Mind the Gap: Benefits Planning for Multiple Generations

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David MyriceRadiology practices trying to recruit the most promising young talent—particularly those facing the retirement of multiple baby-boom–generation radiologists—will inevitably face decisions related to benefits planning. The most contentious of these might be the practice’s retirement-plan offering, as the recent vagaries of the stock market have exposed both the risks and benefits associated with the two most common types of retirement plans.

Defined-contribution plans, generally speaking, have more to offer younger members of the practice, while defined-benefit plans might have more to offer those closer to retirement. A combination of the two has been a common approach for medical practices, but it might be worth a review of each plan’s age-related issues as recruitment increasingly becomes a priority—and as returns on investment (ROI) become less predictable.

Defined Contribution Versus Defined Benefit

Defined-contribution plans place money contributed both by an individual and by his or her practice into an individual account, commonly according to a profit-sharing or 401(k) model that allows the company to take a tax deduction for the monies that it contributes. The individual radiologist is then left to manage that money (and individual contributions) as he or she sees fit, by investing it in stocks, bonds, or mutual funds. In brief, the company’s contribution is defined and its liability is fixed; the individual is then responsible for his or her own ROI.

Defined-benefit plans, on the other hand, define retirement benefits as some guaranteed amount upon retirement—based on several factors, possibly including how long the physician was with the practice. The practice is responsible for ensuring that it can pay the benefits that it has promised, meaning that it would be required to make additional contributions if its investments underperform.

There is a hybrid type of plan, called a cash-balance defined-benefit plan, that can be used. This plan is designed to appear to be a defined-contribution plan to participants, but it still has the same fund-performance risks as a regular defined-benefit plan.

Regulations for the two types of plans have similarities and unique differences. In a defined-contribution plan with profit sharing or matching contributions on 401(k) deferrals, the practice’s contribution is a relatively predictable percentage of the radiologist’s wages and is usually similar for each participant, regardless of age or years of service. In a defined-benefit plan, contributions might shift depending on a multitude of factors, including how long the radiologist has been with the practice, his or her age, and the returns guaranteed (versus actually achieved) using plan assets. For this reason, defined-benefit plans are considered to be more advantageous to members of the practice nearing retirement; those who are just joining the practice will receive smaller contributions to their accounts.

Generational and Other Issues

The difference between the two types of retirement plans can lead to conflicts. Older members of the practice will have a financial incentive to push for the defined-benefit plan, which is generally considered to be higher-risk plan, especially if it is a new plan to the practice. Younger members will favor defined-contribution plans because they have the time to wait for them to grow. As defined-benefit plans might call for higher contributions for older members, this has the potential to cause generational conflicts, if not approached properly.

Another problem can arise when a practice has a large number of nonradiologist employees. Many of the same issues occur for both plan types, but in both cases, all the monies come out of the practice’s funds. Actuarial tables that factor in the employee’s age, years with the company, and wage levels might dictate defined-benefit contributions. If the practice has a high number of nonradiologist employees, it might find itself contributing large sums of money to retirement plans—sums that are primarily being paid by the radiologists, not the nonradiologist employees. In addition, nonradiologist staff can have an impact on the required tests for discrimination and thus affect radiologists’ contribution levels.

Defined-contribution plans enable the practice to predict, with some degree of certainty, the retirement expenses that it will incur over a given period of time. Defined-benefit plans, on the other hand, might depend on actuarial