Robert Tucker, MD, MBA

If you are negotiating the sale of your practice to a hospital or considering a merger into a larger group, the majority of your attention is likely directed toward such things as salary, liability insurance, and work schedules. What is the practice worth? How will I be paid by the new entity? What happens to my accounts receivable? Don’t lose sight of another important decision that must be made as well: What to do with the retirement plan of your existing practice, and specifically, what to do with your individual account.

The general issue of what to do with your practice’s retirement plan is likely something that was discussed during the sale or merger discussions. In the case of a merger of two or more practices, it is typical that both of the existing plans be terminated and replaced by a new plan. Other options are possible and should be discussed with legal and accounting professionals involved in the transaction. In the case of a practice acquisition by a larger entity (e.g., a hospital), it is common to terminate the existing plan. Going forward, employees would become participants in the plan of the acquiring entity.

When a retirement plan terminates for either of these reasons, you as a participant will be given control of your balance and will have several options. The first is to take the value of your vested share as a distribution from the plan. While this does give you the flexibility to use the money in any way you want, the distribution will be fully taxable. And if you are under 59 ½ years of age, there is an additional 10 percent penalty imposed by the IRS. In most cases, this is not the best option.

Another option is to roll the assets into an IRA that would be held at a bank or brokerage firm. The "rollover" has no immediate tax consequences when transferred directly to the new institution, and you can invest the proceeds in any combination of securities available at that institution. The money will continue to grow tax-deferred, and you can start to withdraw the money as early as age 59 ½; you must begin to withdraw money at age 70 ½.

The final option that may be available is to roll the existing balance into the plan of the new employer, if that plan allows this. Again, if the balance of the existing plan is rolled directly into the new plan, there are no immediate tax consequences. While the assets in the new plan are yours, they are governed by the terms of the plan. Among other things, this means that your range of investment choices will be determined by the plan trustees. This could work to your advantage by giving you access to professional asset management that would otherwise not be an option, at least at a reasonable cost.

So what is the proper choice? Not surprisingly, there is no standard answer. If you do not have access to investment advice through another source, rolling your assets to the plan of the new employer might be the best option. Look carefully at the list of investment options. Are there risk-based model portfolios from which to choose? Are there low cost index-style funds that reflect a large variety of asset classes? Is there a mechanism to periodically rebalance the account? Is information about the account readily available? Are there management or administrative costs that are passed along to the participants? Can loans be made from the account? The answers to these questions - particularly those related to costs - will help you decide whether the new plan is a good choice.

Moving assets to a rollover IRA is a good choice if you want maximum control over your investments and have the ability to monitor them yourself or with the help of an advisor. With the rollover IRA, you will not have to deal with a plan trustee or administrator, but you will also not get any of the professional advice or cost benefits the plan may enjoy because of its size. As long as the assets remain in the IRA account, there is no reporting requirement on your annual income tax return.

Costs matter, both in your choice of specific investments and in the management of your overall portfolio. Cost and asset allocation are key factors affecting your investment return that you can actually control. In fact, with regard to mutual funds, the cost to operate a mutual fund was found to have been a better predictor of return than a mutual fund rating service. So, as you look at the options of moving your retirement account following a merger or acquisition, pay close attention to the total cost of each option. Increased costs are not routinely associated with better advice or results.

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If your practice is acquired or part of a merger, you need to decide the fate of your retirement plan. So consider the costs and flexibility of your options.

Rollover Options for your Medical Practice's Retirement Plan

As for-profit businesses, mutual fund companies charge their investors for their services. The expense ratio is only one of the costs an investor pays for the management of assets. Knowing the costs of your investments and how those costs relate to your ultimate return is an important part of investor education for physicians, and can be very useful when selecting investments for your personal or retirement plan portfolios.

