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PROTECT YOUR PRACTICE WITH REGULAR 401K REVIEW

In an effort to reward and attract good employees, many dental practices offer 401k retirement plans. What many dentists don’t realize, however, is that they bear a fiduciary responsibility for the performance of those plans. In other words, the dental employer can be held personally and financially liable if the 401k investments perform poorly, if the plan costs are excessive, or simply if there are better plans available.

Many employers mistakenly believe that ultimate liability rests with the investment company that structures the plan and provides the investment options. But in most cases those firms defer fiduciary responsibility by limiting themselves to custodial responsibilities. That means the liability rests squarely on the dental employer.

It is possible for the employer to name an investment manager as the fiduciary. In that case the investment manager assumes fiduciary responsibility for the investment assets. But the employer retains responsibility for making the appointment and must carefully monitor performance of the investment manager.

Understanding ERISA

ERISA is the acronym for Employee Retirement Income Security Act of 1974. It is the primary federal law regulating private pension systems. These include qualified plans like 401ks, tax-deferred annuities, Individual Retirement Accounts and some deferred compensation arrangements.

ERISA came about primarily because of the bankruptcy of the Studebaker Company in 1963. Failure of the company also meant failure of its pension plan, leaving the retirement plans of thousands of workers in shambles.

The purpose of ERISA was to secure pension promises and to make certain that there would be enough plan assets to pay the promised benefits.

The role of a fiduciary

As explained by ERISA, each retirement plan must name the responsible parties (named fiduciaries) charged with managing the plan and its assets.

The term “fiduciary” means anyone with any discretionary authority or control over plan management or assets, or anyone who provides investment advice about plan assets for a fee.

In most cases, 401k plans are structured so that the employer acts as trustee and maintains primary fiduciary responsibility. ERISA law states that a fiduciary must act for the exclusive purpose of providing plan benefits and minimizing plan expenses.

For example, let’s say a dental office is considering three 401k plan alternatives. The dentist chooses a more expensive plan with fewer investment options because his neighbor works for the company selling the plan. In such a case the dentist/employer is at risk for a lawsuit. Under ERISA, the penalties for violating rules are stiff. A fiduciary who breaches any of his responsibilities, obligations or duties is personally liable to make the plan whole for each breach.

It is important to understand that a fiduciary relationship is a higher standard than a traditional contractual relationship. In a traditional contract, each party makes certain promises and is liable for the monetary value if a promise is broken. In a fiduciary relationship, one party assumes responsibility for the affairs of others and must act on their behalf and in their best interest. In the case of a retirement plan, an employer who selects a plan is essentially taking on a financial responsibility for plan participants that could continue for the rest of their lives.

Fiduciaries must conduct themselves with the utmost integrity and fidelity. A breach of a fiduciary responsibility can result in much greater financial liability than breaking a traditional contract.

ERISA requires fiduciaries to act prudently as investors. The outcome of an investment decision is not as important as whether the fiduciary initially used appropriate methods to evaluate its merits. ERISA imposes an “exclusive benefit” standard. One court has interpreted that to mean that fiduciaries act with an eye single to the interest of participants when dealing with plan assets.

In other words, when choosing a retirement plan, the employer had better be able to explain and justify why one was selected over another.

Fiduciaries also must diversify plan assets to minimize the risk of large losses and to avoid transactions that involve conflicts of interest.

Many 401k plans allow investment discretion by the plan participants (employees). But this also does not remove the employer from fiduciary responsibility or liability. In these plans the employer or plan sponsor still must:

• provide a broad range of investment options;
• allow participants to change investment choices no less than once every three months;
• provide participants with sufficient information to make informed investment decisions.

Steps to protect yourself and your practice

Although the rules and regulations for pension plans are complex, there are several steps a dental employer can take to ensure proper compliance.

Review 401k options regularly. Every two or three years, an employer should thoroughly review several different 401k plan options. Keep records that show why a specific plan was chosen over others considered.

Choose a plan that is user friendly. The more investment options, the better. A plan that allows participants to change investments often is preferable to one that allows infrequent switches. Online account access is desirable.

Evaluate cost and performance. Investment performance is highly variable depending upon the type of options available within a plan. Because of volatility and risk, investment options with the highest returns are not always best. As long as a plan offers a reasonable variety of investment selections, opt for the lowest cost.

Choose a plan that treats all employees equally. To comply with ERISA regulations, a plan cannot favor one group of employees over another. In other words, the plan must treat lower paid office workers the same as highly paid professionals.

Provide plenty of information. Hold annual meetings to make certain employees understand how the plan works. If investments in the plan are self directed, make certain plan participants know where they can learn about investment options and how to make changes in their selections. In most cases, the investment company that administers the plan is willing to host these meetings and provide training to plan participants.