Physicians can have a limited understanding of how much they need to save to fund 25 to 30 years of retirement causing them to upend their lives. Sometimes they need a catch-up solution that will let them increase their retirement account balance rapidly.
When Robert C. Master, MD, became chairman of his 350-physician multispecialty group’s Retirement Planning Committee in 1995, he embarked on a journey that has become a lifelong mission.
“The first thing I looked at was the retirement account balances of physicians in the 60 to 65 age group and I was dismayed at how low they were,” recounts the cardiologist, now 62 and semi-retired.
Master knew the rule of thumb noted on retirement websites that $1 million in conservatively managed assets generates only $40,000 a year in retirement income to avoid outliving one’s assets. He quickly saw that few physicians in his medical group had enough money to enjoy the type of lifestyle they wanted and deserved after decades of service in highly demanding and stressful careers.
Many doctors with whom Master worked upended their lives at retirement.
“One of my colleagues had to sell his house and leave the area because he didn’t have enough for his retirement,” he says. “His home equity was his retirement plan.”
As Master dug into the numbers, he saw that most physicians had a limited understanding of how much they needed to save in order to fund 25 to 30 years of retirement. With annual 401(k) and profit-sharing contributions capped, at that time, around $40,000, options seemed limited, especially for older physicians, who needed to save aggressively. Early in their careers, many of these physicians had priorities centered on school tuition and mortgage payments. Even later in their careers when physicians focused on their retirement, they found that there was no easy way to “catch-up” to accumulate an adequate nest egg without having to continue to work.
“It didn’t seem right,” Master says.
Discouraged, he began researching a solution that would help physicians increase their retirement account balances rapidly. Initially, he focused on non-qualified plans (those not protected under ERISA, the comprehensive federal retirement law passed in 1974).
“In a non-qualified plan, retirement benefits are an unsecured corporate liability,” he explains. “Based on the size and culture of my group, I thought it was much more prudent to have a qualified plan.”
Palo Alto Foundation Medical Group now includes over 1,000 physicians after a merger with two other groups.
The solution: A cash balance plan
Master eventually discovered an innovative solution: adding a cash balance plan to the existing 401(k) plan. A cash balance plan is a type of IRS-qualified retirement plan known as a “hybrid,” since it combines the high contribution limits of a defined benefit plan with the flexibility and portability of a 401(k) plan. By adding a cash balance plan, the group could contribute an additional $250,000 a year for physicians, depending on their age.
“These major tax-deferred contributions could help many of my colleagues squeeze 20 years of savings into just five or 10 years, so more of them could avoid the fate of having to move or continuing to work long hours,” Master notes.
Together with his committee members, he developed a detailed request for proposals and submitted it to Third-Party Administrator (TPA) firms with the actuarial expertise to manage a cash balance plan.
After months of due diligence, Master and his committee hired Kravitz, a firm that has been designing and implementing cash balance plans since their introduction in the 1980s.
“After I understood all the qualities of a cash balance plan I knew it was the right solution for us to overcome the 401(k) limits, while providing major tax-deferred and tax-free accumulation savings, asset protection and stability,” Master says.
Since his group adopted the plan in 2000, it has continued to grow in popularity. Master has a number of success stories about the difference the cash balance plan has made in the lives of retiring colleagues, including his own.
“I know many colleagues now, like me, who have an adequate nest egg, so they can retire early or work as long or as much as they want, rather than out of economic necessity,” Master says. “Their quality of life is better when they do retire and they can remain in the area near family and friends.”
Tax deferral is one of the many advantages of a cash balance plan. All contributions are tax deferred, reducing both ordinary income and adjusted gross income (AGI). Account balances grow tax-free until distribution. Contributions are age-weighted, with higher contributions for those closer to retirement. (See a table of age and allowable benefits.)
A cash balance plan is an ideal retirement vehicle because physicians can accelerate their savings, yet there is a fair amount of flexibility. Not everyone has to receive the same contribution.
“It’s been interesting to see how some of my colleagues are savers by nature,” observes Master. “They get involved in the cash balance plan from the very beginning of their careers, while others procrastinate and reach their 50s before they realize how much they need to put away in order to enjoy a reasonable retirement.”
The cash balance plan allows both types of people to reach their goals.
Accounts are maintained by the plan actuary, who generates annual participant statements. Upon a distributing event, the account balance may be taken as a lump sum distribution or annuitized. Typically, the lump sum is rolled over into an IRA. A cash balance plan’s assets are pooled and invested collectively, earning a guaranteed interest credit, which is set out in the plan document. Each participant has a lifetime limit of about $2.5 million dollars in 2013 (based on IRS limits set annually).
The plans are more complex than a typical 401(k) plan, administrative costs are higher and they have less flexibility when it comes to investment selection, loans and hardship withdrawals. The positives, in terms of asset accumulation, greatly outweigh these limitations.
A successful plan
The key to success is providing excellent participant communication.
“We have semi-annual new physician employee orientations and yearly shareholder meetings where I explain our retirement package,” Master notes. “Almost all our new members are excited about their ability to save in a tax-advantaged way.”
One of his objectives is to encourage new physicians to start saving right away.
“The earlier they start contributing to the cash balance plan the less painful it is and the earlier they will max out the benefit,” he says.
Master likes quoting longevity statistics to new physicians, reminding them that they need to save more for retirement than any other generation, since they will likely live much longer.
The cash balance plan has become a recruiting tool for Palo Alto Foundation Medical Group.
“When physicians are considering joining us, they’re usually looking at other large multispecialty groups as well,” he says. “However, those groups do not have a cash balance plan and, oftentimes, that’s the deciding factor.”
After 18 years as head of the Retirement Committee and 13 years handling the cash balance plan, Master is passionate about sharing his knowledge with other physicians and medical groups.
“My goal is to take care of physicians financially, while they take care of patients,” he says. “I don’t want these physicians — people who dedicated their lives to helping people — having to make big sacrifices when they retire, simply because they didn’t know the options available and didn’t save enough.”
Barbara Lewis, MBA, is the president of the Centurion Consulting Group. She also lectures at the UCLA Anderson School of Management.