Cover Story
FINANCIAL SURVEY

Retirement funding falls again

Doctors can do more to overcome the lagging pension plan growth reflected in our data.

By Lawrence Farber
Contributing Writer

Our latest Financial Survey finds most doctors still wedded to pension plans. Around 77 percent had at least one in 2000, the same ratio as in 1997, the year of our last financial survey.

But hold the cheers. The median annual contribution dropped sharply, from $15,000 to $12,000. More bad news: The value of the typical doctor's plan also fell—from $197,500 to $150,000.

Data from earlier surveys indicate that this downsizing is a continuation of a long-term trend, rather than an isolated phenomenon. In 1986, the median annual plan contribution for all doctors was more than $18,000, and the amount the typical respondent had in his plan exceeded $200,000. Only 8 percent of physicians with plans failed to contribute to them that year, compared with 14 percent in 2000. One possible explanation may be that, by not contributing for themselves last year, doctors with profit-sharing plans could avoid having to contribute for their employees.

401(k)s now win the popularity contest

Last year, three out of 10 doctors had profit-sharing plans. However, for the first time since we've been conducting our surveys, 401(k) plans surpassed them in popularity. About 54 percent of survey respondents participated in 401(k)s, up from 40 percent in 1997. Such plans were most prevalent among doctors in partnership and group practices, where roughly six out of 10 had them in 2000.

Because a 401(k) is funded mainly by voluntary salary deferrals, doctor employers can save on required contributions for employees. The disadvantage is the limit on tax-deductible deferrals—the cap was just $10,500 last year. By contrast, an incorporated doctor with a salary of $170,000 or more was able to put as much as $25,500 into a profit-sharing plan for himself, provided he also contributed 15 percent of payroll for employees.

It's possible to put away even more by adopting a different type of plan or adding a second one. For example, last year a money-purchase plan would have let an incorporated doctor whose salary was $120,000 contribute 25 percent of that—$30,000—for himself, if he put in 25 percent of employee earnings as well. Or he could have contributed, say, $10,000 to a 401(k) and $20,000 to a money-purchase plan to reach his overall $30,000 limit. Since $20,000 was less than 25 percent of his 2000 salary, his required percentage contribution for employees would also have been less.

The $30,000 annual contribution limit also applied to other defined-contribution plans, such as profit-sharing plans, in 2000. Defined-benefit plans were exempt; they can accumulate enough funds to finance a preset yearly pension equal to 100 percent of average salary, based on the highest earnings over three consecutive years. Some doctors with such plans were able to contribute more than $30,000 last year. What's more, this type of plan allows smaller contributions for younger employees, because their retirement is further off, leaving more time to build up the necessary pension kitty for them.

Despite those advantages, only 8 percent of physicians with retirement plans had defined-benefit plans last year. That's about the same as in 1997, but down from 14 percent in 1992 and far less than 1986's 34 percent. One reason for the plans' decline is the high cost and difficulty of administering them, due to enormously complicated regulations. However, their numbers may increase, because a recent change in the law makes these plans more attractive for high earners.*

At the opposite end of the cost and complexity scale is the Savings Incentive Match Plan for Employees plan, called a SIMPLE. As with a 401(k), participants defer a portion of salary. Last year, the maximum was $6,000. The doctor employer must make matching contributions (no more than 3 percent of salary) for those who contribute to the plan, or make fixed contributions (2 percent of salary) for all plan participants, regardless of whether they contribute. SIMPLE plans require far less burdensome record-keeping than other types of plans, and they aren't subject to convoluted antidiscrimination rules. Not surprisingly, SIMPLE and SEP (Simplified Employee Pension) plans are most popular with solo practitioners: 29 percent of solo doctors who had retirement plans in 2000 had a SIMPLE or SEP, vs only 11 percent of physicians who shared ownership.

The reasons behind plan performance

Riding the crest of the bull market, plans of every type have been increasing their investment in stocks since 1992. That year, 25 percent of plans put more than half of their money into equities. The ratio jumped to 51 percent in 1997, and to 56 percent last year.

This policy paid off handsomely in 1997, when more than nine out of 10 equity-oriented plans showed gains, typically 18 percent. But only three of 10 were winners in 2000, and their median gain was just 7 percent. Almost five of 10 suffered losses, typically 10 percent.

Plans with relatively conservative portfolios did better than their more daring counterparts last year. More than half the plans investing mostly for income chalked up gains, while only a quarter had losses.

Earlier surveys have indicated that large plans tend to deliver somewhat better performance than small ones—in part because bigger plans are more diversified, but also because they can afford competent investment counseling. Last year, though, there was no significant difference. The median gain reported for plans valued at $1 million or more was 8 percent, and the median loss was 10 percent. Those same medians also applied to plans overall.

The explanation may lie in the proliferation of 401(k) accounts, which generally are segregated. Instead of having a single investment portfolio centrally managed, these plans let each participant determine how to invest his share, usually by making selections from a limited menu of mutual funds with varied objectives.