, Burton Malkiel, the author of "A Random Walk down Wall Street," described 

an increase in asset management fees of non-index mutual funds

 relative to the growth of their assets from 1986 to 2006. His conclusion: "…investors have received no benefit from this increase in expense ratios." His comments refer specifically to the mutual funds’ expense ratio, or the cost of operating the funds as a percentage of the assets managed. According to Malkiel, the average expense ratio of actively managed funds in 2010 was 0.91 percent. In contrast, index fund expense ratios may be as low as 0.05 percent, depending on the index. In that these dollars come directly from the assets and are not paid separately by the investor, it is not surprising that many investors are not aware of the ongoing cost of their investments. Operating costs include securities research and the personnel costs of those who do it. It also includes the costs of trading as well as some of the costs of promoting the fund to the public. Additionally, funds must disclose whether they pay 12b-1 fees, which in part are paid to entities that recommend the funds to investors. These can be thought of as sales commissions. All of this information must be disclosed as mandated by the SEC.

So mutual fund companies that pay high prices for securities analysts to pick stocks and determine the best time to buy and sell - termed active management - should be able to do a better job than those funds that don’t do extensive research or whose trading philosophy is to replicate the performance of an index or an asset class, right? Well the data actually says the opposite. In a study released in 2010, Morningstar, a well-known mutual fund evaluation service, reported that 

the expense ratio of mutual funds was a better predictor of performance than even its own rating system

. Morningstar’s findings stated: "In every asset class over every time period, the cheapest quintile [of mutual funds] produced higher total returns than the most expensive quintile." Their conclusion was simple: "Investors should make expense ratios a primary test in fund selection."

Typically, the lowest cost funds are those that track an index or an entire asset class. These funds spend relatively little on research and have low portfolio turnover, hence lower trading costs. These savings are passed along to the investors. Index funds do have the disadvantage, however, of having to "reconstitute" at set times during the year. Because this is public information, knowing that reconstitution is about to occur can unfavorably affect the prices of the securities the funds must buy and sell. By contrast, asset class-based mutual funds might be able to avoid this issue while still providing a low-cost alternative to traditional active management.

But how does the performance of these lower cost funds compare to those actively managed? According to Malkiel, over long periods of time, only one-third of active managers are successful in outperforming a benchmark index. And generally, this one-third changes from period to period.

It is not clear from this and similar research that the cost of active portfolio management - picking stocks and timing the market - can be justified. Investors cannot control what will happen in the markets. The defense is to remain globally diversified. But investors can control the costs of their investments, and according to noted sources, will be rewarded for doing so.

So how is this information useful? It is common for corporate 401(k) plans to offer a list of mutual funds from which to choose. This list often includes a brief description of the goals of the fund as well as its cost. When given the choice between funds that have similar investment philosophies, consider the one with the lowest expense ratio. Favor low-cost index or asset class funds over higher cost actively managed funds. Choose a combination of funds that provides the broadest possible diversification. And get the help of an investment advisor whose compensation is not dependent on the funds he or she recommends.

Knowing the costs of your investments and how those costs relate to your ultimate return is an important part of investor education for physicians.

Physicians: Are You Paying Too Much for Your Investments?

The transition from a training program into the active practice of medicine represents one of the great opportunities and challenges in the life of a physician. Finally, you are doing what you trained so hard to do - making decisions independently based on the knowledge and skills you have developed through study and the guidance of your mentors. No doubt you made your choice of a practice after carefully studying the options, getting advice from your friends and family, and developing a strategy for starting and building a successful career. In the midst of the excitement, did you devote as much time to the details of your financial plan? Do you even have a plan? All too often, some of the important steps may have been put on the back burner and forgotten.

The first step is the realization that a plan is necessary. For many of us, the beginning of medical practice represents the first opportunity to have "discretionary income" - money available for investing, travel, a larger home, or the country club membership. But with this euphoria of early success, don’t forget that things such as premature death, disability, or family discord can happen. Be certain to establish priorities, and review them regularly. Don’t delay your savings plan, the purchase of life insurance or the drafting of a will once you have determined your needs. Very few physicians enter practice thinking about retirement needs; however, by delaying or ignoring these important issues, you might begin your career at a disadvantage.

The financial plan begins with a statement of your personal goals and objectives. Some may be short term, such as the purchase of a new home or private schools for the children. Others are ongoing, including protection from losses related to illness, disability, or natural disaster, and creating an effective investment strategy. Still, others are more abstract, such as achieving financial independence and transferring future wealth to families or charities. Some questions to begin thinking about are:

How do I protect my assets from litigation and judgments?

