Rollover Options for your Medical Practice's Retirement Plan

August 5, 2013

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.

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.