ļ»æPFFAP-PYP-24-0201-Courtenay Shipley v1
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Welcome to the Physician Family Financial Advisors podcast, where physician moms and dads like you can turn today's worries about tax. Hello,
Nate: physician moms and dads, I am Nate Renike, certified financial planner and primary advisor here at Physician Family. We have a special guest joining me today on the show.
Her name is Courtney Shipley. Courtney is the founder and chief planologist of Retirement Planology, a consulting and registered investment advisory firm for corporate sponsored retirement plans. So Courtney is an accredited investment fiduciary, chartered retirement plan specialist, certified plan fiduciary [00:01:00] advisor, and certified exit planning advisor.
What this means, all these letters behind her name, all the knowledge and all the experience she has is going to help us accomplish our goal in this episode, which is to demystify defined benefit plans. Good morning, Courtney.
Courtenay: Good morning, and thank you so much for having me, Nate. It's great
Nate: to be here.
You got it. Hey, I should check. Is it morning for you? Where are
Courtenay: you? Oh, um, East Coast. So, just, you know, afternoon,
Nate: we're okay. Podcasting through lunch. That's nice. Okay. So we're going to demystify defined benefit plans, but I have a question for you. Uh, first of all, you have a young child. Is that right? I do.
I have a six year old. Six year old. Okay. Boy or girl? Boy. Boy. Six year old boy. I have two boys, a three year old and a five year old. So you're the perfect person to answer this question for me. Okay. Okay, you ready? Mm hmm. Okay, so my three year old was trying to go to [00:02:00] bed last night, and right as he was about to fall asleep, he popped up off his pillow, and he had his little Snoopy, uh, stuffed animal in hand, and he looks at me, and total, very serious, says, Dad.
So my question is, do dogs have hands? I cannot think about defined benefit plans until I know the answer. I got to tell him,
Courtenay: I think dogs have paws, right?
Nate: That's right. That's, that's what I told him, but he wasn't accepting the answer with Snoopy in hand. So
Courtenay: I'll tell that story because we were, when Max was a little bit younger than that, we were talking about, um, different animals and You know, different parts of the animal and whatnot.
And I said, um, you know, and dogs have a tail and monkeys have a tail. And then I looked at him, I said, do you have a tail? And it was clearly that he had never considered this before. And so he goes searching for his tail only to respond. [00:03:00] Yeah.
Nate: Well, I got a good laugh out of it, which, which spiraled out of control because then he started asking questions about all his other stuffed animals.
I was like, all right, time to go to sleep, but at least I have an answer about Snoopy for him now. There you go. Okay, so now we can move on because I have my answer. Um, demystifying defined benefit plans. This is important, uh, important topic. And I, many physicians I speak with, they just feel totally lost when it comes to defined benefit plans.
Like they don't really get it. They know that it might be helpful. They don't know if it's right for them. So, I want to focus mainly on the basics today. Explaining what they are, who might benefit from them, um, and I think we can give a good idea, maybe not exactly how to do it, because that's your department.
Been piecing all those pieces together, but maybe we can give people an idea on if they should even consider these. Okay.
Courtenay: So what is a defined benefit plan? Is that what I'm answering?
Nate: That's the [00:04:00] first question. What, the what, what is a defined benefit plan? A
Courtenay: defined benefit plan is a retirement plan that you are defining the benefit.
You are defining the outcome down the road when you hit retirement age. And there's a formula. You have an actuary involved. You are going to figure out Or they're, they're going to work with you to figure out how much money to set aside today to pay that benefit that you're promising in the future. And so this could be a formula that is based on a percentage of your paycheck that's going to be paid to you in the future.
Something like, you know, we're guaranteeing for every year of service that you have with us, we'll pay, um, 45%, uh, or something along those lines of the, the, uh, average of your highest five years of pay or something along those lines. You have to work for us for 20 years before you get this. Um, so there are strings attached.
There's a very defined benefit, um, that will happen at a future point. And [00:05:00] you are going to shove a bunch of money into a trust, and that has to support that payout in the future. And an actuary is going to check your work each year to see if you have enough to fund that future benefit. They have strict parameters on how that works, and where you have to be, you know, within range for funding.
And they're going to tell you at the end of the year, okay, this is what you need to deposit based on what you have in there and where we're going from here. Does that help?
Nate: That totally helps. Yeah. So, um, essentially I think the big takeaway for, for our listeners is going to be if you want a defined benefit.
Like, and literally, if you want to define your benefit, you can choose one of these plans. The hard part is that actuaries work. So they earn their money because that's a complicated calculation. It's sort of like, how do I guarantee a defined an actual, this benefit that I have defined? How do I guarantee it?
Well, that's the actuaries work and it's difficult to do. So you have to [00:06:00] engage an actuary. So obviously there are benefits to this and we're going to get into those benefits and everything. But could you tell me Who would, who is the right person for this? Like who actually ends up looking at opening a defined benefit plan where it works for them?
