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Should Residencies Have to Offer Opt Out Retirement Plans for Trainees?

The main goal of residency is to learn to become the best doctor that you can be. However, that does not mean that you should completely ignore your well-being, or any individual component of it. Including your financial well-being. However, we don’t receive any financial education or help in building healthy financial habits in training. I do believe that there is one way to improve this: opt out retirement plans for trainees.

But first let’s talk about some reasonable financial goals for residents…

Personal finance in residency

When you are a resident, you don’t make a lot of money. And you work a ton of hours. And you are constantly learning like trying to drink water from a fire hose. As a result, most of our time and energy during this time period is focused on learning to become a doctor. And rightfully so.

opt out retirement plans
Even small amounts can grow impressively over time with compound interest!

The problem however arises when, in the pursuit of this goal of becoming the best doctor, we completely ignore our well-being. That is like trying to become the best runner we can be but forgetting our shoes.

Fortunately, many doctors are now recognizing the importance of many aspects of well-being, including mental and physical health, etc. One important aspect of well-being is nearly universally overlooked by doctors, administrators, and hospitals alike. And that is financial well-being.

My point in this point is not to belabor the point that becoming a more financially well doctor makes you a better doctor. That is just true. You can learn more about my story here to see why.

Instead, my point here is to say that I understand that residency is super busy. So I don’t expect that residents dedicate a lot of their limited time to personal finance. Instead, I think it is important to emphasize the importance of building the few but important healthy financial habits that will carry forward and really pay off after residency.

For example

A great general rule of thumb is to save 20% of your pre-tax income. And then contribute those savings to things like paying out debt, investing, and more.

But as a resident, unless your spouse or partner is making good money, saving 20% is near impossible. I know that we could not do that in NYC with 2 kids. But we still could do better than 0%.

So, when my wife and I began our financial education and ran our first budget, we made a goal to save 1% of our pre-tax income. Then next month, we shot for 2%. And so on. Ultimately, we probably got to around 4%. But that was not the point. The point was that we had established a very good financial habit.

And when I became an attending and we started to make good money, it was easy to save at least 20%. The habit was already there. And now we save closer to 40-50% as you can see from our money flow.

And that brings us to opt out retirement plans for residents.

Because saving and investing early is better

That’s really the most important financial habit that anyone can build. The habit of saving some amount of your take home pay and investing it wisely. And the sooner you form it, the better.

If any resident saves 1-5% of their income and invests it in low-cost, broadly diversified index funds, that resident would be financially ahead of 99% of their peers.

And if it sounds simple, that’s because it is. But that does not make it easy.

Because awareness and our own behaviors get in the way

As doctors, we have a ton of education. But very little exposure to personal financial education, whether formal or informal. I’ve been a proponent of formalizing financial education into medical school. However the reality is that we are far away from this currently.

So it is on us. And that is what you are already doing by reading this blog! Unfortunately, the majority of doctors-in-training are not like you. Most either actively, like I did, or passively ignore their financial well-being and education.

And beyond awareness, our behaviors also stand against us. Too many people who know that they should save and invest and maybe even know how to do it, still don’t. Why? Because it always seems easier to spend on something else for the present and convince ourselves of the financial myth that we can just do it later.

Which brings us to opt out retirement plans…

But first, let’s look at DBPs vs DCPs

As a refresher, until the very recent past, most retirees just relied on their companies to support their retirement through pension plans.

Via pension plans, companies essentially took money involuntarily out of the employees’ pay checks (they didn’t really withhold but just paid employees less for the favor of invest investing the money they would have paid and using it for their pensions) and invested it on their behalf. Then they paid a fixed amount based on various factors once the employee retired. This type of retirement plan is called a Defined Benefit Plan (DBP).

However, for various reasons, pensions and DBPs have gone to the wayside (largely to save companies money). In their place came Defined Contribution Plans (DCPs) such as 401k’s and 403b’s. With DCPs, employees can choose to have a certain amount of money from their paycheck withheld pre-tax and placed in an employee-sponsored investment account. Or they could choose not to do so.

With a DCP, it is totally up to the employee. The employer only has to offer a pathway to save and invest for retirement. Otherwise they are hands-off.

Is this good or bad?

Well, on the one hand I think it is good. For people like me and maybe you. Because I know I can invest more successfully myself via passive investing than my employer could through their pension fund, the majority of which were actively managed.

But, and this is a big but, this is only beneficial for those who actually choose to use their DCP. And way too many people didn’t and don’t…for one reason or another. Unfortunately, one of the main reasons for lack of participation was a lack of awareness that they even existed.

And thus the opt out retirement plan was born

I think this is a really cool example of companies actually doing something in their employees’ interest.

Over the past decade or so, multiple large companies have gone from a traditional opt in retirement plan, where employees must choose to contribute but the default is not to contribute, to a opt out retirement plans, in which the default is for en employee to contribute. Now, they had to actively choose not to save and invest in their DCP.

What was the result of this?

The result was a huge increase in retirement plan participation, saving, and investing. Meaning more people preparing better for retirement. And more people progressing along the road to financial freedom.

And the reason is simple psychology. As humans, we pretty much always just leave thing the way they are. We respect the default. Because we are lazy. Maybe that’s a bit harsh but it is what the research shows.

How common are opt out retirement plans?

It’s tough to put an exact number on it. But not super common.

However, through SECURE 2.0, employers starting new retirement plans after 2022 are required to offer only opt out plans starting in 2025. But this will not impact most people who are already enrolled in retirement plans and have been for some time.

But shouldn’t more companies be doing this? Yes! Which got me thinking…

Shouldn’t residencies have to offer opt out retirement plans for their trainees?

To me this is a no brainer! Of course they should.

I already showed above and hopefully throughout this entire blog why financial well-being to so important to our overall well-being as well as our functioning as doctors provisions patient care.

And small acts like saving a little and investing it can make a massive difference for residents.

And now we have a really easy way for residencies and their hospitals to support these habits and increase trainee financial and overall well-being. With pretty much no expense to the training program and institution. They all pretty much already offer 403b plans for trainees. So just make them opt out!

I really wish that my training institution had done this. It’s too late for me. But not for so many more.

So we should really start pushing for this!

Is a residency sponsored opt out retirement plan the best place for residents to invest though?

Honestly, probably not.

A Roth IRA is likely an even better place for a resident to invest their money while in training. Because with a Roth IRA, you invest money that has already been taxed. But then it is never, ever taxed again. And residents are in the lowest tax bracket that they will ever be in. So investing this way makes a lot of sense.

But a tax deferred retirement account like the 403b that most residencies offer (and would ideally offer in an opt out fashion) is a very close second. In these accounts, money goes in pre-tax and then is only taxed when you withdraw it in retirement. So it’s still really good.

And let’s be honest, in most cases for residents, we are comparing investing in their program retirement plan or not investing at all. So while a Roth may be option #1A, when compared to not investing at all, an opt-out 403b is head and shoulders better!

How can we make this a reality?

  • Talk to your residency program directors and chairs
  • Speak with your training administrators
  • Lobby to hospital administrators
  • Meet with your residency advocacy groups
  • And keep talking about this stuff!

In the meantime, keep up the work improving your own financial education and build healthy habits like these!

And take a look at my actual written financial plan!

What do you think? Should residency programs be required to offer opt out retirement plans? Why or why not? Let me know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected].

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