How much life and disability insurance do I need?

What benefits does my employer offer, and how do I take advantage of them?

What are appropriate investments to meet my needs consistent with my risk tolerance?

Set up a process, and get the expert help you need early on to answer these questions. Develop action plans, and track how you will address each one. For example, understand what you are spending by periodically reviewing your credit card statement and checkbook. Carefully read and understand all the benefits available to you through your employer, and take full advantage of those that are helpful to your family. Also, set a target savings amount from each paycheck, and develop a strategy for paying down student loans and other debts.

Next comes a means for making projections about the future. Factor in college education for the children, weddings, new cars, or a second home. Understand how your savings might reasonably grow over time. And don’t forget about the effects of inflation. A number of simple calculators are available that can provide crude estimates, but as your situation becomes more complex, you will likely need help in creating a detailed model. The ideal model can accommodate multiple scenarios with little additional work.

Another important consideration is risk management - how best to prepare for unexpected income losses through illness or death, or against property losses through natural disasters, or litigation. The first line of defense will likely be insurance, but an overall estate plan must also be in place, particularly when there are children, debt, or high-value assets.

Sound overwhelming? It certainly can be if you don’t have the time or inclination to do it yourself. If that’s the case, don’t be afraid to get help in setting up and implementing your plan.

While there are benefits to implementing a financial plan early in your career, it’s never too late to begin. Whatever the stage of your practice, it makes sense to regularly review your goals, and decide if you are on a path to meet them, and if you have assembled the best team to help you succeed. Regularly working with such a team not only provides the expertise you may not personally have, but also the discipline you need to maintain the long view and stick with your plan, even during those short-term periods when emotions try to steer you away.

Sound familiar? It should, because the only difference between sound financial management and good medical practice is the tools that are used.

It makes sense to regularly review your financial goals, decide if you are on a path to meet them, and if you have assembled the best team to help you succeed.

How Physicians Can Create a Plan for Financial Independence

When we were in training, we were taught to "look at the literature" to get the latest in treatment methods. We learned to understand how the study was designed so that we could decide if the results were valid. And we learned that when the evidence was overwhelming in one direction, that was probably the best route to take. Interestingly, it is no different with investing. There is a large body of literature based on academic studies of the stock market and investor behavior, and much of it supports the conclusion that Wall Street has it wrong! There is a better way to invest that is consistent with the way you make medical decisions - it can be termed "evidence-based investing."

If you have not had success with do-it-yourself investing and/or with conventional Wall Street approaches, it may comfort you to know that even the pros have trouble. Over the five years ending 2011, up to 83 percent of actively managed public equity funds failed to beat their benchmark index

. And the "average investor" did even more poorly - failing to keep pace with inflation over the 20 years ending 2011

. In fact, the average investor - lacking a disciplined strategy - could have earned about three times as much during that period by buying and holding an index fund tracking the S&P 500

. Apparently, few independent investors have the knowledge to effectively choose investments or the willpower to stick with a strategy throughout the wild gyrations of the markets.

The popular press is filled with predictions about where to invest your money, but academic research has shown that it is actually very difficult to consistently make accurate predictions … and probably not worth the increased cost of attempting to do so. In fact, such research, based on more than 80 years of data, has suggested that the securities markets are reasonably "efficient" - the price of a security reflects all available information about the underlying company, and securities analysts cannot consistently identify and capitalize on incorrect prices.

The same academic research - no different in style from the scientific research on which your medical decisions are made - has shown very definite long-term trends:

• The return of stocks as a group has exceeded that of bonds and inflation.

• The return on stocks of small companies has exceeded that of large companies.

• Stocks of financially distressed ("value") companies have outperformed those of fiscally sound companies.

This is the basis of the "three-factor model" of investing

, which predicts that less than 10 percent of the return of a portfolio is due to active security selection and market timing. The remainder is due to asset allocation – how much in stocks, bonds and cash.

These observations are explained by another important lesson of the academics:

• There are certain types of risk that are rewarded and are therefore worth taking.