Courtenay: Well, usually the high income, uh, self employed individuals or owner and their spouse. Uh, or family businesses, um, businesses that want to maximize their tax savings with large tax deferred contributions that are being set aside. Those tend to be the ones who benefit the most. We've also seen it in other situations where they want to be very generous with their retirement benefits that they're offering their employees.
Nate: Right. Yeah. Because, because it is a rather, uh, the benefits large. So another way to say that is it's expensive, right? It's
Courtenay: [00:07:00] expensive. There's risk. Yes. Um, because the, you know, the business is on the hook for being able to fund this thing. Um, and that is going to largely depend on the underlying investments.
They're trying to manage those investments to a stated interest rate of some sort or, um, and that's a moving target. Based on, on different actuarial parameters. So, right. Yeah,
Nate: it's complicated. Yes, it is. And I think that's, yeah, I think that's why people have so many questions. It's not so clear cut. Um, the defined benefit seems reasonable for them to understand, but putting into practice is tough.
So, I, I, a clarifying question, okay, um, you said high income. And I think, I don't know that that's a, that's another moving target. Like what, what would you consider an actually high income to make this worth it? Because it is complicated. There's a lot of moving parts. Like what amount of money does someone need to have available to make this [00:08:00] worth it?
Courtenay: So if we're, we're talking about compensation strictly, the, the maximum eligible compensation. For 2024. So in other words, the amount that you make that could be considered for a plan like this, um, the, the top end is 345, 000. So if you're making that or above, then I think that this would probably be a good.
thing to look at. Another thing though, is really do you have a lot of profit coming from your business as well? And so if you have a, um, too much cash and too many taxes problem, then this is, this is the, uh, end of the line. All right. You're welcome. Thanks for being here. Have a great day. Take care.
Nate: Right.
Okay. What, what, where's the [00:09:00] beginning of the line?
Courtenay: Oh, the beginning of the line is the straight up regular old 401k plan. Okay. Yeah.
Nate: We all know about those. We do. Yeah. So 401k plan. And what you mean by that is, um, they're relatively simple to administer and you can't put a ton of money in them, at least compared to a defined benefit plan.
So if you're not a really high income, you know, solo practitioner, You may just be fine with a 401k because you wouldn't save any more, even if you had the option. Is that right?
Courtenay: Yeah. And it's important to note that there's a couple of different parts that go into a 401k. So you have what you as the employee can contribute.
And for 2024, that's 23, 000. If you are age 50 and up, you could do the catch up too. So you could do 30, 500. But then there's this profit sharing contribution that can be put into the plan as well. And so it's kind of like a stair step, [00:10:00] right? You put your money in and then the employer can put money in, um, and that goes up to 69, 000.
So instead of it just being Um, the 23 that you're putting away when you put an employer contributions, the maximum between those two is 69, 000. And then you graduate maybe, and you take a look at either a cash balance pension plan or the defined benefit plan.
Nate: Right. Okay. So that's actually. For people considering this, that's actually an interesting number that 60 some odd thousand dollars.
Like if you, if you still have a bunch of extra money that you would love to put away for retirement and shelter from taxes, then maybe it is time to take a step up that ladder. Exactly. And it's complicated. Obviously, you know, W2 employees don't have a lot of control over this, but we're talking like people who run their own practice or large organizations that are considering this for highly compensated employees.
So if you are a physician who wants to save [00:11:00] a lot more in taxes and wants to save a lot in taxes and also contribute a lot more toward your retirement, this could be super beneficial for you. But, um, there's some, there's some questions kind of, they're a little bit detailed questions like that people will come to me and ask.
So I want you to answer them for me. Okay. Make my job easier. No problem. Okay. Okay. So can a physician have. A defined benefit plan alongside a 401k profit sharing plan. Yes. Okay. They can. Okay. Tell me a little bit about how that works. Well,
Courtenay: again, it's complicated. Um, there are, there's certain IRS criteria.
That you can't surpass, um, your actuary and your third party administration firm are going to be the ones that you rely on to keep you out of trouble with all of that, um, and make sure that you don't go above any annual limits for how, how much you can put away between plans.
Nate: Mm hmm. Yeah. There's some extra rules when you're pairing these together, right?
[00:12:00] Exactly. Okay. So get, get your team all lined up because they all have a part in this puzzle. They
Courtenay: do. And you also want to work backwards from how you're trying to construct the puzzle. What is the outcome that you want? Because that will be very helpful in determining the plan type and then how you accomplish it between, you know, this ecosystem of plans that we've talked
Nate: about.
Right. Okay, good. Um, is it the same deal with solo 401ks? Can you have both?
