By Konstantin Litovsky, Guest Writer
Group Practice Retirement Plans: Fix Problems, Improve Your Plan, Minimize Cost
Even though group practice retirement plans typically have a relatively small number of participants, these plans can be more complex and laden with compliance issues and challenges. Older group practice plans often have serious compliance and fiduciary issues, and unless someone knowledgeable takes the time to examine the plan operation and paperwork, chances are that these issues would only be discovered upon an audit by the Internal Revenue Service or U.S. Department of Labor – in other words, much too late. Compliance errors and fiduciary breaches can potentially lead to hefty IRS and DOL penalties and fines, especially if such breaches have occurred over many years. Therefore, it is preferable and almost always less costly to not only fix them, but also to make sure that your plan is run in such a way as to eliminate the possibility of serious breaches, errors, and liabilities in the first place.
Is Your Plan in Compliance?
As a new practice partner or a current plan trustee, the task of making sure that your plan is in compliance is intricate and may involve a number of professionals, including a Third Party Administrator (“TPA”), an ERISA attorney and an ERISA §3(38) fiduciary. Before you evaluate, hire and/or replace any providers, you will need to have a good understanding of the types of issues your plan may have and how you can fix them cost-effectively. While it is important to address any fiduciary and compliance issues, the ultimate goal is to provide plan participants with a platform to build wealth for retirement. In the process of fixing any issues, you can also improve your plan design and minimize the costs paid by all plan participants.
6 Common Issues Encountered with Group Practice Plans
#1 Plan Cost and Fees
Responsible fiduciaries, including individual trustees and other partners within the practice, must make sure that the fees paid by plan participants are reasonable. These determinations, typically done by benchmarking or proposal request and evaluations, must be documented and provable. Most small practice plan sponsors, partners and plan trustees rarely take these steps, and this can subject the plan to excessive fee assertions by DOL, and/or lawsuits by the participants. While such lawsuits are somewhat uncommon for smaller plans, a documented evaluation with an experienced outside expert is important because smaller plans often have other operational aspects that tend to result in higher fees than larger plans. As a result, the determination of reasonableness can be more challenging. A documented evaluation process is critically important to protect against any audit examination or dispute. Because small practice plans often pay significantly higher fees than do larger plans, even if the fees are deemed ‘reasonable’ they may still not be optimal given the alternatives, and there is no reason to accept anything but the lowest fees for the best possible services.
Many older group plans have investment menus with high expense ratio funds. These plans often pay high asset-based fees for plan services, but get very little in terms of service quality to justify these fees. Because many doctors and dentists will accumulate significant assets in their retirement accounts, removing all assets under management (AUM) fees from the plan can potentially save millions in unnecessary expenses for the plan participants. There are a number of ways in which practices can minimize the cost of their plan, and it is the job of your ERISA §3(38) fiduciary to make sure that your plan gets the best services for the lowest possible cost.
If your plan has only self-directed brokerage windows and no fund menu, this can potentially be a significant problem that we’ll address below.
#2 Plan Design
Doctor and dentist group practices typically employ high-earning doctors at various stages in their careers with different financial needs. Younger doctors might still be paying off student loans while older doctors might want to accelerate their retirement savings above what’s permitted in a defined contribution 401(k) profit sharing type of plan with a Cash Balance plan. Some plans started by older doctors might not have a design that’s the best fit for younger doctors. The following plan design elements and considerations may be of interest:
Minimizing Employer Contribution
Group plans typically include profit sharing. If the plan has multiple non-partner employees, the right design should be utilized to minimize employer contribution. This does not always happen, resulting in high employer contribution cost which could be lowered with a better design.
Customizing Profit Sharing Contribution Amount
Some plans may not allow different profit sharing contribution amounts for the partners depending on their ability to contribute. This can be easily fixed with a customized design.
Adding a 401(k) Option
Some plans have no 401(k) option that allows participants to make salary deferrals and catch-up contributions. These plans only allow profit sharing contributions, which prevents those over age 50 from utilizing an additional $6k catch-up contribution. Adding the 401(k) option will also enable higher 401(k) contributions for groups that have a Cash Balance plan where the profit sharing is limited to 6%. This is the case with most non-PBGC plans.
