retirement planning

Demystifying the defined benefit pension plan| W. Ben Utley CFP® writes for Orthopreneur

When it comes to money, there’s only one thing more complicated than the tax code, and that’s the rules surrounding qualified retirement plans. While they may be complicated, these plans are simply the best way for surgeons to beat the tax man at his own game.

No qualified plan is more powerful than a defined benefit plan, and no plan is more poorly understood. Here’s a primer to help you get started.

A defined benefit plan is an employer ­sponsored retirement plan that promises to deliver a specific or “defined” amount of money or “benefit” to an employee beginning at retirement and lasting for the rest of their lives. Traditionally known as “pension plans,” defined benefit plans have been around for decades. Actuaries—the bean counters who design and administer these things—refer to them collectively as “DB plans” and the most recent incarnation of the DB plan is called a “cash balance plan.”

No matter what you call it, the DB plan is a wicked sharp tool for deferring income, reducing taxes and protecting assets.

Every dollar that goes into the plan is a dollar that your employer (that’s you, if you’re self-­employed) does not pay out in profits, which means that income is not taxed today. If you’re a surgeon aged 45 earning $210,000 or more, you can receive contributions to your plan of up to $112,000 in 2014 (twice as much as you could contribute to a combination 401(k)/profit­sharing plan). At age 55, you can receive contributions of more than $200,000. Given taxation in the 35 percent Federal marginal tax bracket, surgeons taking advantage of a DB plan are deferring somewhere between $39,000 and $70,000 in taxes every year.

Note the use of the passive voice, here. We did not say “you can contribute.” We said “you could receive contributions.” This is one aspect that sets the defined benefit plan apart from the more familiar defined contribution plans (like 401(k), 403(b) and profit­sharing plans). You, as an employee, have precisely zero control over a DB plan. It all rests in your employer’s hands. They decide how much you can defer, how it will be invested and whether or not you can participate. If you’re not self­employed, you might as well stop reading here because there’s literally nothing you can do about a DB plan.

If you’re self-­employed, though, meaning you’re a partner, shareholder, LLC member or sole practitioner, there are a few things you need to know.

  • Contributions to your DB plan are based on your employee’s age and compensation. Older, more highly­compensated employees (typically the surgeon owners) will require greater contributions, while younger staff with lighter wages will get less.
  • You cannot game the system so that only the owner-­employee benefits. The IRS has strict rules about who must be covered and more rules that prohibit discrimination. A skilled actuary may be able to tilt the playing field in your direction, but you must know that your employees will be treated equitably by your plan.
  • A DB plan requires commitment. While there is no hard and fast rule about how many years you must keep your plan in operation, actuaries generally advise employers to keep their plans open for at least five years, and to keep those plans active/funded in at least three of those years. This means you need to have a reason to believe that your practice will have sustainable positive cash flows in the foreseeable future.

These general guidelines paint a picture of which practices should, and which should not, adopt a DB plan.

The best fit scenario we have seen was a group of four radiologists who had no employees. Two of the physicians were in their early 60s, with one junior partner in her mid ­40s and one newly ­hired physician on track to become a partner. They all earned mid-­six-­figure incomes. Collectively, they could have socked away more than a half million dollars a year.

The worst fit scenario typically involves younger physician owners with highly-­compensated physician extenders, a plethora of older support staff and a hazy or fragile bottom line.

However, some scenarios that seem like a poor fit for a DB plan might be salvageable. Particularly in situations where the employer has a safe harbor defined contribution plan, like a combination 401(k)/profit sharing plan where the employer is already making generous contribution to each employee’s account. In such a case, it might be possible to dramatically increase the overall contributions to owner-­employees while only slightly increasing the share of plan benefits received by employees.

Beyond the tax benefits, DB plans are hugely helpful for surgeons in subspecialties with high rates of malpractice. As entities governed by the Employee Retirement Income Security Act of 1974 (ERISA), they are exempt from the reach of creditors through bankruptcy.

