Are you liable for retirement plan malpractice?

My recently published article in Medical Economics to Doctors comparing failing to comply with their fiduciary duty with physician malpractice. There is a legal responsibility to providing comprehensive retirement plans to employees that should not be overlooked. My parents are both Doctors and I have first hand experience in seeing how large private practice offices could use a second opinion when it comes to the health of their retirement plans. This is one case where the doctor and the staff could gain from a little financial TLC of their own. Please contact me directly if you have any questions about this important subject.  seth@orchidwealthmanagement.com   1(650)334-6104

Click Here to Read Article at Medical Economics Site

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Are you liable for retirement plan malpractice?

Seth Swenson, MBA, President at Orchid Wealth Management

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) 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 under ERISA, including:

• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
• Carrying out duties prudently
• Following the plan documents (unless inconsistent with ERISA)
• 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. Additionally, these obligations can follow you into bankruptcy via liens on personal property and garnishments of future income. Lawsuits are expensive, time consuming and stressful. There is no immunity from fiduciary liability lawsuits. Any business that provides a retirement plan could be sued.
Physicians and smaller companies have been sued by former employees. These companies were sued because they allegedly either ignored lower-cost options that were available to their plans or simply were not aware that there were other options.The problem is that once employees were ready to retire, they were coming up short on retirement savings due to excessive fees.
Proper administration of a retirement plan will result in liability exposure reduction and an optimized plan. Here are five ways to reduce fiduciary liability.

1. 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. If a plan is being audited, the U.S. Department of Labor will routinely ask for a plan’s statement. Once the IPS is created, it should be well communicated to plan administrators and plan participants so that everyone clearly understands it.
2. 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[CM1] . Talk with your retirement plan advisor about finding a record keeper that offers this fixed per-participant fee structure.
3. Get a second opinion from a fee-only registered investment advisor (RIA) that specializes in retirement plans. An RIA is a fiduciary and must put their client’s best interests before their own and since 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.
4. 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.
5. Obtain fiduciary liability insurance. Insurance goes beyond the fidelity bond and covers plan sponsors and their legal expenses  if a breach of fiduciary duty occurrs. 

Seth Swenson, MBA is a retirement plan advisor and is President of Orchid Wealth Management in Palo Alto, CA