Maximizing Profit Sharing Contribution
Some 401(k) plans do not have any profit-sharing because of potentially significant employer contribution cost. While the cost of adding profit sharing can be prohibitive for some plans, there are ways to design plans to allow for an enhanced contribution for the partners. This is especially true for larger practices where there is significant flexibility to use all available plan design tools.
Adding a Cash Balance Plan
For plans where the practice owners are already maximizing their 401(k) contribution, adding a Cash Balance plan should also be considered. This is not a solution that will work for every practice, so plenty of due diligence is necessary. This includes a thorough design study to determine the benefit vs. cost.
#3 Legal and Fiduciary Compliance
Many group plans have been around for a long time without any compliance or fiduciary oversight. In these cases, many compliance errors stay hidden until an independent review exposes them. Very often administrative and compliance errors are serious enough to warrant going through the IRS voluntary compliance process under the IRS Employee Plans Compliance Resolution System (EPCRS).
In addition to administrative and compliance errors, there are often serious breaches of fiduciary duty by the plan sponsor. Because many smaller practices do not have knowledgeable HR staff and most doctors are not aware of their group’s duties as the plan sponsor, staff is often left without adequate education or access to guided investment choices. This can cause problems for the plan sponsor if such participants experience significant losses in their plan or if a participant decides to sue.
While excessive fee lawsuits dominate the news, most small practice plans should worry more about administrative and compliance errors as they are a lot easier to detect now that DOL/IRS has automated the process of analyzing form 5500 data. There are also a lot more opportunities for such errors. The pain and difficulties of an IRS or DOL audit should not be underestimated, and any such audit almost always finds errors and issues with the plan.
#4 Lack of Plan-Level Fiduciary Oversight and Using Non-Fiduciary Advisers
Many group plans use either a broker or have no investment, fiduciary and compliance advice provided. In such cases, key IRS and DOL fiduciary requirements for participant-directed plans are often not met. These requirements include 404(c) compliance, failure of the plan to operate according to the plan document and various types of discrimination issues related to the benefits, rights and features for employees vs. partners. Group plans might use an adviser who is not a fiduciary and who also provides advice to several of the group’s partners. This is a clear conflict of interest and a breach of fiduciary duty that can result in scrutiny on audit and other liabilities. Oversight over all of the activities of non-fiduciary advisers is essential, especially if the adviser actively solicits business from plan participants. The partners who are plan fiduciaries can be held fully personally responsible for all actions of such advisors.
#5 Brokerage-Only Plan Platforms
Many group plans are brokerage-only plans where every participant has their own personal brokerage account with nearly unlimited investment choices. This is often done to allow each individual partner to invest their money using a brokerage of their choice. However, this makes the compliance effort very difficult to implement because of the number and variety of such accounts.
Self-Directed Brokerage Accounts (SDBAs)
There are numerous problems with plans that use SDBAs. For example, if each account is not titled correctly, such mistitled and potentially disconnected individual brokerage accounts may not afford the legal protection of non-assignment and alienation from malpractice claims and creditors. As a result, these accounts can be attached by claimants in malpractice actions. This is likely the case with at least some of the accounts in older plans. Quite often, certain types of investments that are not allowed in 401(k) plans are present and can result in tax and other liabilities. SDBA holders rarely know that the investments in their SDBA are illegal or taxable. Moreover, frequent trading in a retirement account is something that’s frowned upon by the IRS and DOL. Since this information must be disclosed to the government, such plans will receive significant scrutiny from auditors.
SDBA Conflicts of Interest
SDBAs are often managed by outside advisers who charge asset-based fees that are paid out of the accounts. If any of the fees are paid out of SDBA assets, this also creates a big problem for the plan sponsor who is supposed to make sure that any fees paid from plan assets are reasonable. Sometimes the plan sponsor has no idea what fees are charged in SDBAs, so they have no way of knowing whether the fees charged are reasonable.
