If you are like 80 percent of Americans who save for their retirement, the money you are socking away will be insufficient to equal your current standard of living.
When pressed to picture what he will do when he retires, Dr. John Swicegood envisions himself working. He's so into the thick of building a solo practice as a pain management specialist that he doesn't have time to ponder the distant future.
But he knows he will retire someday, and when asked why his Fort Smith, Ark., practice provides a retirement plan for himself and his four workers, he doesn't hesitate: "It is the right thing to do," says Swicegood, 50. "In my strategic business plan I would like to work at least until I am 67. One thing I need is employees who have a strong incentive to stay with me through the years." And his personal reason for wanting to build a retirement nest egg, he says, is his wife, Cindy. The couple recently celebrated their 30th wedding anniversary. "The most reassuring thing for me is that if something happens to me, she will be OK," he says.
Like Swicegood's, many practices offer a 401(k) or some other type of retirement plan. That's the good news. But the bad news is very few know whether the plan will actually help the physicians and employees retire in "dignity."
"For some reason in retirement plans, we don't focus on outcomes; we focus on design - and on who has the most attractive Web site. We don't focus on the most fundamental question," says Gregory Kasten, MD, who began a second career as a certified financial planner catering to medical groups.
The ultimate goal is to accumulate sufficient assets to maintain your lifestyle in retirement. In general, a plan participant will need to accumulate seven to eight times his annual compensation (in today's dollars) to have a shot at this goal. "What we have discovered in our research is generally [these] plans are failing," Kasten says. "We know statistically doctors and their rank-and-file employees will not get to their destination."
Practices also have added difficulty in establishing a retirement plan that addresses the income disparity among the clinical and support staff. Yet, with careful planning, implementation, and oversight, meeting the retirement needs of all staff is possible.
Design is paramount
Surely you don't expect to spend your golden years driving an old Volkswagen bug with bald tires and living in a trailer. But if you are like 80 percent of Americans who save for their retirement, the money you are socking away will be insufficient to equal your current standard of living - much less your fantasy of driving a late-model car, owning a seaside home, and trekking to Europe.
As obvious as it sounds, it bears repeating that how much money you end up with at retirement is a product of how much you save, plus your return on your investments. But how can you save as much as you will need?
"If you have the right plan design, you can significantly increase both the participation rate and the deferral rate," says Kasten, president and CEO of Unified Trust Company, based in Lexington, Ky. "All these things need to be put together as a cohesive strategy so you have adequate savings. If you don't, the return will be inconsequential."
If your practice offers a retirement plan, you have more to worry about than your own retirement. The laws that govern retirement plans state that the trustees of the plan must manage it for the "exclusive benefit" of participants and do so as a "prudent expert" would. This means that it is important to review your vendor, fund managers, or financial advisers on an ongoing basis, using a documented process for making needed changes.
You may delegate some of these duties to a third party such as an investment adviser or consultant if you are not comfortable doing them yourself. But in any case, you have some responsibility as the plan administrator to think about your employees' futures, in addition to your own.
Encouraging employees to contribute more money requires an understanding of why they don't - and a proper plan design that will help them save more, Kasten says.
"Most people who are not saving enough money know they are not saving enough," Kasten says. Most often the reasons are "inertia and procrastination." Some also don't want to think about the future, choosing instead to spend the money they have now. Others don't "trust the system" and prefer to stash their savings in lower-yield products like money market accounts, he adds.
The simplest way to get employees started is to make participation in the plan automatic. This means that unless they sign a form indicating they want no part of the plan, a certain percentage of their net pay, usually with a match from the practice, will be automatically deducted from their paycheck. "You can take participation to 95 percent by doing it this way," says Kasten. "People can always opt out, but it is too much trouble."
A second technique is to incrementally - but again, automatically - increase the percentage by a few points each year. Over time, this can add up to 10 percent or more without employees feeling the pinch as much.
A financial consultant can provide more specific help. For example, Kasten's firm annually reviews each employee's income and savings rate to determine the likelihood of meeting his or her retirement goals. The idea is to carefully benchmark each participant's true progress towards accumulating sufficient assets.
"What the doctors and clinic administrators need to look at is what kind of structure will need to be in place to develop a balance that maintains the person's standard of living," Kasten says. "Doctors typically focus on features in a retirement plan that have no effect on outcomes. Things like self-directed brokerage accounts, colorful Web sites, and plan statements mailed in 10 days rather than 12 days seem to attract attention, but will never help someone retire faster."
