Solve the Retirement Dilemma with a Cash Balance Plan

APRIL 26, 2013
Barbara Lewis
When Robert C. Master, MD, became chairman of his 350-physician multispecialty group’s Retirement Planning Committee in 1995, he embarked on a journey that has become a lifelong mission.
“The first thing I looked at was the retirement account balances of physicians in the 60 to 65 age group and I was dismayed at how low they were,” recounts the cardiologist, now 62 and semi-retired.
Master knew the rule of thumb noted on retirement websites that $1 million in conservatively managed assets generates only $40,000 a year in retirement income to avoid outliving one’s assets. He quickly saw that few physicians in his medical group had enough money to enjoy the type of lifestyle they wanted and deserved after decades of service in highly demanding and stressful careers.
Many doctors with whom Master worked upended their lives at retirement.
“One of my colleagues had to sell his house and leave the area because he didn’t have enough for his retirement,” he says. “His home equity was his retirement plan.”
As Master dug into the numbers, he saw that most physicians had a limited understanding of how much they needed to save in order to fund 25 to 30 years of retirement. With annual 401(k) and profit-sharing contributions capped, at that time, around $40,000, options seemed limited, especially for older physicians, who needed to save aggressively. Early in their careers, many of these physicians had priorities centered on school tuition and mortgage payments. Even later in their careers when physicians focused on their retirement, they found that there was no easy way to “catch-up” to accumulate an adequate nest egg without having to continue to work.
“It didn’t seem right,” Master says.
Discouraged, he began researching a solution that would help physicians increase their retirement account balances rapidly. Initially, he focused on non-qualified plans (those not protected under ERISA, the comprehensive federal retirement law passed in 1974).
“In a non-qualified plan, retirement benefits are an unsecured corporate liability,” he explains. “Based on the size and culture of my group, I thought it was much more prudent to have a qualified plan.”
Palo Alto Foundation Medical Group now includes over 1,000 physicians after a merger with two other groups.
The solution: A cash balance plan
Master eventually discovered an innovative solution: adding a cash balance plan to the existing 401(k) plan. A cash balance plan is a type of IRS-qualified retirement plan known as a “hybrid,” since it combines the high contribution limits of a defined benefit plan with the flexibility and portability of a 401(k) plan. By adding a cash balance plan, the group could contribute an additional $250,000 a year for physicians, depending on their age.
“These major tax-deferred contributions could help many of my colleagues squeeze 20 years of savings into just five or 10 years, so more of them could avoid the fate of having to move or continuing to work long hours,” Master notes.
Together with his committee members, he developed a detailed request for proposals and submitted it to Third-Party Administrator (TPA) firms with the actuarial expertise to manage a cash balance plan.
After months of due diligence, Master and his committee hired Kravitz, a firm that has been designing and implementing cash balance plans since their introduction in the 1980s.
“After I understood all the qualities of a cash balance plan I knew it was the right solution for us to overcome the 401(k) limits, while providing major tax-deferred and tax-free accumulation savings, asset protection and stability,” Master says.
Since his group adopted the plan in 2000, it has continued to grow in popularity. Master has a number of success stories about the difference the cash balance plan has made in the lives of retiring colleagues, including his own.
“I know many colleagues now, like me, who have an adequate nest egg, so they can retire early or work as long or as much as they want, rather than out of economic necessity,” Master says. “Their quality of life is better when they do retire and they can remain in the area near family and friends.”
Tax deferral is one of the many advantages of a cash balance plan. All contributions are tax deferred, reducing both ordinary income and adjusted gross income (AGI). Account balances grow tax-free until distribution. Contributions are age-weighted, with higher contributions for those closer to retirement. (See a table of age and allowable benefits.)
A cash balance plan is an ideal retirement vehicle because physicians can accelerate their savings, yet there is a fair amount of flexibility. Not everyone has to receive the same contribution.
“It’s been interesting to see how some of my colleagues are savers by nature,” observes Master. “They get involved in the cash balance plan from the very beginning of their careers, while others procrastinate and reach their 50s before they realize how much they need to put away in order to enjoy a reasonable retirement.”
The cash balance plan allows both types of people to reach their goals.

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