Addressing SDBA Issues
If your plan is a brokerage-only plan, plan participants can keep their existing brokerage accounts by implementing the right fiduciary process. The first step is to add a fund menu with low cost investments and a number of managed model portfolios, including a qualified default investment alternative (‘QDIA’) portfolio. Adding these items is almost always an attractive option for partners and staff. The next step is to require brokerage account holders and/or service providers to complete a detailed survey. The plan fiduciaries will keep documentation of the brokerage account data, including the fees charged, how the fees are paid and investments used in each account, among other items. The appropriate utilization of your ERISA 3(38) fiduciary adviser and/or ERISA attorney will be very helpful and instrumental in making sure that the responsible and liable parties implement this process appropriately.
New Fiduciary Rule Fallout
Because of the pending implementation of the new Department of Labor ERISA Fiduciary Rule, many SDBA advisers and firms that service SDBAs have dropped or will drop this part of their business altogether. Others are outsourcing SDBA management in ways that are harmful to the plan sponsors by requiring that the practice partners enter into a fiduciary relationship on unfavorable terms.
#6 Cash Balance Plan Risk Management Strategies
Cash Balance plans are often mismanaged by not considering actual risks to the practice that might lead to an early plan termination and asset liquidation under less than ideal circumstances. This, in turn, can lead to significant losses for plan participants. These plans may also have too much portfolio volatility and often excessive investment management costs via asset-based fees. With a high volatility portfolio, there is a real risk that assets would be liquidated after a market downturn if one or more participants take significant distributions, forcing the rest of the partners to make additional contributions to fund the plan.
In some cases, there is no fiduciary oversight over the plan. Services are often provided by a non-fiduciary adviser, which essentially makes the plan fiduciaries and partners fully responsible for the actions of the adviser. Because there is no participant direction in a Cash Balance plan, the plan sponsor is thus directly responsible for investment management of participant money, which is a significant fiduciary risk.
What Really Matters for a Group Practice Plan
There are many different types of issues that have to be addressed with group practice retirement plans that require a team of experts including a TPA, ERISA §3(38) fiduciary and possibly even an ERISA attorney. Whether you are starting a new plan or have an existing plan, there are basic things that should be covered to make sure that your plan is run smoothly for the benefit of all plan participants.
Governance and Fiduciary Process
Without a solid framework to make key retirement plan decisions, your plan would always be several steps behind. Do you know your fiduciary duties and obligations as the plan sponsor? Do you have a prudent fiduciary process in place? Is there an appointed committee to oversee and interface with the plan’s administrative and investment service providers? Are you doing everything possible to minimize your plan cost while getting access to the best investments available on the market? Is your plan design optimal for your practice?
Fiduciary Oversight
Many plans use professionals who simply do not know the rules of ERISA-governed plans, so hiring an ERISA 3(38) fiduciary adviser who is independent and works exclusively for the plan sponsor will ensure that your plan receives a number of key services. These include helping the plan sponsor create and follow a prudent fiduciary process, select the best service providers, minimize plan expenses and provide access to the best low-cost investments available.
Open Architecture Providers
While selecting a good record-keeper is important, having direct access to your own independent TPA and an ERISA §3(38) fiduciary adviser is key. The TPA will take on the administrative and compliance duties so that you don’t have to do it yourself or rely on a record-keeper who might not be able to provide the level of service necessary for your specific plan. Selecting the best independent providers is always better than selecting a single large provider. You will get better results if you use independent providers who are specialists in their respective areas rather than hiring a single company whose employees or affiliates are providing you with services.
Using a single ‘bundled’ provider will not guarantee you the best of everything cost-effectively. In fact, the cost for bundled providers can be significantly higher without any added benefit. In terms of efficiency, having a plan that consists of several open architecture service providers can be just as good as one where everything is under one roof. Independent providers will be working for you and this will also ensure that you have adequate checks and balances. In contrast, a single provider is much less likely to make sure that other parts of the plan are operating properly. It may be appropriate to have a smaller independent provider take ownership of their specific duties rather than rely on a single organization where employees do not provide individualized services and are merely servicing you as they would thousands of other clients. An independent investment adviser (ERISA §3(38) fiduciary) is always better than services provided under the umbrella of the record-keeper because a truly independent adviser will only be working in your best interest, rather than for a third party. You can, therefore, be assured there are no conflicting loyalties. Always make sure your providers are looking at your plan holistically, from all angles. If an issue does arise, it is essential that your providers can recognize it proactively and address it before it becomes a problem.
