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Fall 2015


Managing the “L” Word in Your Practice’s Retirement Plan (Liability, That Is)

Patrick D. Runyen, CPA, CFP®
Independence Advisors LLC, Wayne, PA

Would you consider yourself an investment professional in your spare time? I didn’t think so. But many doctors who run their own practice are unknowingly held to that standard as fiduciaries to their 401(k) plan. If you’re playing that role, in part or whole, you’ve opened yourself up to personal liability if you (or those to whom you’ve delegated the decisions) fail to make the best choices for your plan’s investment line-up.

This situation may sound far-fetched—not unlike asking your receptionist to perform medical procedures between phone calls—but I’ve seen it happen time and time again. Many small medical practices have their own retirement savings plans, typically a 401(k) or the very similar 403(b). You may start your plan with the best intentions: to give yourself and your employees the ability to build tax-deferred retirement savings. But someone has to decide what investments will be offered in the plan. Someone also must accept fiduciary duty for the decisions made. And lastly, someone must provide investment education to employees to help them effectively manage their funds.

As an unpleasant surprise to many medical professionals, the investment selection decision-maker may NOT be the one at fiduciary risk. The fiduciary risk might well remain with you, the employer, who is also referred to as the plan sponsor. That means that if the investments are ever deemed inappropriate or mismanaged, you or whoever in your practice is the named plan sponsor could be held personally responsible to restore any plan losses and/or profits improperly acquired through this breach of fiduciary duty.

According to the US Department of Labor, those named as a 401(k) plan fiduciary “must act prudently and solely in the interest of the plan’s participants and beneficiaries.” This seems fairly logical. It’s important to know, however, that many of the brokerage and insurance companies currently administering these plans are either choosing not to take on the fiduciary responsibility, or are unable to act in that capacity.

If the investment companies aren’t responsible for ensuring that their investment choices and fees are appropriate, then who is? It defaults to the decision maker (the plan sponsor) at the company or medical practice. That means if an employee sues because of an inappropriate investment choice or because investment fees are higher than others available in the market, your personal assets could be at risk.

This may seem far-fetched. You’d like to believe your employees would never sue you over the 401(k) benefit you have provided them. But read some of these recent examples at large companies:

  • In November 2014, MassMutual agreed to pay $9.745 million to retirement plan participants, to settle a suit that claimed they breached their fiduciary responsibility by receiving revenue-sharing payments from investment advisors and mutual fund companies.
  • In December 2014, Nationwide settled for $140 million, for similar revenue-sharing payments.
  • In February 2015, Lockheed Martin settled for $62 million, over a lawsuit claiming the company offered investment options with excessive fees in its retirement plan.
  • In August 2015, Boeing, with the second largest 401(k) plan in the country, reached a settlement in a class-action lawsuit that alleged the company mishandled its 401(k) plan by including investments with excessive fees.
  • As of August 2015, Edison International is being sued by its employees, who are accusing the large utility company of favoring higher-cost mutual funds in its 401(k) plan.

Even if your practice is graced by an abundance of satisfied employees, all it takes is one current or former disgruntled staff member to set the lawsuit ball in motion. So how do you protect yourself and your company? Here are three key questions you can ask to determine where you stand, and what additional actions may be warranted:

1. Who are the Fiduciaries?

A retirement plan must have at least one fiduciary named in its written plan. If no third party is named, it’s highly likely that you or someone in your medical practice is fully liable for any fiduciary breaches that may occur. Fortunately, there are ways to pass portions of your fiduciary liability to a third party. Specifically, you can pass on the fiduciary duty associated with prudent investment management to an investment professional. Only certain types of financial institutions, such as Registered Investment Advisor (RIA) firms, are currently held to a fiduciary standard. As such, only these types of firms can accept this fiduciary duty. (That said, there are recent rumblings out of the Department of Labor that they may require brokers and other companies to be held to the same standard, so stay tuned.) Even if you hire an RIA firm to take on the fiduciary investment management role, you still retain a fiduciary duty to select a worthy manager to begin with. But by selecting an appropriate ally, you can effectively pass at least the investment management buck on to the experts.

2. What Type of Fiduciary Are They?

Not all fiduciaries are created equal. There are different levels as discussed below. We suggest hiring a 3(38) fiduciary, also called a Discretionary Asset Manager. Named after the ERISA regulation that guides plan management, a 3(38) fiduciary can take on all investment-related decisions within the plan as well as the fiduciary responsibility for the decisions made, which removes the risks of related liabilities from your shoulders.

Do be sure that the firm accepts the role of 3(38) advisor in clear, unambiguous writing. What we see instead are brokerage houses and insurance companies providing no fiduciary relief to the company, or providing a lower level of delegation, such as a 3(21) co-fiduciary or an even hazier “fiduciary warranty,” which warrants very little. See Figure 1, Fiduciary Burden vs. Fiduciary Delegation. In short, when looking for someone to work with, protect yourself by ensuring you are receiving full 3(38) fiduciary protection, in writing. Fuzzy, feel-good phrases are not the same thing.

3. What Fees are You Paying?

Among the most common misperceptions we hear when speaking with medical practices is the erroneous assumption that their 401(k) plan is “free,” since they never have to cut a check to pay for its management. This is a classic bait-and-switch trick, preying on those who forget that if something sounds too good to be true, it very likely is. You may not be paying the fund company directly, but you and/or your plan participants are still paying, typically through excessively priced investment options within the plan.

In most cases this is worse than paying transparent fees, since the individuals in the plan are paying them rather than the business. And those employees with the highest plan balances (typically the business owners themselves) are the ones paying the lion’s share!

For your own and your employees’ retirement savings, it’s critical to understand the fees you are paying—all of them. Because dollars spent on expenses are dollars lost to your tax-deferred wealth accumulation, it’s vital to keep your costs as low as possible. In most cases, a fund’s expense ratio should not exceed one percent. In fact, depending on the asset class being targeted, many good selections are available for considerably less than that.

Those in the medical profession are all too familiar with the “L” word (i.e., liability). The word itself can cause anxiety, just seeing it in print. Fortunately, as an anesthesiologist, you already know of ways you can greatly reduce your medical practice liability risks. For example, you know it’s important to be an expert at what you do. You know how to delegate other areas of expertise to trusted allies. You know it’s important to always read the fine print, and to follow carefully documented procedures every step of the way. Apply these same insights to your retirement plan’s fiduciary liabilities, and you and your employees alike should be able to breathe easier about your retirement savings.


Patrick D. Runyen, CPA, CFP®, is a Financial Planner at Independence Advisors, a feeonly Registered Investment Advisory (RIA) firm that helps individuals, including many anesthesiologists, achieve their financial goals. Pat is a Certified Public Accountant and Certified Financial Planner®. His email address is prunyen@independenceadvisors.com.