If you decide to explore the option of adding a DB plan to your practice, there is no substitute for a consultation with a pension guru. It is customary for pension actuaries to run a complimentary analysis of your practice to let you know whether or not a DB plan might be right for you. This analysis is usually free of charge.

While the rules surrounding DB plans are painfully complicated, there is no reason to fear what you do not at first understand. The potential benefit is so enormous that you owe it to yourself—or at least you owe it to the next partner who brings this idea into your executive committee meeting—to ask questions and listen to the answers so that you can understand all the costs and benefits to know whether or not a DB plan is a good fit for your practice. 

W. Ben Utley, CFP®, is an attending advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping physicians throughout the U.S. to make a plan and get on track with saving for college and invest for retirement.

This article originally appeared in Orthopreneur with the title "Demystifying the Defined Benefit Pension Plan".

Three ways to make the best of a bad (401k) situation | W. Ben Utley CFP® writes for Orthopreneur

We see the changes that physicians make to improve their financial security, but one item is usually beyond their control: their 401(k) plans. Unless you are self-employed, there is practically nothing you can do about your 401(k)’s underwhelming investment options, ridiculously low contribution limits or perverse tax consequences. If your 401(k) is your main (or maybe your only) investment vehicle for retirement, we have good news for you. It is possible to work around your 401(k) plan’s limitations, so that you can get back on track toward retirement.

Low Limits Many physicians operate under the mistaken belief that if they max out their 401(k) plan contributions, they will be set for retirement. But did you know that the maximum amount of money you can elect to defer into your 401(k) this year is only $17,500 ($23,000 if you will be age 50 or older by December 31)? That’s roughly $1,400 deducted from your paycheck each month ($1,900 per month if you are age 50 or older).

Have you ever met a physician who could live well on $1,400 a month? We haven’t. In fact, the physicians whom we serve are planning to spend more like $10,000 per month in retirement, and that’s after tax. It would take a miraculously high rate of return to turn $1,400 per month pre-tax into $10,000 per month after-tax. As you can see, many physicians are well on their way to a retirement disaster.

To improve your odds of reaching your retirement goal, you can save outside of your 401(k) plan. Even if you cannot deduct the contributions you make to a Traditional IRA, you can still contribute $5,500 this year ($6,500 if you will be age 50 or older by December 31), and if you max out your own IRA, your spouse can also contribute up to $5,500 to his or her IRA ($6,500 if he or she will be age 50 or older by December 31), even if they are not earning an income. Depending upon your tax situation, it might also make sense to convert these contributions to a Roth IRA, doing what is known as a backdoor Roth IRA contribution. Once the money is in a Roth IRA, it can grow tax-free for the rest of your life. Of course, this still might not be enough to allow you to retire comfortably, so you should consider investments outside of your 401(k) plan and IRAs.

Underwhelming Options You probably haven’t read the fine print behind your 401(k) plan, but you are betting that your practice manager has carefully vetted both your 401(k) plan provider and the investments offered inside your plan. Don’t believe it! We have found that busy managers either fail to read the fine print or lack the experience to understand what they have read. Despite new laws requiring plain English disclosures of investment-related fees, many employers continue to keep physicians locked into expensive plans with unpalatable investment options.

If your plan charges more than 50 basis points (0.50 percent) on top of mutual fund operating expenses, your plan’s costs are draining an unfair share of your retirement savings. To get this under control, you need to raise your voice, but carefully. We regularly see very expensive plans that persist simply because of office politics.

It’s more common to see an investment lineup consisting mostly, if not entirely, of actively managed mutual funds. This is a sign of ignorance on the part of your plan fiduciaries. At a time when most prudent investors recognize that passively managed index funds have been shown to have delivered better results at a lower cost than the average actively-managed fund, there’s no good reason that your plan should continue to limit you to subpar investment options.