Fixed Fee Pricing
Small plans pay some of the highest fees for plan services. One way to make sure that you never overpay for your plan services is to use independent providers who only charge flat/fixed fees. It is not necessary to pay any asset-based fees out of your plan’s assets. Asset-based fees will cost all plan participants significant money over time, and you can always find providers who do not charge asset-based fees for their services. When getting proposals from various vendors, always compare the numbers side by side using a calculator that estimates the cost of running your plan over time. Asset-based fees compound, so only a long-term analysis will help you visualize the benefit of minimizing asset-based fees.
[Editor’s Note: Konstantin Litovsky is the founder Litovsky Asset Management, a wealth management firm that offers flat fee retirement plan advisory and investment management services to solo and group medical and dental practices. Konstantin specializes in setting up and managing retirement plans, including 401(k) and Defined Benefit/Cash Balance, and serves in an ERISA 3(38) fiduciary capacity. Litovsky Asset Management is a paid advertiser and a WCI Recommended Practice Retirement Plan Provider, however, this is not a sponsored post. This article was submitted and approved according to our Guest Post Policy.]
What do you think? Have you been in a position to select or evaluate a group practice retirement plan? Share your experience and comment below!
Hello,
I’ve been looking at this for our group of about 100 docs for the last several months. We’re paying .8 per $1000 asset based fee to the retirement company. In addition are the associated investment ER’s ranging from .3-1.2. Overall seems to be high.
Which company does your group use? Are there other options out there easily vetted?
This is way too much. Your expense ratio for the funds should average around 0.15% or so, and you should NOT be paying AUM fees for anything in the plan. You can easily switch to a lower cost providers, but for that to happen you should be working with a flat/fixed fee ERISA 3(38) fiduciary who works exclusively for you and does everything in your best interest. There is way too much money in retirement plans, so most providers out there are very happily charging you high AUM fees for not much service, and it is in your power to make the change.
My group of 6 physicians allows the physicians to invest their retirement money any way they want. The plans vary in their fees and risks. We purchased fiduciary insurance a few years ago to protect the two plan trustees at a cost of ~$1,000/year. Later, we thought it would be cheaper and safer to simply make every partner a trustee. Our thinking was that a plan participant could not sue in the future due to high fees or high risk if he himself was a plan trustee.
Wow! Every physician his own trustee? You are playing with fire. All it takes is for one physician to get into financial trouble and ” borrow” from “his” pension trying to avoid his personal financial disaster. It could void the entire pension plan for everyone. A major disaster for all. I have seen this before years ago. Close the plan, let everybody roll “their” pension into an IRA. Then go to Fidelity or Vanguard and they will set you up with a safe and reasonable plan. Remember, it is hard to go broke at Vanguard or Fidelity.
Exactly! If one of them messes up their own account, the whole practice is liable, including the individual doc.
Fiduciary insurance isn’t worth the paper it is written on:
https://www.jdsupra.com/legalnews/the-worthlessness-of-the-401k-fiduciar-36186/
If you don’t have any non-HCE employees, certainly you can make all partners a trustee, there is no law against that.
And yes, you can have self-directed accounts for each partner. I’ve discussed this above. If there is nobody overseeing what’s going on in each of these accounts, then collectively the practice is responsible (and individual trustees are responsible) if they break the law and do things wrong in their individual accounts.
So your arrangement is not going to help you one bit. The only thing that will help is having competent providers, such as a TPA trained in compliance. There is no reason to have self-directed accounts in a retirement plan, this opens the plan to a lot of liability that I described in detail in the article.
My ideal arrangement (if you must self-direct) is to set up a menu of funds, and to use a single brokerage window (such as ameritrade) from within the plan. As long as your brokerage window is part of the plan, it will be a lot easier to monitor than if every partner just opens their own SDBA (at least this is how I’m interpreting your comment).
Why anyone would want to make a partner the trustee at all is beyond me.
