The ultimate goal of any retirement plan is for participants to prepare for retirement, but Physicians must also maintain the appropriate structure of the plan. How can you be sure everything is handled correctly? Below, one of our 401(k) plan experts, Jack Adams, answers a few frequently asked questions about 401(k) plan education, structure and design.
Question: How do we prepare our participants for retirement?
Answer: With participants, one of the most important things you want to do is talk to them about the reason they need to save for retirement. Other advisors seem to focus on the investments, but if a participant isn’t properly saving for retirement, they will never reach their ultimate goal. What we do in our retirement meetings, from an education standpoint, is focus on how much a participant needs to be saving to accomplish their goals. Typically, we tell them they need to save eight to ten times their salary, because they will live off about 80% of their pre-retirement income when they retire. This money has to last them 20 to 25 years. So again, getting them to start saving and then try to increase the amount saved each year is going to be important in reaching those retirement goals.
You also want to talk to participants about Social Security. Many people believe Social Security is going to be a large portion of their income at retirement. During our retirement meetings, we show them an estimate of the percentage of their income that will come from Social Security and what percentage has to be made from their private sources.
I think it is important to educate participants along the way to ensure that they are not surprised when they are 65 years old and ask “am I going to have enough to retire?” The last thing we try to incorporate in every one of our meetings is a retirement estimate. That is something we put on the fourth quarter statement for our clients. We calculate a projected retirement income based on their personal contributions, along with their employer contributions. When you look at this calculation each year, if the number has gone up, you’re doing the right things. That number is what you can expect to live on, along with social security, during retirement.
Question: Tell us about the different kind of structures that could be in place for a physician practice.
Answer: Typically, the ultimate goal is to try to get as much of a contribution into the physician’s account as possible while attempting to minimize the required contribution to the rest of the staff. There are different ways you can structure a plan depending on which safe harbor contributions you choose to make. The two options we see most often include a 3% non-elective contribution, which means that every participant would receive a fully-vested 3% contribution based on their compensation or a basic safe harbor match of 100% on the first 3% they defer and 50% on the next 2% deferred. Which scenario a practice chooses depends on the ultimate goal of the practice. If the practice is going to make a profit-sharing contribution in addition to the safe harbor contribution, then choosing the 3% safe harbor, non-elective contribution is often the better approach. This is because this 3% contribution counts towards satisfying the practice’s minimum required non-elective contribution that each eligible participant is required receive in a cross-tested profit-sharing plan. The two most common types of physician practice profit sharing plan designs are the aforementioned cross-tested design or the integrated design. Depending on the age of the physicians and their ultimate goal, we can look at each plan design to ensure the maximum benefit at the lowest cost.
Question: What can Physicians do to ensure they have the right plan?
Answer: We recommend that you review your plan or have a professional assist, periodically, to better understand your fees structure, plan design and investments. When it comes to fees, it can be difficult to understand where they’re coming from, what they’re for and how the they are paid. In particular, understanding the different ways that fees are structured can reveal some areas for cost savings.
We suggest you find out how your plan advisors are compensated. They’re often compensated through a 12b-1 agreement or some type of commission-based arrangement within the fund options. Also, it’s a good idea to find out if there is an amount contributed towards record keeping. We offer plan assessments where we look at your plan’s design, fees, investment diversification, investment performance and your investment policy statement. We want to make sure your plan is appropriately designed to get the maximum benefit. During our assessments, we typically find that people determine what they like and don’t like about the plan, and from there, we give them recommendations. The goal is just to understand your plan better.
Article contributed by Jack Adams, Asset Management Member & Retirement Plan Consultant. Warren Averett is an official Gold Partner with the Medical Association.