To work around these issues, look at your retirement investments holistically. Think about your 401(k) plan, your Traditional IRAs and your after-tax accounts (mutual funds and brokerage accounts) as if they were all one retirement portfolio. Then use the least-bad investment options from your 401(k) and pair them with the best options available within other accounts that make up the balance of your portfolio.

Tax Time Bomb You already know that physicians pay more than their fair share of taxes. But did you know that you are probably setting yourself up to pay more taxes on your 401(k) than you really should? That’s right. There’s a perverse little wrinkle in the tax code that can turn your 401(k) plan into a tax time bomb.

To understand this trap, you need to know a little bit about how investments are taxed. Withdrawals from your 401(k) plan will be taxed at your marginal income tax rate, which may be as high as 39.6 percent for Federal income tax. At the same time, capital gains and qualified dividends from mutual funds held in taxable accounts outside your 401(k) plan are taxed at a maximum Federal rate of 23.8 percent (which is 20 percent plus the new 3.8 percent Medicare surtax).

This means that your 401(k) nearly doubles the tax rate you pay on capital gains and qualified income by effectively converting these tax-favored returns into tax-trapped ordinary income. Consider holding equity mutual funds in a taxable account, or better yet, own them in your Roth IRA or the Roth subaccount of your 401(k) if you have one.

If your 401(k) is a lousy place to stash your stock funds, what should you hold there instead? Consider low growth, income-producing investments, including bond funds and stable value funds. If you have an appetite for more aggressive fare, consider high yield (junk) bond funds or emerging market bond funds. Outside of your 401(k) plan, these investments may be taxed at your highest marginal rate, so it’s a good idea to protect your income by keeping it inside of the tax shelter of your 401(k) plan.

Again, the best workaround for this tax trap is to view your entire retirement portfolio, including your 401(k) plan, your IRAs and your other accounts that are earmarked for retirement, as one portfolio. Choose to own the best investments in the accounts that make the most sense from the standpoint of expense, risk, return and taxation.

Summary Even if you are stuck with a stinky 401(k) plan, you can still make the best of a bad situation. All you have to do is take a look at the big picture, think outside the box and make smart moves to put yourself on track for a solid retirement.


W. Ben Utley, CFP®, is an attending advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping physicians throughout the U.S. to save for college and invest for retirement.

Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF, is the founder of Physician Financial Services. Based in New York. He offers income protection and wealth accumulation strategies for physicians nationwide.

This article originally appeared in Orthopreneur with the title "Overcome 401 (k) LImitations: Three Ways to Make the Best of a Bad Situation".

9 reasons why most physician 401k's stink

Warning: Physicians who follow my blog know this is a family affair, meaning I'm direct but "nice." This is not one of those posts. Lately I've been rebalancing 401k accounts and I can't help but notice that they are lacking in many, many ways. Here are most--but not all--of my complaints:

