Issue 6 - May 2003

Don't paint yourself into a financial corner!
A retirement plan can be within your reach
By Joel M. Blau, CFP

If you are like many Americans, you may find yourself financially unprepared for your retirement years. Too many people start saving too late and are unable to make up the shortfall during their peak earning years.

As a small business owner, however, you may be overlooking a source of retirement income, believing it is out of reach for you and your staff. That source? A qualified retirement plan.

A qualified retirement plan is a congressionally approved tax shelter that provides you with major tax advantages: As an employer, any contributions your practice makes to a qualified plan are tax deductible. And as an employee of your practice, your earnings on the plan’s investments are tax-deferred. At retirement, participants in qualified retirement plans are often in a lower income tax bracket and therefore pay less tax on the distributions.

Qualified retirement plans are generally classified as either “defined benefit” or “defined contribution”. Some plans may combine features of both types of plans to maximize contributions for the highest paid employees.

Defined benefit plans
In a defined benefit plan, the employer makes contributions, and at retirement a specific benefit amount is paid. The benefit amount may be based on a flat percentage of compensation, a percentage that increases with the length of service, a percentage that changes at certain compensation levels or a number of other formulas.

Defined benefit plans tend to favor older, highly compensated employees who are relatively close to retiring. More of the employer’s contributions must go into his or her account to compensate for the relatively short time before retirement. Actuarial calculations are used to estimate how much must be contributed each year to accumulate the necessary future amount. Interest rates, investment rates of return, and the ages of the participants have an impact on the calculation.

The investment risk of a defined benefit plan rests solely on the employer, since the employer is required to fund the plan adequately each year, although the annual contribution can and will vary based on the plan’s investment results.

Defined contribution plans
At the other end of the spectrum are defined contribution plans. The main difference is that contributions to these plans are set aside for the benefit of the employees, and future benefits are a direct result of investment return and the amount invested.

Unlike a defined benefit plan, there is never any promise of a specific dollar amount during retirement.

Several variations of defined contribution plans exist, including the Money Purchase Pension Plan, Profit Sharing Plan, Age Weighted Profit Sharing Plan, and for very small practices, the SIMPLE Plan.

Except for the SIMPLE Plan, which essentially is an IRA funded by the employer; all defined contribution plans offer a vesting schedule. The number of years an employee is with the practice dictates the percentage of their contributions that will be forfeited if they leave their employ-ment prior to becoming fully vested.

These forfeitures are reallocated to other participants’ accounts based on income and contribution level. If turnover is high, this can be substantial. Forfeitures serve to increase the contributions to the chiropractor’s own retirement account and provide future benefits.

For this reason, defined contribution plans tend to favor younger participants since the longer they remain employed, the greater number of forfeitures they benefit from.

A third party administrator (TPA) should work in tandem with you, your accountant and your financial planner to determine which specific plan type best fits your goals and objectives. In this way, the chiropractor/owner can implement a plan that provides benefits most consistent with their own long-term goals. For the chiropractor/employee who doesn’t have input as to what type of plan is offered, time should still be taken in determining how to best utilize the existing plan based on their specific goals and objectives.

The key with all plans, from a regulatory standpoint, is to be certain they are compliant with the U.S. Labor Department’s Employee Retirement Security Act (ERISA) of 1974. Regardless of which qualified retirement plan is chosen, the plan’s trustees need to satisfy the following ERISA requirements:

1. An investment policy must be established and should be in writing.

2. Plan assets must be diversified.

3. Investment decisions must be made with the skill and care of a “prudent expert”.

4. Investment performance must be monitored.

5. Investment expenses must be controlled.

6. Prohibited transactions must be avoided.

Designing a retirement plan isn’t something you have to do on your own. Many skilled professionals are available to assist in qualified plan implemen- tation. The plan’s administrator assists in plan determination choices and related tax reporting. The trustees take responsibility for investing or hire an investment manager. An actuary gets involved when utilizing defined benefit plans or age-weighted profit sharing plans.

Many professional financial organizations can act in multiple capacities. For smaller plans, the practice’s accountants may perform the duties of plan administration, while the principal chiropractors act as trustees and hire investment professionals to construct and invest the portfolio. Whoever a chiropractic practice chooses to work with, they need to be aware of the goals and objectives that the practice has determined to be in its best interest.

Joel M. Blau is president of MEDIQUS Asset Advisors, Inc. He welcomes readers’ questions and can be reached at 800-883-8555 or at blau@mediqus.com.