What You Need to Know about 401(k) Plans Today

The changes in Employee Retirement Income Security Act (ERISA) regulations governing retirement plans affect everyone — including physicians. In order to comply with the rules, you first must be aware of them.

Last summer, rather quietly, new rules from the Department of Labor (DOL) governing 401(k) plans went into effect. At the deadline all “covered service providers” must have presented the newly required fee disclosures to plan participants. The service providers were also required to disclose earnings (i.e. fees) in excess of $1,000 since every participant has the right to see an accurate breakdown of costs and fees.

Now that the dates are far behind us, retirement plan fiduciaries must be in compliance with the new regulations, as outlined by the DOL — yet some are not. In this article, we’ll discuss what is expected of plan sponsors and making plan contributions.

Responsibilities

If you own your practice and have not provided comprehensive fee disclosures to your employee participants, then it’s likely that you’re vulnerable to lawsuits — and it only takes one employee to blow the whistle on a company that is not following ERISA’s new regulations!

Generally, 401(k) offerings for employees are managed by an outside retirement plan service provider. Now, if management fees and fund offerings are not properly supervised, there may be harsh legal consequences, such as we saw in the $35 million dollar penalty against ABB Incorporated, the plan sponsor that employed Fidelity as their service provider. Neither company properly served the employees’ interests.

Physicians and companies offer 401(k) savings plans as an employee benefit. However, as the saying goes, the road to hell is paved with good intentions. As a plan sponsor, it’s your responsibility to act as a fiduciary, act on behalf of your plan’s participants, disclose all fees, present information in as transparent a manner as possible and follow the law.

The DOL has outlined its standards here. Employers assume fiduciary responsibility and accountability when it comes to the chosen plans, so it is vital to ensure that, independent of the retirement plan service provider’s goals, the plan participants are cared for first. ERISA regulations governing these plans created greater accountability (and therefore liability) for the plan sponsor.

What should every plan have? High-quality, low-cost and flexible choices: this means a wide range of different, low-cost investment options. Furthermore, it is crucial that there is a competent investment advisor acting in the capacity of a fiduciary and available to offer ongoing, unbiased, personalized support to plan participants. This constitutes not only putting the menu of investments together for the plan sponsor in a one-time meeting, but also ensuring that participants who wish to receive more education will be able to make well-informed decisions.

Optimally, this education will occur several times per year with the goal of ensuring the participants choose investments which match their goals with as little risk as is possible. During these meetings, participants will be informed about topics relating to their investment choices, such as the benefits of active versus passive management, rebalancing, and the dynamic asset allocation strategies over the course of a participant’s lifetime.

Making contributions

If participants have not begun making contributions, then these meetings offer an appropriate time to encourage them to do so since it’s never too early to start. The limit of contributing only up to $17,500 in your retirement plan is no more. For most qualified physicians, structures are available to invest up to $50,000-plus in a qualified retirement plan each year. This may also include an after-tax Roth option for diversification and tax-free compounding for after-tax assets. The greater your pre-tax savings, compounded over a lifetime, the more money available to finance retirement.

Plans can be created to increase the amount of capital a participant can save using incrementally more pre-tax dollars; therefore, he or she will have more money available to save while reducing taxable income. At present, people under the age of 50 are able to put away $17,000 per annum, while people older than 50 years can contribute up to $22,500 in their plans.

If there is profit sharing, than workers younger than 50 years can save up to $50,000, while those older than 50 can possibly put away $55,500. The same may be true for saving up to $100,000; it’s a defined benefit plan that, even for those who start late, could allow participants to amass a significant amount of money in five to 10 years given proper management.

Decisions

Optimally, the plan sponsor (you) compares and contrasts the offerings and services available from a range of providers and assess not only the quality and variety of the funds, but, the level of service provided to employees based on the fees collected by the 401(k) provider. The actual, total costs, under the law, must be clear and transparent so as to guide your decision without deceptive, hidden, or unknown fees.

There is no reason to be restricted to a small group of high-cost mutual funds, when low-cost exchange traded funds (ETFs), and individual securities are available. The role of the investment advisors does not begin and end with assisting in selection of funds available for participant in a retirement plan. Rather, consistent information and education is required to fulfill the fiduciary obligation. Each plan participant is entitled to clarity and guidance.

There are studies, including Winning Investment Strategy by Larry Swedroe, that show that over 95% of “actively managed” mutual funds underperform their benchmark, which adds up over the life of a retirement account. Intelligent investors must have access to passively managed funds in the practice’s retirement plan. Access to lower cost, passively managed mutual funds and ETFs, as well as a Self Directed Plan option, can allow more flexibility to participants who wish to have access to individual securities in addition to funds.

Analysis and audit

If your practice’s 401(k) plan has not been thoroughly audited in the past five years, we urge you to arrange one now. A formal retirement plan analysis and audit not only evaluates losses and gains, but creates clarity and legal compliance for all parties: plan sponsor, plan provider, and employee.

Auditing the plan also shows that the plan sponsor is eagerly participating in its fiduciary responsibility by testing the current providers and showing the participants their plan expenses are “reasonable” and have been confirmed by an independent third party.

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Brian Luster and Steven Abernathy co-founded The Abernathy Group II Family Office and the country's first Physician Family Office (PFO). The Abernathy Group Family Office sells no products, receives no commissions, and is independent, employee-owned, and governed by its Advisory Board comprised entirely of thought-leading professionals. They are regular contributors to several publications and blogs including The Huffington Post.

The information contained in this article is provided solely for convenience purposes only and all users thereof should be guided accordingly. The Abernathy Group II does not hold itself out as a legal or tax adviser. If you wish to receive a legal opinion or tax advice on the matter(s) in this report please contact our offices and we will refer you to an appropriate legal practitioner.