Courtenay: Yes, um, you, it's actually very easy to have a defined benefit plan if it's just you that you're covering. So that's, um, from an administrative standpoint, very easy. It's when you start getting other employees involved that the cost goes up as far as how much you have to contribute to the plan as well.
Nate: Oh, I see. Okay. Yeah, I want to talk about costs in a minute. So, um, you can, you can pair these plans together. It is a bit complicated. You should certainly, well, [00:13:00] you're required really to find professional help here, especially with the actuary. I want to know, uh, you, you talked a lot about a, uh, the return.
So the return in this account, um, you're aiming for a specific return, which sort of pushes you towards certain asset classes. Can you talk a little bit about how the money in this defined benefit plan should be invested? Yes.
Courtenay: I'm going to contrast it with the other plans we've talked about. Now we know in a 401k plan, that's you.
and the employer contributing money and there's no defined benefit. It's just however much you put in and then however you choose to invest it. There's a menu of investment options that you can pick from and you get to combine those to make your own portfolio and that outcome is completely on you as the investor.
Then you move into the cash balance pension plan. This is a hybrid plan. It's very similar to a defined benefit, but it is Actually, just if it's not defining the outcome, it's [00:14:00] only defining what is being put into it. So the, um, the cash balance plan is similar to the defined benefit plan in that we need a pot of money to support the amount that's going in the contributions going in.
And then we are also going to define how it grows. So there's going to be some crediting interest rate that we assign And so the, the pool of money underneath needs to support. That, uh, the contributions that went in, as well as the annual crediting rate. So you can pick different things. You can talk with your actuary and you can decide we want to keep up with treasury bills, or we want to keep up with the market returns, et cetera.
So that's going to drive what you have to. Use as the underlying investments and so it could be as simple as a balanced portfolio. It could be a bond ladder. It could be so there's, there's some flexibility in how you want to pull that off. Um, one of the pitfalls though, is that you don't want to end up with a severely overfunded plan or that [00:15:00] could affect your ability to take deferrals we were talking about before.
Now, moving into the defined benefit plan. Now, again, you are defining the outcome. So you are Relying on that actuary to help with those future projections. Um, and that's where the market being very far down. Let's say you have more of an equity allocation and the market's gone way down one year. Let's go back to, um, 2010, 2009, 2008, somewhere in that timeframe.
And you as the business owner, um, are going to have to fund an underfunded pension, maybe more than you thought you would. So that's why this is a little bit tricky as far as how you invest it. Yes,
Nate: that is very complicated. Um, in practice, I mean, it's, it's complicated to understand, but the reality is it's actually complicated to achieve, you know, the return that you would like.
I mean, if I could achieve the exact return that people asked me [00:16:00] for, I'd be. I mean, I wouldn't have time to be on this podcast. That's how busy I'd be. So it's a difficult thing. And, um, there are some problems if it's, you know, underfunded, especially to, uh, as far as, you know, you got to come up with the cash to fill it up.
So this is, um, difficult. And once again, I can't, I can't stress enough, like you get some help with these plans. I mean, they are not Made for physicians to do on their own or kind of piece together on their own. So, um, definitely get some help there. Uh, and the, the other big thing that I sort of wanted to touch on is a lot of times, because of those requirements that you have to choose a rate that you're trying to keep up with.
A lot of times, what people feel like more, most comfortable with is choosing a rate that isn't too large. And so they end up choosing some investments in these plans that are rather conservative. And when you're balancing, when you're trying to [00:17:00] decide between which type of plan you're going to have, especially if it's just for yourself, young physicians don't tend not to be comfortable with super conservative investments.
They want some growth in there. So this is, it's a give and take in these plans and going over them. with someone like you would be a really good idea to decide on if this is right for you. The big winners here are people who are don't need, don't feel the need to be as aggressive and have a ton of cash in their business to save on taxes.
Did I get that
Courtenay: right? Yeah and they don't need a lot of flexibility with what they do with that cash because once you sign on to one of these either the cash balance pension plan or the defined benefit plan you're kind of on the hook. You know, you're going to have to make contributions. These are not short term plans.
The IRS expects you to have them open for a minimum of three to five years, uh, or else they get a little upset if you terminate it early. And so that takes away your flexibility with how you use that, that cash. And, you know, depending on where [00:18:00] you are in life, if you've got two kids, you're trying to put through college, or, you know, you want to invest in some new equipment, um, to make the practice more efficient or offer something your competitors don't that it does hamstring your ability to do those types of things.
If you're not
Nate: careful. Right. Yeah. Careful is, is a big one in this department. So we're talking about permanency, investment choice, mandatory contributions. These are all things you should understand really well before signing up for one. Could you tell me a little bit about fees? Like what should people expect to pay for something like this?