Actually, you should select some partners as trustees. If you don’t, and if you have a company that acts as a trustee, then they are not necessarily acting in your best interest, because they only have to act in your best interest as long as it suits them (and legally you can’t do anything about it). I’ve seen this arrangement, and the practice in question was paying a huge sum of money for not really much service, but the company they hired was a ‘trustee’. They don’t have to provide the best/lowest cost solutions to you, as long as those are ‘reasonable’ and even that is in their estimation – if you get a fully bundled service, you won’t have that type of provider replace a higher cost part of the service because ultimately they are the beneficiary of the fees you are paying, so they have no incentive to lower your plan cost, and all of this is happening even as they are a trustee for the plan. You see why you can’t beat having one or more of the partners be trustees?
Of course, it turned out that partners did not really know their fee structure very well, and that they were overpaying for the services they were getting. Also, on the compliance side, they just assumed that their appointed trustees would take care of everything (because the TPA was also working for the same firm), and they didn’t even know what was going on compliance-wise with some potentially questionable things they were happening inside the plan. Nobody seemed to have all of the information together. For this reason I always recommend that at least one or more of the partners get involved and keep track of all of the information about the plan because you never know when you will need to replace your providers, and if all of the knowledge about the plan is with the provider you are replacing, there goes everything to help you manage your plan prudently going forward.
Group practice plans aren’t exactly plans with 1000 participants (at least not most of them), so there should always be someone to step up to the plate because after all, this is all your money, and if not you, who will be the best steward of your retirement savings?
Thanks for the insightful article Kon. I think most docs and administrators (especially at smaller practices) have no clue about the issues at hand.
Our non-megacorp center has 401(k) and 457(b) plans, the latter only for the doctors. It seems our executive director (a non-physician, but a HCE) is the trustee. He hired an advisor (with a fiduciary responsibility) to help with the plans. This advisor is employed by BigInvestCorp A, which our 457(b) plan is with, but our 401(k) plan is with BigInvestCorp B.
During my first year here I was only able to contribute to the 401(k). I asked what my rollover options were from my previous employers 401(k) plan were. I was given 3 options by the advisor: 1) rollover the funds into an IRA with BigInvestCo A, which he of course would open for me. I thought this was fishy, 2) rollover the funds in an IRA that I open on my own (what I eventually did), or 3) keep funds in the 401(k) plan at my old employer.
So even if an adviser is a 3(21) fiduciary working for the SAME company that runs your plan, this is a huge conflict of interest. The trustee should have done the legwork, and should have hired an independent fiduciary for starters. Usually there are two fiduciaries: a 3(38) that works on plan level advice and a 3(21) that does participant level advice. They have to be independent, and a 3(21) has to be overseen by a 3(38).
The rollover advice is a fiduciary advice, so a 3(21) who provides it can’t just say ‘roll your money into provider A’ without considering all of the alternatives and costs, and this puts the plan sponsor on the hook if such advice is not provided consistent with the fiduciary duty of the adviser. He just gave you 3 choices without taking any responsibility on himself to provide an actual fiduciary advice.
When someone asks for a rollover advice, the first thing that has to be done is a fee comparison of various options, and the second is to understand which option(s) would be the BEST choice for the participant. Then you can give several alternatives, less those that are obviously not competitive. It is more than OK to say, open a Fidelity, Vanguard or Schwab IRA (especially if you don’t work for either). Also, an adviser can say ‘our plan has Admiral shares of funds, and no AUM fees, so when you roll your IRA money into the plan, you will get the benefit of that vs. opening your own IRA’. They should not tell you for example to roll the money into a high cost plan if the adviser is benefiting directly from that by increasing the AUM for his fee. As you can see, fiduciary or not, if a fiduciary is an employee of a company and not independent, it almost does not matter.
However, plan sponsor is on the hook for the behavior of a 3(21) acting this way, because a 3(21) is a co-fiduciary, and they have to be overseen by someone who works for the practice. In your case, nobody is overseeing them, and worse yet they are working for a plan provider, not for you (so this conflict makes their advice questionable).