Kasten adds that the practice's employees aren't the only ones who have trouble saving. "There will be a lot of junior doctors who end up much more like the staff do," in terms of saving insufficient retirement dollars.
Put your money to work
Cave Run Clinic in Morehead, Ky., has had a retirement plan for as long as anyone can remember, and traditionally, the eight surgeons made investment choices for themselves and their 40 employees.
But as the market soured, they grew increasingly uncomfortable with the risks they were taking, says clinic administrator Bryan Stadig. Before working with Kasten's firm, the clinic used a brokerage.
"They offered pretty good funds and advice but our committee was kind of directing things. That was all right [for a while] but at the time the telecommunications stocks started heading south, we didn't get any red flags to that effect," he says.
Stadig realized he had options and began a search for a new plan vendor.
Even if you are happy with your plan provider it makes sense to do a vendor search every three to five years, especially with increased regulatory scrutiny of plan fees and expenses. This does not mean you must switch but it is essential to document your process in case you are ever questioned about your management of the plan. "Competitive pressures and the expense of upgrading technology have led to many vendors exiting the market in recent years," says John Sutton, a certified financial planner with SilverStone Group Inc., of Omaha, Neb. "One of the primary things we look for is a vendor that we feel is going to be around in the future. It is disruptive and confusing for participants and a lot of work for the sponsor to change vendors."
In the past, mutual fund companies, insurance companies, and banks generally offered only those products they managed. "Most top providers now provide a multimanager platform, meaning they will have options from a lot of different investment managers," Sutton adds.
This can work to your advantage, as it will expand your choices. You might be able to pick funds from Fidelity, Vanguard, and American Funds, for example, rather than being restricted to those from one manager.
You should also look for variety in terms of the size of firms you invest in and whether they are being offered because they are "value" (lower-risk stocks) or "growth" (higher risk, but possibly higher returns), Sutton says.
With continued downturns in reimbursement, physicians face enough volatility in their practices, says Sutton. So he advises investment choices in a retirement plan to be well diversified and avoid "speculative" risk.
"This usually represents the core of their retirement assets," says Sutton. "I advocate keeping costs as low as possible, and broadly diversifying their assets. With the potential of higher returns always comes higher risk. It is easy to get caught up in chasing a high flier when the real goal is having enough money to meet your retirement objectives. If you are confident your core savings and investments will meet your retirement objectives, then it can make sense to look at other investments with higher return potential if the risks are well understood."
You also want a fund manager that offers online access to accounts, statements, and investing information. Choose a Web site that is easy to navigate and search. Expect to receive e-mail alerts, updates, or newsletters - tailored to your practice if possible. Look for good human support, too. Insist on a specific account representative for your practice.
Getting useful data is essential. "It comes down to information, but it's got to be information presented at the level the investor can understand, and be given the opportunity to get more information and ask more questions," says Stadig.
Among the other important factors to consider are fees charged by advisers and managers. These may be hidden, and while seemingly small in percentages, they can quickly add up.
"If you earn 6 percent and inflation is 4 percent, and you pay 1 percent in fees, how much are you really earning?" Kasten says. "You are only earning a real return [of] 1 percent."
Kasten also recommends seeking a service provider that operates under the "Frost" rules. This means that a fund manager or adviser must disclose any fees it receives from certain funds for promoting them. Some managers and advisers will pass these "savings" on to customers by giving dollar-for-dollar fee offsets.
Consider also how much control you want to retain, and what responsibilities you expect the manager or adviser to handle. Beware of the difference between "advice" and "education" that is offered. Although they sound similar, advice and education are quite different. Education is general, while advice is specific and takes into account each participant's unique goals and risk tolerance. Someone giving advice is considered a fiduciary, meaning he bears liability for his actions and information. Most firms and advisers do not accept this liability, so it is important to clarify the issue.
"Many groups are seeking advice today because their outcomes in the past have not been good. In order to give advice, the provider must be willing to accept fiduciary status - something many do not want to do," Kasten says.
And don't underestimate the good will a retirement plan engenders in your practice. Stadig once worked for a practice that considered it "just too expensive" to offer a plan. But he believes that kind of thinking is "archaic." At Cave Run, at least 60 percent of the workers participate, and the practice provides matching funds.
Employees also made use of Kasten's Web site to check their accounts, and have contacted Unified Trust representatives for assistance.
As for Swicegood, his philosophy is simple: "The more you do the right things for the right people, the more they will do for you."
Theresa Defino is an editor for Physicians Practice. She can be reached at firstname.lastname@example.org.
This article originally appeared in the June 2005 issue of Physicians Practice.