Some survey respondents with 401(k)s ascribe their poor results to faulty administration. For example, a doctor employed by an Arkansas group complains, "The 401(k) plan's manager is an idiot! I can't make timely decisions, because his reports are out of date." An Oregon FP, meanwhile, gripes that "they're so slow in executing orders that I always get in or out too late." A Michigan doctor protests, "All my plan offers is a stock index fund, a bond fund, and a money-market fund."

Another common complaint is the lack of guidance for participants who are investment novices. In some cases, this may be due to extreme caution on the part of plan sponsors, who fear being sued for bad advice. However, the Department of Labor, which oversees pension plan management, allows sponsors to provide explanations of concepts such as diversification, dollar cost averaging, risk tolerance, and asset allocation, as well as worksheets and software to help participants apply these principles to their situations.

Dissatisfaction with investment advisers isn't limited to 401(k) plan participants. A doctor whose money-purchase plan lost 25 percent last year reports that, in March 2000, his adviser persuaded him "to switch $750,000 from blue chips to tech stocks that all went south."

A Texas internist with a profit-sharing plan isn't much happier. "My adviser pushed me into load funds that charged high sales fees and haven't done any better for me than no-load funds would have," he says. Other doctors resent their managers' tendency to play down poor results, though most survey respondents recognize that adverse market conditions can stymie even a competent manager's best efforts.

Some respondents emphasized the need for mutual agreement on objectives and the scope of the manager's authority and responsibility, especially if he oversees the operation of the plan as well as its investments. Among sore points mentioned:

• "They concentrate on bigger clients and give the problems of my small practice short shrift."

• "He refuses to make any suggestions for new investment strategies."

• "I wasn't able to start a plan last year, because my adviser missed the deadline."

Be mindful of the issues raised by such comments if you're interviewing candidates to handle your plan. A knowledgeable, cooperative manager can contribute as much to its success as a buoyant stock market.

Ways to give savings a lift

With prudent management, it's reasonable to anticipate that in time, retirement plan values will resume growth as the battered stock market and the economy gain strength. But doctors who've lowered their contribution rates face an uphill battle to reclaim lost ground.

As mentioned previously, adding a second plan may be a solution in some cases. Moreover, for some plans the contribution limits are now higher, due to inflation indexing. For 2001, you can put as much as $35,000 into a profit-sharing plan or $6,500 into a SIMPLE. And in coming years the new tax law will phase in higher limits for these plans, IRAs, and 401(k)s, as well as "catch-up" provisions for participants 50 or older.

Roth IRAs already offer some physicians another savings option. As you know, contributions to these accounts aren't tax- deductible, but earnings on them compound tax-free, and withdrawals aren't taxed unless you make them prematurely. At present, couples with adjusted gross incomes of $150,000 or less can put $4,000 a year into Roths. About one in four respondents who qualify has this type of account. Roth IRAs are particularly suitable for doctors who have just opened a practice and haven't yet set up a pension plan, as well as for nonowner employees who otherwise can contribute only to a 401(k). Some three out of 10 physicians 34 or younger had a Roth IRA last year.

Most doctors' earnings levels bar them from making tax-deductible contributions to a traditional IRA, although nonworking spouses may be eligible. Also, some have rolled payouts from pension plans into traditional IRAs. That helps explain why doctors 50 or older are more likely to have them—seven of 10, compared with six of 10 overall. The median value of traditional IRAs was $50,000 last year. The median for Roth IRAs, which have only existed since 1998, was about $8,000.

How doctors see their financial future

On the whole, today's uncertainties don't seem to have shaken doctors' confidence in their long-range financial outlook. Typically, they expect to build up a $2 million nest egg by age 65. That's unchanged from the median estimated by respondents to our 1997 survey. Then, as now, nearly a quarter of them hoped to have at least $4 million at 65.

However, only three out of 10 respondents to last year's survey said they expect to retire at 65. Among doctors 60 or older, more than half won't quit until at least 70. But roughly half of those younger than 50 say they're likely to bow out by age 60.

Regardless of when they fully retire from practice, many physicians intend to stay active in medicine, even if they don't need the income. More than a few look forward to doing volunteer work abroad under the auspices of religious groups or organizations such as Doctors Without Borders. Some will offer patient care, consultation, or administrative services to domestic charities, hospitals, nursing homes, and health agencies or expand the time they're already devoting to such activities. Others plan to teach, write on medical subjects, or lecture to community groups.

Summing it up, the average doctor expects to retire in comfort. Based on the figures reported in our survey, that's probably right. But the odds can be improved by more fully exploiting the available opportunities for tax-sheltered savings.

Are you saving more toward retirement this year than you did last year? To respond, visit our Web site, www.memag.com .

Which plans doctors choose

A downtrend in contributions

Pension funds shrink

Mixed investment results

IRAs help boost savings

Expected retirement age

*See "Fuel-inject your retirement plan," Nov. 6, 2000.

The author, a former Senior Editor of Medical Economics, is based in Laguna Hills, CA.

Lawrence Farber. Financial Survey: Retirement funding falls again.

Medical Economics

2001;14:78.