and with the [Employee Retirement Income Security Act.] Taking administration out of the hands of those that don’t do that on a day-to-day basis and putting it in the hands of experts is worth the cost.”
Once a practice chooses a plan, it can take three to six months to set up, because there is a fair amount of administrative work required to get started, says Hertz. These early stages are important to make sure the plan is set up correctly and that everyone understands the benefits.
“Be sure to get good, expert help and educate yourself, and take the time to understand the great value you are bringing to your employees,” he says.
The options available today are many, but Ward says anyone intelligent enough to get through medical school is capable of making a good decision on a retirement plan.
“It would be in their best interest to save for their retirement and keep the staff loyal and do it within the law so they don’t get sued,” says Ward. “The default is always something easy, but for some time invested going through all the options, they can get something that they and their employees will get a lot of benefit out of it. They don’t need to learn pension law to do that.”