  1. Your plan provider is (probably) an insurance company. Need I say more? OK, I will. When I recently surveyed insurance company 401k providers, I found that several are accepting revenue from the mutual funds you buy AND adding a "record keeping" fee on top of that. I know everybody's got to eat, but this adds a bunch of expense, which subtracts a chunk of your return. Of course, they disclose this expense but you don't have time to read it, much less time to do anything about it.
  2. Enrollment is a pain. They send you a ton of paperwork and they expect you to read it, understand it, and take action. Most of what they're requesting is so obvious (your name, Social Security Number, date of birth) that someone else should have filled it out for you already… but they didn't. If you're lucky, they may enroll you automatically but...
  3. They expect you to pick your investments yourself. Someone out there seems to believe that "Mutual Fund Selection 101" was part of the curriculum in medical school… and they're wrong. How on earth are you supposed to know the difference between "growth and income" and "total return" when you spent years learning the difference between a Steinmann pin and a K-wire? To make matters worse, some 401k providers will not accept a limited power of attorney that allows someone else to do this task for you.
  4. You've got way, WAY too many options. With as many as 81 investment options in some plans I've seen, it's no wonder some physicians have told me that they literally "dropped a pencil on the page and bought what it hit." No kidding. Sometimes less is more but sometimes there's...
  5. Not enough options, either. If you are a tax conscious investor (I am… and you should be too), you know that your "fixed income" investments (a.k.a. "bonds") belong in a tax-deferred account like your 401k while stock mutual funds belong in a Roth account or perhaps a regular old taxable account. So why do they offer you only two choices when it comes to bond funds? It baffles me, and it robs you of a shot at diversification.
  6. Your options are limited to old-school actively managed funds. It's like the folks who created the list of investment options inside your 401k are stuck in the 1950's: they never got the memo that tells us actively-managed mutual funds tend to do worse than comparable, passivley-managed funds over the long haul due to the impact of management fees (and the occasional human blunder that can torpedo years of outperformance). To that guy who continues to overlook index funds when building out the list of investment options I say, "Wake up and smell the Vanguard and DFA, dude."
  7. The plan website is a labyrinth. I've seen the inside of scores of participant-directed retirement account websites and I have noticed that no two sites use the same word for "rebalance." And to make matters worse, you can rebalance either your existing assets or your future contributions, or both. Yes, there is a difference, and yes it's a good idea to make different elections for each.
  8. Your Roth is lumped in with your Regular. You may have a Roth subaccount in your 401k but you probably didn't know about it. You really have to dig to find it. And if you do, you will want to allocate your faster-growing assets to that subaccount but you probably cannot do this easily. Some 401k providers do not allow for separate allocation instructions while others make the process more difficult than it has to be.
  9. There's lots of "service" but no real help. Sure, your retirement plan company has an 800 number, and even a smiling rep who comes to see you each year, but nobody really has your back. This is a do-it-yourself thing, so YOU have to pick the funds, YOU have to rebalance the account, YOU have to be certain you are actually maxing out your contributions and YOU have to make sure you are getting the full match (and believe me, many docs miss out on this fundamental part of the plan).

Does your 401k stink?

I sure hope not. But if it does, and you want to do something about it, prepare for a long slog through a deep morass of minutia pockmarked with political pitfalls. There's a lot of money on the table with your practice's 401k plan and everybody wants a piece of the action. Your best bet is to find someone who can really help: a professional who has a penchant for picky details, a "winners never quit" attitude and an undying interest in your family's financial security.

Will a defined benefit pension plan save physicians taxes? | W. Ben Utley CFP® answers in Ophthalmology Business magazine

Will a defined benefit pension plan save physicians taxes? | W. Ben Utley CFP® answers in Ophthalmology Business magazine
Will a defined benefit pension plan save physicians taxes? | W. Ben Utley CFP® answers in Ophthalmology Business magazine


I’m a 45-year-old eye surgeon and I own my practice. This year I got nailed with a huge tax bill despite the fact that I maxed out my 401k and bought new equipment last year. I took home about $500,000 last year pre-tax. I  have 10 employees who earn about $40,000 on average, and I’m carrying all of them in my profit sharing plan too. In your last column, you said that a defined benefit pension plan might save me taxes. I know there’s no free lunch out there, and I’ve heard these plans are kind of risky. Is it true? If so, what are the risks? Or are they actually a decent deal?


Looking at the headlines these days, you might begin to believe that “pension” is actually a four-letter word. Recent data from the Pew Center on the States showed that the country’s 100 largest pension plans are facing a combined shortfall of almost $1 trillion. That means employees in these plans are going to get a nasty surprise when they hit retirement age: way less money than promised.

But when I spoke with a few of the nation’s top “pension geeks” (that’s what they call themselves), I got an entirely different impression, especially about pension plans for small business owners.

“It’s kind of a shame,” said Michael D. Hughes, an employee retirement benefits attorney and pension guru based in St. Petersburg, Fla. “I think a lot of people are missing the boat by overlooking these plans,” he said. Defined benefit plans, particularly the new breed of plans known as “cash balance plans,” are often a slam dunk for high earning professionals, particularly those who already max out their 401(k) and profit sharing plan contributions like you do.