• Other risks can be decreased through diversification.

In other words, risk and return are related; investors have historically been rewarded for taking on the extra risk of owning stocks, particularly of small and value companies.

How can you take advantage of this information? One approach is to forgo attempts at "beating the market" by constructing a diversified portfolio of securities that seeks to achieve the average returns of all segments of "the market." An efficient way to do this is by selecting no-load mutual funds, each of which is designed to match the performance of a particular asset class - foreign and domestic, large and small, growth and value. To further improve the efficiency of the portfolio, the funds should be managed in a cost-effective and tax-efficient manner to minimize trading costs and capital gains distributions; both of which are passed directly to the investor, reduce return and increase tax liability.

The value-added then comes from having access to all market segments, and in the way these funds are combined to create a portfolio that is less volatile and delivers greater expected returns than the individual components. Success comes as a result of defining and rigidly following a well-thought-out strategy, and resisting the emotional urge to tinker regardless of short-term market fluctuations.

By adhering to these basic academically-based principles - securities markets work, risk and return are related, and costs matter - it should be possible to structure long-term investments in an efficient and effective manner. Those investments then can play a key role in helping you achieve financial independence.

2. Study by Dalbar Inc. as reported by JP Morgan, January 2013

 Index is an unmanaged index comprised of the 500 stocks with the largest market capitalizations trading in the United States. The Index does not reflect the deduction of any fees or expenses.

4. Fama, EF and French, KR. 1993. Journal of Financial Economics, 33:3-56.

Applying the same evidence-based thinking you use in your medical practice can actually create a more efficient investment portfolio for you personally.

How Medical Decision Making and Investing Are Alike

You hear it discussed whenever doctors get together. All too often, the conversations include such comments as, “I still have kids in college,” “I need to continue working to qualify for health insurance,” or “I made some lousy choices in my retirement plan.” With the changes in healthcare financing and regulation over the past decade, it’s not surprising that physicians are more often looking at their practice as a vehicle for achieving financial independence rather than primarily as a lifelong calling. Financial independence is having the means to choose your time to retire in the style you want. To get there, you must develop a plan and have the discipline to follow it.

It would be great if we all began to plan for retirement as soon as we joined a practice. Somehow the more immediate needs of raising a family and starting a career get higher priority. Not knowing how to plan is also an obstacle. So where do you start? Some suggest that you need enough assets to allow withdrawal of 4 percent every year. That sounds simple, but what about inflation and the return on your investments? Others suggest creating a retirement portfolio containing a percentage of bonds equal to your age. But what happens if the return on bonds is low (as it is now) and the income doesn’t cover your needs? There are also calculators available, many free and online. But how realistic are the assumptions on which they base their calculations? All of these methods are best used to raise - rather than answer - the question: “How much do I have to save and how should I go about saving it?”

To plan where you want to be, it helps to know where you are. The best planning processes begin with a thorough accounting of your current financial position - a detailed financial statement, including cash, investments, debt, and life insurance. The next step is to make assumptions on future income, spending and investment return - reasonable guesses based on what you know today - and begin to develop a model depicting the future value of your savings. The model becomes the cornerstone of your financial planning; suggesting saving and spending parameters that will help you achieve your goals. This model becomes a living document that can accommodate changes in your life and provide some objectivity when selecting from various strategies.

For example, it can help in determining the amount of investment risk that is necessary to achieve your goals. Given that investment risk and return are related, the question becomes how much investment risk should you take to generate the expected return you need to grow your assets to the necessary level. Or, it can illustrate the effect of pushing retirement back a few years, or buying a second home, or spending a little less each year. As with a patient’s treatment plan, the financial plan and its progress need to be reviewed on a regular basis as lifecycle situations change and as goals and objectives are modified.

But what about such things as inflation or return on investment? How will they affect your plan? Sophisticated planning tools will take these into account. For example, investment returns vary from year to year, often deviating significantly from their historic averages. Planning tools that use Monte Carlo simulations actually calculate a “probability of success” based on hundreds or even thousands of calculations using different returns, rather than relying on an average annual return. This variability more closely represents actual historic performance, and takes into consideration the potentially disastrous effect of scenarios in which returns are unusually low as well as the timing of those returns. Models that assume a constant rate of return year after year do not allow for this. Take advantage of this powerful tool by creating different scenarios to cover possible career moves or investment choices.

