Physicians know there are only two certainties in life: death and taxes. But actually, there is a third: retirement. It’s that period right before death, and right after taxes.
And since you are going to retire some day, you might as well enroll in your employer’s retirement plan (or your retirement plan if you are self-employed).
But before you do that, you should get the answers to a few questions about each plan.
- What kind of plan is it? There are two main types of plans. The most common type are defined contribution plans that start with a “4”, like 401k, 403b, 401a, 457b and 457f. (All of these number/letter combinations refer to sections of the Internal Revenue Code.) Defined contribution plans limit the amount you can contribute. On the other hand, “defined contribution” plans limit the amount of money you can expect to receive at retirement. These may include “pension” plans like a cash balance plan.
- Can I control how much money goes into it? A no-brainer question, right? Wrong. If you have a 401a or 457f plan, your employer makes the contribution and they decide how much goes into the account.
- What is the maximum amount I can contribute each year? For most defined contribution plans, the limit will be $17,500 per participant in 2013 with a $5,500 “catch up” allowance for physicians aged 50 and over. Defined contribution plans, however, may allow you to contribute more than $100,000 per year.
- Does it have a Roth component? The answer to this question really depends on the language in your plan (see your Summary Plan Description) but many 401k’s and 403b’s have a Roth component. Generally speaking, it’s a mistake for physicians to contribute to the Roth portion of the plan, or to do an in-plan Roth conversion.
- Who is the custodian? The word “custodian” means “the company who is holding your money.” For example, your money might be with Fidelity or Vanguard or Principal or TIAA-CREF. Every custodian has strengths, weaknesses and idiosyncrasies.
- Who is responsible for the investment decisions? In some cases, your employer might appoint an advisor to manage your money. In other cases, the onus is on you to take care of it.
- What investment options are available? Some plans offer as few as six options, while others offer dozens or hundreds of options. Some will offer actively managed mutual funds while others offer low-cost index funds from Vanguard or even exchange-traded funds. Choosing the right options will help you earn a better return and save money on investment-related expenses.
- If I leave this employer, can I rollover my money to an IRA? Some deferred compensation arrangements, like Section 457 plans, may not allow you to make an IRA rollover and may require you to take all of your money with you when you retire or move on to another job.
- What happens if my employer becomes insolvent or goes bankrupt? Certain plans—including 457b and 457f plans—may have a “substantial risk of forfeiture” that puts your entire account balance at risk, regardless of how it is invested. In these situations, you could lose all of your money if the employer goes bankrupt, so read the fine print before you enroll in the plan.
If you do a little due diligence before you invest, you can save yourself a lot of time and money after you have made the decision to enroll in the plan. Ask your H.R. person for a Summary Plan Description and read it before you sign up.