Are you liable for retirement plan malpractice?

March 10, 2017
Seth Swenson, MBA
Seth Swenson, MBA

Most physicians in America know all about medical malpractice risks, but many are unaware of another type of liability exposure: retirement plan malpractice.

Most physicians in America know all about medical malpractice risks, but many are unaware of another type of liability exposure: retirement plan malpractice. 

As a physician offering a retirement plan such as a 401(k) to employees, you are a plan sponsor and fiduciary to your plan participants. Per the Employment Retirement Income Security Act of 1974 (ERISA), a fiduciary has important responsibilities:

 

  • Acting solely in the interest of plan participants and their beneficiaries

  • Carrying out duties prudently

  • Following the plan documents

  • Diversifying plan investments

  • Paying only reasonable

  • plan expenses

 

As a fiduciary, your personal assets could be at risk and could be used to compensate for fiduciary losses. Proper administration of a retirement plan will result in liability exposure reduction and an optimized plan. 

 

 Create an investment policy statement (IPS) that is easy to follow. ERISA states that a plan must create a clear, prudent, documented procedure and process for investment-related decision-making in relation to the plan’s goals and objectives for plan investment. This statement would include the processes for selecting and monitoring the plan’s investments. The IPS helps to reduce liability exposure by providing evidence of a prudent investment decision-making process. 

Once the IPS is created, it should be communicated effectively to plan administrators and plan participants so that everyone clearly understands it. 

 

 Eliminate revenue sharing. Reduce liability exposure and save on fees by working with a record keeper who uses a fixed, per-participant, fee model and is not being compensated by revenue sharing. 

 

These fees can start out at a reasonable level, but over time, as the plan assets grow, the fees may become excessive, thus increasing liability exposure. Fixed per-participant fees help to ensure that costs do not become exorbitant as the plan’s assets grow and the plan sponsor’s liability exposure is reduced. 

 

 Get a second opinion from a fee-only registered investment adviser (RIA) who specializes in retirement plans. An RIA is a fiduciary and must put his or her client’s best interests before their own. Because they cannot participate in revenue sharing, they should tend to recommend investments and funds that have lower expense ratios. 

Benchmarking your plan with what is currently available and possible is the best way to determine if your plan is paying excessive fees. Fees are relative and you can only know if you are overpaying if you shop around. 

 

 Maintain the required ERISA Fidelity Bond of no less than 10% of the plan’s assets as of the beginning of the year. ERISA’s minimum required bond is $1,000 and the maximum is set at $500,000. A fidelity bond will help to insure the plan’s assets against fraud or dishonesty on the part of anyone handling the plan’s assets. By not having this fidelity bond, it could signal to the Department of Labor (DOL) and others that fiduciary duties are not being met. 

 

 Obtain fiduciary liability insurance. Insurance goes beyond the fidelity bond and covers plan sponsors and their legal expenses  if a breach of fiduciary duty occurs.