French classical author Francois de la Rochefoucauld once noted that, "The only thing constant in life is change." That may be a depressing thought, because it's a well-known fact that change is hard. We're all creatures of habit, and when we find our comfort zone, change can be an extremely disruptive force in our lives.
“When I was young I thought that money was the most important thing in life; now that I am old I know that it is.”—Oscar Wilde
French classical author Francois de la Rochefoucauld once noted that, “The only thing constant in life is change.” That may be a depressing thought, because it’s a well-known fact that change is hard. We’re all creatures of habit, and when we find our comfort zone, change can be an extremely disruptive force in our lives.
However, the changes brought about by the Pension Protection Act of 2006—changes that took effect the first of this year—should be easy for physicians to digest. One of the key features of the PPA makes it painlessly easy for physicians to automatically enroll their employees in the practice’s 401(k) retirement plan. Less than two months after the law took effect, physicians are eagerly taking advantage.
“Almost a quarter of our physician groups are using the automatic enrollment, and those numbers are only going one way,” explains Dean Kohmann, vice president of 401(k) plan services for Charles Schwab. “They’re going up.”
Change is Good
The new ruling addresses the fact that an estimated one-third of all employees do not participate in their company’s 401(k) retirement plan. The new law is aimed at boosting the amount of money Americans put aside for their retirement years. Employees receive written notification that the practice is participating in automatic enrollment, and then have up to 90 days to opt out, if they choose. Previously, employees had to opt in.
“The government understands that there’s something to the fact that people procrastinate,” says Michael Reiman, CFS, RFC, DIA, of Reiman Financial, LLC. “If you can limit the amount of procrastination, people will probably experience a little more of a successful retirement.”
That, again, is because people are hesitant to change. If a physician’s staff previously hesitated to opt in to the practice’s 401(k) plan, they’re now less likely to opt out once they’re automatically enrolled, right?
“Absolutely,” agrees Kohmann. “We see between 85 and 90% of employees stay with the plan they’re defaulted into. It’s a benefit,” he adds, noting that physicians should position it as such. “Employees are getting investments that they couldn’t buy on their own, they’re getting the tax benefits of participating in the plan, and they’re getting the benefit of professional management at a lower cost than they could ever go out and get on their own.”
Kohmann suggests target date retirement funds as an excellent choice into which physicians can default their employees. “[Target date funds] are the fastest growing asset class in the country right now,” he says. “They become a little more conservative each year as the employee gets a year closer to retirement. It’s a very simple, hands-off investment choice.”
Physicians Benefit, TooThe 401(k) rules changes also offer significant financial benefits to physicians. The greater the percentage is of employees participating in the practice's 401(k) retirement plan, the more physicians themselves can contribute to the plan, up to specific IRS maximum limitations of $15,500 for 2008. Physicians older than age 50 can contribute an additional $5,000 this year.
In addition, almost every physician previously would have been prohibited from using a Roth IRA because of its income limitations. But where a practice has a 401(k) retirement plan in place, physicians can have a Roth inside the 401(k) plan with no annual income limitation. And, says Kohmann, the tax benefits of doing so are considerable.
“With a traditional 401(k) you get the tax deduction today when you put the money in,” Kohmann explains. “But when you take the money out, you’re going to pay income tax—ordinary income tax—on everything that comes out. With the Roth 401(k), you do not get the federal and state income tax deduction when you put the money in. But, the entire amount, when it comes out, is tax-free. Basically, you’re getting the entire amount invested and accumulating tax-free for all those years.”
The rules changes also allow for the conversion of an existing 401(k) directly into a Roth, also with no income requirements. “That’s a big deal,” explains Reiman, who specializes in advising doctors. “If I’m a physician and I have $100,000 in an old retirement plan, I can convert that to a Roth. I may pay taxes on that $100,000, but in 20 years, if it grows to $500,000, that’s $400,000 that I never paid taxes on.”
The PPA also made the rules around the Roth 401(k), which when originally proposed were going to expire in 2010, permanent. And physicians, says Kohmann, are taking advantage.
“Among our physician clients, nearly 40% have the Roth 401(k) provision already, and that number is certainly on the rise,” he explains.”
So, even though change is constant, that doesn’t mean it has to be painful.
Ed Rabinowitz is a veteran healthcare reporter and writer. He welcomes comments at firstname.lastname@example.org.
36%—Percentage of high-income households at risk of being unable to maintain their current standard of living in retirement.(Center for Retirement Research, 2007)