Mind the Gap: Benefits Planning for Multiple Generations
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 tables and do depend on ROI; as such, their potential financial impact on the practice in the future can be difficult to determine. Recommendations For these reasons, many practices have moved toward either defined-contribution plans or a combination of the two types of plans, which has the benefit of balancing higher- and lower-risk approaches to the benefit of radiologists of every age. For groups with a high number of nonradiologist employees, however, the defined-contribution approach is likely to be considered the most logical. Practices seeking to sweeten a defined-contribution plan can also take advantage of the new Roth 401(k) option, which accumulates all of the earnings tax free, but taxes the contributions made at current tax levels. Using a Roth option requires careful consideration, but might be most attractive to younger members with a longer time horizon until retirement. For practices that want to use either a combined approach or a defined-benefit plan, one way to equalize the difference in contributions between older and younger radiologists is to mandate that everyone must pay for his or her own defined-benefit contributions. This equalization approach is similar to that used by many practices for CME, with individual payment for CME being used to adjust for the disparity in different radiologists’ spending on CME events. Retirement is an excellent benefit offered by practices, and no matter what their circumstances, they should seek to maximize the allowable contribution. Practices that are considering a combined approach would be well advised to bring in an actuary to help members understand the complexities of defined-benefit plans and how to avoid or minimize pitfalls. David Myrice is a senior finance manager and practice administrator with Medical Management Professionals, Inc, Atlanta, Georgia.