Retirement planning should also include the possibility that retirement may be forced prematurely, either by disability or death. Either will have a devastating effect on the family, and the need for insurance protection against these possibilities is important, particularly early in your career.

It is clearly very difficult to predict what inflation, your net worth or your income will be 10 years, 20 years, or even 30 years from now. But by carefully making assumptions and regularly reviewing them, a financial model using sophisticated techniques can be a useful benchmark by which to judge your progress toward financial independence.

• Although it is best to start planning and saving early, it is never too late to begin.

• The planning process should start with a comprehensive analysis of your current financial picture.

• Models predicting future growth of savings should take into consideration inflation and the variability of investment returns.

• The model can be used to assess the effects of alternate career plans or different levels of investment risk, or even suggest when you may be investing too aggressively.

• Don’t forget to plan for unexpected loss of income through death or disability.

• Review your plan regularly and make adjustments as your circumstances dictate.

Understanding your spending needs and creating a realistic savings plan is one of the cornerstones of a financial plan for physicians.

Retirement Planning for Physicians: Where to Begin

Physicians in most specialties have no “products” to sell other than their expertise and advice. For that reason, productive use of time, both at work and at home, is critical. It has taken on increased importance among physicians just beginning their careers, for whom lifestyle quality and time management have taken on greater importance in their selection of a practice and even of a medical specialty.

Time management also seems to gain importance as physicians approach the later stages of their careers, and look to enjoy the benefits of many years of hard work and sacrifice. As the saying goes, “No one on their deathbed ever said, ‘I wish I had spent more time at work.’” But scheduled patient care, emergency care, administrative burdens, and adoption of new technology (an EHR for example) can challenge the amount of time left for dealing with all the aspects of family and personal life. Do you really want to spend time calculating your life insurance needs or reading about estate plan options in the few hours you have at home to spend with your spouse and children? Do you really have the time and expertise to know what investment information is important and what is noise? Isn’t there a value to having someone help you with these kinds of decisions?

Many busy professionals have realized that a personal financial adviser can not only provide counsel and advice, but can also coordinate the activities of attorneys, accountants, insurance agents, and investment managers to reduce the burden of financial “scut work.” These are the tasks that so often get inadequate attention or are neglected completely because they are mundane, confusing, and time-consuming. Think of an adviser as the chief financial officer for your home: someone who proactively advises you on the important issues while acting in your best intere

t on matters you have neither the time nor the desire to handle - you just want them to be done properly.

An adviser, particularly a fiduciary who is independent of sales commissions and referral fees, can help assess business opportunities, identify and plan for potential liabilities and threats, and monitor investments; they are a partner who can help simplify and improve the quality of your life. The benefits of having an adviser are outright: organization, efficiency, and a greater peace of mind knowing that these essential pieces are handled by a specialist whose work is coordinated for the benefit of your family. Equally important, such a trusted adviser can keep you informed of pending challenges, provide a disciplined approach to achieving your goals, and help prevent decisions based solely on emotions. And in the event of death or disability, the adviser provides continuity and is a source of information readily available to help the survivors with the transition.

As physicians, we are trained to make decisions independently, and then act decisively on behalf of our patients. But as medical training becomes more specialized, we have learned that our area of expertise has become more focused. We need medical consultants to deal with those issues outside of our own comfort zone. You have a team to help run your office and manage your patients; you want to devote your time in the office to dealing with patients, expanding your career, and generating revenue. Any distraction from those activities is inefficient and costly. Attempting to micromanage all the financial activities in your personal life can also detract you from the big picture: enjoying family and friends, growing personally, and achieving your long term goals. You need a partner who is free of conflicts, familiar with the challenges you face, and knowledgeable to provide advice and assistance to keep you on the path to financial independence.

Don't lose time you could be managing your practice, seeing patients, or spending time with family to micromanage your finances. Get some outside help instead.