Regulatory Changes to Impact 401(k) Plans for Physicians (Part I)

Ask people how much they pay for their 401(k) plan and you’re likely to receive a blank stare. Ask about the plan’s cost for recordkeeping, custodial services, or advisory fees and you’re likely to get an even more puzzled look. Let’s face it, until the past few years most people didn’t worry about such fees. But that’s all about to change as new fee disclosures begin hitting later this year. 

The true costs of 401(k) plans have been traditionally hard to determine. With fees hidden in the fine print of annual statements or often cobbled together in various sections of the plan document, it’s been nearly impossible to determine the actual cost of most plans. But with new regulations hitting this year - and early 2012 - the total cost of 401(k) plans will be much easier to determine.

And these regulatory changes will impact physicians in two critical ways: as individual plan participants and, in some cases, as plan sponsors (especially for those owning their own practice).

Physicians as Plan Sponsors (Employers)
As of April 1st, 2012, plan providers will be required to provide an “Aggregate Plan Fee Disclosure” to all plan sponsors (employers), as mandated under the Employee Retirement Income Security Act (ERISA) § 408(b)(2) revised regulations. This new disclosure will specify the fees paid to service providers of the plan and clearly show the amount of compensation paid to the plan provider(s).

What does this mean to physicians who own group practices? Well, up to now it’s not meant much. After all, their local financial advisor offered to help manage the plan and provide oversight - so why worry, right? But unbeknownst to many physicians, they’ve been established as the plan sponsor of their 401(k) plan. And as plan sponsor, the physician, not the financial advisor, carries the fiduciary responsibility to oversee the plan. That means the physician is required to act in the best interest of plan participants, establish appropriate investment choices, and ensure the plan’s paying reasonable fees. But that’s virtually impossible to do if the physician is not aware of the responsibility. And the end result could spell trouble for physicians - and other employers - that find themselves in this situation.

To provide an example of what fiduciary responsibility means, let’s examine a plan’s fees. How do you determine what’s considered reasonable? Well it depends. Smaller groups are likely to pay higher fees simply because they have fewer participants to spread the fees across. In addition, a smaller group is likely to have less leverage to negotiate fees with plan providers. For instance, a plan with under $1 million in assets will pay an average all-in fee of 2.37 percent, according to a June 2009 report from Deloitte Consulting, LLP, while plans with $100 million to $500 million in assets pay an average of only 0.69 percent in fees. Benchmarks such as these help plan sponsors evaluate their plan and determine if the fees they’re paying are considered too expensive. If so, they should actively pursue a less expensive alternative - or be ready to defend the cost of their plan to employees.

It’s important to keep in mind that even a fiduciary’s lack of action could be deemed a breach of their responsibilities. If plan participants have lost a sizable portion of their account balance to fees, and as plan sponsor you’ve not explored other options, you could be at risk. Remember, if a physician owner is identified as the plan sponsor and fiduciary, they are personally liable for any losses to the plan resulting from a breach of their duties.

Oh, and by the way, ERISA § 404(a)(5) will require the plan sponsor (physician owner) to provide standardized Participant Fee Disclosure Statements to all plan participants (employees) for plan years beginning on or after November 1, 2011, which could add further cost to the plan and increase plan fiduciary scrutiny if done poorly.

For those interested in learning more about this new fee disclosure, there’s an excellent whitepaper called “ERISA 404(a)(5) A Game Changer?” The whitepaper is written by Dalbar, Inc., the nation’s leading financial services market research firm and can be found on their company website.

In part two of this blog post, Hegwood will explore the impact of regulatory changes for physicians as 401(K) plan participants.

Mike Hegwood is assistant vice president at AMA Insurance Agency, Inc. and the officer responsible for the company’s Physicians Financial Partners program. You can e-mail him here.