In our recent blog series, “The Best Retirement Plans for Medical Groups,” we have been examining the options available to physicians and their pros and cons. Choosing the right retirement plan is especially important for physicians because of their above-average compensation. The first step in making such a crucial decision is understanding what the options are.
The most popular retirement plans that doctors establish in their practices are:
- Defined Benefit Pension Plans
- 401(k) Plans
- Defined Benefit/Defined Contribution Combination Plans
- Cash Balance Plans
Last week, we covered Defined Benefit/Defined Contribution Combination Plans for physicians. This week, we’ll cover the strengths and weaknesses of Cash Balance Plans.
What Makes a Cash Balance Plan Different?
The Cash Balance Plan, though often considered a hybrid, is actually a DB plan that, according to the Department of Labor, “defines the benefit in terms that are more characteristic of a defined contribution plan.
In other words, a cash balance plan defines the promised benefit in terms of a stated account balance.” The difference between a traditional DB plan and a cash balance plan is that a traditional plan defines the benefit as a series of monthly payments for life to begin at retirement, and cash balance plans define the benefit as a stated account balance.
Instead of figuring the employer’s contribution based on the promised benefit at retirement, a cash account balance is built through a combination of a “pay credit” (usually a percentage of compensation or a flat dollar amount) and an “interest credit” or a guaranteed rate of return. At retirement, a cash balance plan participant has the option to receive their account balance as an annuity for life, much like the traditional DB plan, or as a lump sum.
Why are They Popular with Physician Practices?
Cash Balance plans are appealing for physicians looking to put a lot towards retirement because they allow a much greater contribution than a 401(k) with profit sharing. The extra contribution not only helps the physician save for retirement but defers state and federal income taxes while the physician is in the top tax brackets. In 2012, 28% of cash balance plans were run by/for physician partnerships.
What are the Drawbacks?
In spite of their popularity, cash balance plans are not best for everyone. For those not needing to save more than a 401(k)/profit sharing plan allows a cash balance plan is probably not a good fit because they are very complex and much more expensive to run (though they usually cost less than traditional DB plans).
How to Choose the Best Option
The plethora of retirement plan options available can be confusing and intimidating. When choosing a retirement plan for your medical practice, it is always important to work with a qualified financial professional who can help you navigate the complexities and find the plan that is best suited to your needs. A knowledgeable professional can provide an analysis of the costs and benefits of each plan and help you make this important decision. For more information on retirement plan options for physicians, contact me today at 480.494.8992 or by email at info@ff401k.com.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.