Gosh,
Courtenay: could be all over the map, right? Yeah, definitely. I would say that. Cash balance plans will probably end up depending on how many employees that you have somewhere between, let's call it two and 10, 000 in administrative fees for defined benefit plans. Again, it's going to come back to how, how many people are we talking about, uh, that the plan covers, but it could be in the neighborhood [00:19:00] of the same range.
Nate: Mm hmm. Yeah. So once again, if there's not enough tax breaks in this situation for you to make up for those fees, consider something else. But if, if you have a ton of money laying around and you're going to save way more than 10, 000 in taxes by doing it, it could be right for you. That's right.
Courtenay: Okay. And don't forget to, with all of these plans, you're not just funding it for you.
You also have to fund it for your employees. So, there are, um, you know, age comes into play, um, everyone's different salary or compensation also comes into play in determining those contribution numbers. And so, it's very important that you have spoken with somebody and talked about the different demographics.
To get the total cost of the plan, because it's one thing to know how much you're saving. It's another thing to know how much you're having to spend in funding other people as well that work for you in order to get that great tax break. Because as we know, the IRS gives you these nice things because you are also [00:20:00] going to cover these other employees with it.
Nate: Right, right. You know, that brings up a question I wasn't planning on asking, but I think that You'd be well suited to answer. So we just talked about all, all the things that could go wrong, but what's the real driving force for these bigger hospitals or big groups that are considering these? Like, why do they do this?
What's the benefit to all their
Courtenay: employees? Yeah. So there's, there's really two. One of course is the tax issue because this is a way for businesses to defer tax money. It's also a way to recruit and retain great people. Defined benefit plans have gone the way of the dodo. Um, most large corporations that have them have even, have either frozen them or they're getting ready to terminate them.
And so this, this would be special. It would be a special type of benefit to get, um, some really good people in the door for you. And also with things like the cash balance. Uh, pension plan, you can put a three year vesting schedule on it. Um, [00:21:00] perhaps they don't stay around long enough to get the comp or the, uh, contributions that the employer put in for them.
And so you can take that back. Um, same thing goes with the profit sharing, but it's an attraction and retention tool. And that is why, uh, it gets a lot of, of play because it's a valued benefit, especially for your older demographic.
Nate: Yeah. You know, I, I see this quite often when physicians are considering changing jobs as an employee, they look at their retirement benefits when they talk to us.
And you know, sometimes if they're on the fence, they'll just stay because the retirement benefits are so rich and, um, that can be good and bad. Sometimes we call those the golden handcuffs. Um, but yeah, that's, uh, it is a good tool to use to retain great talent. So that's, that's good. Um, Yeah. So imagine where we have some listeners that really want to do this.
Um, when do they need to get their plans set up by? Like what [00:22:00] date?
Courtenay: So, um, we were talking earlier about this. There are some different targets. Um, like for example, right now it's The end of January, you could still set up a profit sharing only plan, uh, for 2023 for last year. And you have until you file your taxes in order to fund it.
Now that's kind of the, one of the only ones that you could do retroactively. So anytime you're thinking about putting a plan in place, my rule of thumb is 90 days. That gives you enough time to talk through with all of your different consulting partners, you know, talking with your actuary and your third party administrator, your investment advisor, and then also your tax accountant and have everything in place.
And if you, if you just go at this with, it's going to be 90 days before we pulled any trigger, um, then you'll have enough time. If you want to start accruing benefits, though, you have to get it done sooner than later so that you have [00:23:00] the year to, um, to accrue the benefit and then fund it in the following year.
Nate: Okay, so what I'm hearing you say is they have some time this year to do it, but I probably the best practice is to start as soon as possible. I know physicians schedules pretty well and they don't have a ton of time to be thinking about these kinds of things. So sooner rather than later, but we're at the beginning of the year, so you do have some time.
Okay, I think that's everything. Now I'm going to ask you for the big takeaway. And, and I think that we gave a lot of detail. Uh, we tried to demystify the, the, uh, defined benefit plan, but at the same time, it can still be confusing. What's the one thing our listeners should take away from our podcast today?
Courtenay: Well, to put it in medical terms, uh, a prescription without a diagnosis is malpractice. So, trying to go it alone on setting these types of plans up is, is, uh, not a [00:24:00] good situation to put yourself in just because they are complicated. The IRS and the Department of Labor both have purview over it and you want to make sure that you get it right and that you lock in the flexibility that you need.
Or the the tax savings that you want. Okay.
Nate: And Courtney, before I take us out, can you tell our listeners where they can find you if they're interested in setting one of these up or just have questions about how to get started? Sure.
Courtenay: They can go to retirementplanology. com slash learn more. Or you can find me on LinkedIn under C
Nate: Shipley.
Thank you so much, Courtney, for being on today's episode.
Courtenay: Thank you, Nate. Thanks so much for having me.
Nate: You got it. Okay. That's all we have for today. And until next time, remember, you're not just making a living. You're making a life.
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