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

In the first part of his blog post, contributor Mike Hegwood detailed regulatory changes that will impact physicians as 401(K) plan sponsors for their employees. Here, he explores the impact for physicians as plan participants.

Many physicians currently participate in 401(k) plans. And while most are likely familiar with the benefits these qualified retirement plans provide - namely the ability to contribute pre-tax dollars and earn tax-free growth - most are unfamiliar with the costs associated with these plans. In fact, a survey conducted earlier this year by the Association of American Retired Persons (AARP) revealed that 71 percent of respondents thought they paid no fees for their 401(k) plan.

But as I mentioned in last week’s blog, that’s all about to change as new regulations hit later this year, requiring plans sponsors to fully disclose all fees and costs associated with their plan in a standardized format.

Physicians as Plan Participants (Employees)
While these new regulatory requirements could be problematic to physicians serving as plan sponsors and fiduciaries; they will likely benefit physicians as individual participants in 401(k) plans. The future transparency of these fees will undoubtedly force higher cost plan providers to seek lower cost alternatives to remain competitive. In turn, individual plan participants (like physicians) should begin to experience lower fees - meaning more of their money will actually go towards their retirement.

Why is this a big deal? Well, even a slight reduction in fees can have a dramatic effect on a retirement account. For instance, a missed opportunity to lower fees by just 1 percent is significant. According to the United States Department of Labor, “a 1 percent difference in fees can reduce your account balance at retirement by 28 percent.” Apply that to an account balance of $100,000 and you have only $72,000 for retirement. And on a $1,000,000 retirement account that equates to a loss of $280,000! That’s a pretty significant amount of money to be left on the table.

But plan participants should be leery of plan providers positioning themselves as the lowest cost option. In some cases, the lower fees might be achieved by skimping on service. In other situations, fees might be reduced by limiting investment choices and flexibility. So the goal isn’t merely to find the lowest cost plan. The goal should be to find a plan provider that offers a strong service platform with a good mix of investment choices, all at reasonable fees.

Moving Forward
As these new regulatory requirements hit, physicians with 401(k) plans will be impacted one way or another. Those established as plan sponsors will likely feel more pressure to manage their fiduciary responsibilities as they become subject to more scrutiny by plan participants. So all plan sponsors should educate themselves on these new fee disclosures now, before it’s too late.

For starters, plan sponsors might consider taking the following steps to become better positioned when the regulatory changes are finally implemented:

1. Determine your plan’s “all-in” cost and benchmark it against comparable plans.

2. Explore lower cost alternatives to your existing plan.

3. Look for ways to minimize your fiduciary responsibility.

You might also consider speaking with a financial services professional for additional ideas. And remember, before you make any final decisions consult with your attorney and tax advisor.

As these regulatory changes unfold, you may begin to see a number of plan providers exit the market. The increased pressure on costs will simply make it too difficult for some to compete. But change also fosters opportunity. Those plan providers able to effectively create scale utilizing alternative structures - such as multiple employer plans - and those able to leverage technology will likely emerge as the winners. So while these new regulatory changes might seem like a daunting challenge for many, ultimately, they should result in better 401(k) plans for plan sponsors and participants alike.

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.