The Employee Retirement Income Security Act (ERISA) calls these “hybrid” plans, said Dan Kravitz, author of Beyond the 401k, and president of his own cash balance plan design firm in Los Angeles. They combine the features found in both defined contribution plans (e.g., 401k) and traditional defined benefit pension plans. As the business owner, you get a tax deduction for making contributions to the plan. As a taxpayer and a physician, your portion of the plan gains asset protection from bankruptcy creditors and can grow tax-deferred since this is a qualified plan under ERISA.

One more feature of cash balance plans makes them a win for your employees, too. Mr. Kravitz, who worked as a teacher before he began doing pension stuff back in 1989, still has an “old school” pension plan from his days as an educator. He said the school district’s plan is so complicated that, “I still have no idea how much money I’m going to get at retirement.” Since this is a benefit for your employees (not just a fat tax shelter for you), it’s nice for them to be able to look at their annual statement, see the cash balance, and know what it’s worth to them. It’s a nice feature if you’re aiming for higher rates of staff retention.

Unlike 401k plans, you as a business owner bear responsibility for the performance of the investments in your plan, and that’s where the risk comes in. By design, the plan assumes a rate of return or “interest crediting rate” that may be pegged to a benchmark (like the yield on the 30-year U.S. Treasury bond) or it may be set arbitrarily, usually at a rate near 4%. If your investments earn less than the interest crediting rate, you as the plan’s sponsor are responsible for making up the difference. That’s the bad news.

The good news is that eye surgeons can contribute way more money to a cash balance plan than they could contribute to a standalone 401k/profit sharing plan. According to Norman Levinrad, a pension actuary with Summit Benefit & Actuarial Services, Eugene, Ore., you might contribute as much as $120,000 more to a cash balance plan than if you had only a 401k plus profit sharing plan alone.

That extra contribution could save you about $48,000 in state and federal taxes, depending on where you practice and pay taxes.

There is one more catch but it’s manageable. The feds wants to make sure that everyone in the plan is treated fairly, so you will be required to include your employees in the plan and make a contribution for them as well. In this case, you’re contributing to their profit sharing plan accounts, so you may have satisfied the contribution requirements already.

So yes, there are some risks but the benefits far outweigh the costs. This is indeed a good deal for someone in a situation like yours.

Mr. Hughes believes now is a good time for physicians to consider setting up a cash balance plan, and he should know. He has been at this game a long time, having started his law practice just one year after ERISA became law, almost 40 years ago. “When you look at the tax and compliance issues surrounding these plans, it’s just about as good as it’s been since the 1980s in terms of what you can do and how you can design these plans.”

Speaking of design, I want you to know you will need a small team to make a cash balance plan a reality in your practice. First, you will need an actuary to calculate how much you can contribute to the plan. Next you will need an attorney to draft the plan documents. Once the plan is in place, you will need a bank, brokerage or mutual fund company to hold or “custody” the plan’s assets. If you’re crazy, you will manage the plan’s investments yourself, but if you’re smart, you’ll hire a registered investment advisor to do it for you. You will need a third party administrator or “record keeper” to keep track of the value of each participant’s balance in the plan. And you will need an accountant to file the plan’s Form 5500 each year, which is a report to the Department of Labor.

Sound overwhelming? Don’t fret. You can acquire each one of these team members independently (like you might if you called Mr. Hughes), or you can get them all in one place (like you might with Mr. Kravitz or Mr. Levinrad), though none of them offer investment management or custody services.

The all-in administrative cost for a cash balance plan might run you as much as $7,000 per year or maybe just a couple thousand more than you already pay for your 401k and profit sharing plan. All three of the pension gurus I interviewed for this column said that they would generate a free proposal to help you determine the costs and benefits of a plan for your practice, as is the custom in their line of work. At the very least, you or your office manager should make an effort to get further details.