We are evaluation some options as well. We have about 20 docs, and about 20 PAs along with a large number of ancillary staff totaling about 300 participants. Currently, we have a pooled 401K with assets split between two advisory firms who charge some AUM. Both of these firms invest in individual stocks and no index funds or other funds last I checked. We also have a separate TPA. Is this a good setup for this type of practice?
Individual stocks? No. I’d threaten to sue you (and if I had to I’d win) if I were one of your docs.
I’ve seen such arrangements, I’d say that this is absolutely the worst set up, especially if you don’t have an ERISA 3(38) managing the account. Even if you have an ERISA 3(38) managing this account, they can easily be sued for mismanagement if they invest in individual stocks in such accounts. While I am a big proponent of pooled plans, I would not recommend a pooled plan in this case.
Plan sponsor is 100% responsible for investment performance in a pooled plan if there isn’t an ERISA 3(38) managing it, and I don’t know any ERISA 3(38) who would use individual stocks ever in any type of plan, because this is simply reckless in a retirement plan. So if the investment manager (who is not an ERISA fiduciary) screws up, plan sponsor is open to lawsuits regarding investment performance and the cost of investment management.
Also, I’m assuming that this is salary deferrals in one account and profit sharing in the other account – I’ve seen such arrangements before. The problem is also that you must have a way of equalizing the investment expenses, because one account might get a higher expense ratio than the other, and if some participants have more in one than in the other, that can create a fiduciary problem right there.
In any case, I don’t see any benefits to this arrangement, only pitfalls. If you want the best of all worlds, here’s what I recommend:
1) Hire an ERISA 3(38) fiduciary (fixed fee) to review your plan and to propose an alternative solution that would eliminate any future ERISA and fiduciary issues. They will evaluate your plan and potentially bring in an ERISA attorney if there is a need to fix any current outstanding issues that have to be fixed. Often, going to a low cost record-keeper and hiring an ERISA 3(38) to oversee the plan will fix most of the issues that arise from using arrangements as you described.
2) Your 3(38) will help you select an appropriate low cost record-keeper for the plan (open architecture, whether a fully fixed/flat fee, or that has a small custodial fee).
3) Given the size of the plan, you should have individual direction, but there is a way to make sure that those who have no idea what to do get adequate help with investment selection. For that to happen the ERISA 3(38) should build a number of managed low cost portfolios, and also select a QDIA (default investment) so that participants are placed in a portfolio even if they don’t make an election. Also, it is not difficult to hire a 3(21) to provide individualized advice and education. For the type of cost paid by plans like yours it is most likely possible to do all of this and have money left over as well.
ERISA 3(38) fiduciary (fixed fee) hire for review – how much does this sort of review cost?
Not sure what others charge, we typically do this review a no cost as part of the introductory evaluation. If a deeper review is needed, appropriate professionals would provide a quote for their services, but usually the top level review can provide a good idea as to what can be improved and/or fixed. That is, of course, provided that the information is available, which is not always the case. Sometimes all of the details only come out when there is some digging involved, which is good too because at some point someone has to do it.
So Ken has moved the scare tactics over to WCI now. The truth is that the IRS has made it much safer and easier to be the fiduciary for a small office retirement plan. Using a reasonable diversification for asset allocation, with low expense ratio funds, and using a TPA for plan design and paperwork compliance and you’re fine. There has not been a single case where a doctor has had a problem with those conditions. Ken has spent years on Dentaltown trying to scare docs into believing they are at risk, but the facts don’t line up with his narrative.
First, this is an article on larger group practice plans, not solo owner plans. Group plans have a lot more sophisticated issues that have to be handled carefully, because the cost of non-compliance is significantly higher. That is not to say that smaller plans don’t have issues, but those can be addressed without having to use an ERISA attorney. And not all TPAs are qualified to handle retirement plan compliance – only the ERPAs should be trusted with this type of task, and a typical TPA (even if using an independent firm) is rarely experience enough in this matter.
This article has been thoroughly reviewed by an ERISA attorney, and also corresponds to my personal experience working with group practice plans, and everything in this article is factually correct (in fact, this does not cover everything as there are many more examples of how larger plans can have significant issues with them).
Can you substantiate your statement ‘There has not been a single case where a doctor has had a problem with those conditions.’? I often see cases of smaller group practice plans spending a lot of money on legal fees because of issues with their plans. I also see many plans that have potential compliance issues that would be significant if they came out during an audit. Would you recommend that such plans be simply left alone and nobody needs to fix them up?
Also, I’m interested in finding out more about my scare tactics, and specific examples where what I’m saying is wrong or misleading in any way. In fact there are plenty of cases that you just don’t get to hear about. The whole point is that you do not need to spend a lot of money fixing up a plan that has been out of compliance. You should talk to an ERPA or an ERISA attorney and you’ll quickly learn about all of the IRS and DOL audits and the costs associated with those. Yes, just like with individual tax returns you might not get audited next year, but that’s not a reason to NOT care about retirement plan compliance, especially if this can be done cost-effectively.
Most doctors who join a group practice never had their own personal plan, and even fewer have experience running a plan with lots of assets and many of participants, as well as often complex internal structure that originated many years before they joined the plan. They need all of the education they can get on the topic of retirement plan compliance, so the recipe of ignorance and following advice of a typical TPA (which is neither a fiduciary, nor has experience with investment management or fiduciary compliance, or has to provide you with any advice altogether) is really not an option even for smaller solo owner plans. Educating yourself about retirement plan compliance is important, but at some point it is simply much more efficient (and cost-effective, especially for larger plans) to hire the right providers who can make sure that their plan is in compliance as well as has the best lowest cost investment options.
I assume you mean Kon.
Why not send a guest post about your experience setting one up?
Kon, appreciate you adding to this site yet again. Haters above.
Can you clarify the concerns over having the partners being trustees? All the owners are trustees in my group. They are trustees of the overall plan. Plus we have the seperative fiduciary, compliance people, etc.
What such concern above for physician trustees?
As a plan sponsor, all owners, whether trustees or not are responsible for your plan’s compliance. You can outsource some fiduciary duties (such as investment selection and management) to an ERISA 3(38) (please note that ERISA 3(21) is a co-fiduciary, so you retain full responsibility as a plan sponsor, they are merely a provider of advice, which is often conflicted if a 3(21) is not independent, so as a plan sponsor you have to determine whether their advice is to be accepted and implemented). With a 3(38) you don’t need to provide instructions to them, but you do need to oversee them (because as with a 3(21), there are often conflicted advice provided). As far as administrative compliance, you nave to be sure that your TPA has that capability. I often see TPAs being very passive, so as a 3(38) I have to initiate the compliance conversation. Also you want your TPA separate from your 3(38) to provide better checks and balances and better oversight.
The role of trustees is to oversee plan service providers, and to replace them as necessary. Whether all partners are trustees or not, that’s not an issue. As far as fiduciary responsibility, all partners are responsible, even if only one or two do all of the work. It might be a good idea for other partners to also be trustees but this is only really practical if you have a handful of partners, and only if they are going to be doing the work of a trustee. A trustee usually takes an active role of interfacing with the service providers, and also makes decisions on whether to replace providers or not. Also, their signature is often on all of the relevant plan documents, so at least they have to be aware what is going on in the plan.
One thing to note is that many providers interpret their duty to act ‘in the best interest of plan participants’ to mean charging ‘reasonable’ fees and using ‘reasonable’ investment expense ratio funds as compared with other similar plans, so if your plan is small, you can expect that even ERISA attorneys are fine if your funds/providers charge you a relatively high fee (even if they are fiduciaries) as long as other plans of this size charge similar fees. In that sense, a fiduciary can still not act in your total best interest legally (this is a huge loophole in the law, in my opinion). Best interest means always getting the best of everything cost-effectively, yet that is not how the industry operates.
There are ways to outsource the role of a trustee, but the costs can be significant, and for a small plan I would not recommend it. Someone at some point has to oversee all of your providers, and there aren’t too many firms taking on the role of the trustee for retirement plans, so the costs are up there, and the quality from what I’ve seen is questionable at best. At some point it is not the title that matters, but the results.
My belief is that if everything is set up correctly and is overseen by competent providers, there isn’t much you need to worry about as far as lawsuits. And with the right providers even IRS/DOL audits are not an issue, as long as the plan is in full compliance.