Keep an Eye on Your Money

The key to financial security is vigilance. Get curious. Ask questions! Dig for answers … or email your questions to me so I can do the digging for you. If I use your question in “Eye on your money,” I will send you one of my favorite personal finance books to feed your head and a cool “Eye on your money” coffee mug to satisfy your thirst for answers.

Mr. Utley is president and founder of Physician Family Financial Advisors Inc., which delivers fee-only financial planning and independent investment advice to clients coast-to-coast. Contact him at 541-463-0899 or visit

This article originally appeared in the July 2013 ezine of Ophthalmology Business, pages 12-13. To download a PDF version, click here.

Latest Tax Changes a Bittersweet Bill for Physician Families

Since 2001, Congress has made nearly 5,000 changes to the Tax Code whose nearly 4 million words make it seven times as long as Tolstoy’s War and Peace but not nearly so easy to read. Congress’s most recent addition to this ongoing saga—the American Taxpayer “Relief” Act of 2012 (ATRA for short)—closes a chapter on tax uncertainty for many physician families at the expense of those earning more than $450,000. It’s a bittersweet bill that will bore you to tears so today I am sharing the cliff notes (yes, pun intended).

ATRA a Bitter Pill for Physician Taxpayers to Swallw

  • Medical specialists are hit hardest. While the Bush era tax rates on the first six marginal tax brackets were made permanent for all taxpayers, Congress (Obama, actually) added a seventh marginal tax bracket that applies to physician families earning  more than $450,000. In my experience, only medical specialists and double-physician families earn this much, so they’ll be paying 4.6 cents more in tax on every dollar they earn above $450,000.
  • Almost every physician will pay more tax. Even though tax rates were effectively frozen, the total tax burden for practically all physicians went up substantially. Families earning more than $250,000 will have their itemized deductions reduced and their personal exemptions will phase out. That means deductions for charitable donations, home mortgage interest and property tax become less valuable.

ATRA Brings Sweet Relief for Physicians in Both Life and Death

  • The "doc fix" is fixed again. Self-employed physicians escaped a 27% reduction in Medicare and Medicaid reimbursements. For some of you, this may be a huge win, particularly those whose census contains a greater proportion of elderly patients. The cuts will rear their ugly heads again on January 1 of 2014 since this is a temporary fix. If history repeats itself though, Congress will extend the doc fix again since they have extended it twelve times since the Medicare Sustainable Growth Rate (SGR) cuts became a part of law via the Balanced Budget Act of 1997. (Hospital docs may feel the pinch though since ATRA levied cuts to hospital reimbursements.)
  • The federal estate tax rules are finally final. With the federal estate tax rate rising from 35% to 40%, the new tax rules may not sound like much of a win for physicians until you consider that rates were set to jump to 55% and the size of a taxable estate was set to fall to only $1 million.Now that the size of a taxable estate has been set to $10.25 million for married couples, there’s reason to cheer because the exemption is permanent now (so you can do your estate planning) and most physicians won’t be taxed at the federal level since the average physician family’s estate is well under $10 million, in my experience.With federal estate taxes more or less resolved for the bulk of physician families, you should turn your attention to state estate taxes if you live in one of the fourteen states that impose their own estate taxes. For example, Oregon taxes estates above $1 million, so that’s an issue for almost all mid-career physician families here in my state.

One of the more interesting provisions of the American Taxpayer Relief Act is a new rule that allows you to do a Roth conversion from your Traditional 401k account to the Roth portion of your 401k without having to leave your job or rollover your money to an IRA.

For most physicians, this in-401k Roth conversion will be useless. But for a tiny fraction of them it offers a chance to save big on future taxes. If you are expecting a big dip in your income (for example, if you take an extended sabbatical without pay or if you are disabled and not earning taxable income for the majority of a tax year), you might consider converting your Traditional 401k to a Roth so that your account will grow tax-free indefinitely. For other physicians earning six figures, the tax hit will likely make such a conversion less than palatable.

In February, Congress will sharpen its pen to write the next chapter, so stay tuned for more coverage in upcoming posts, and thanks for reading.

*Image Courtesy of