Designing a Group Retirement Plan Part 1: The Trustee

Setu Mazumdar, MD

Physicians can find themselves the trustee for their group's retirement plan, and if they don't know what they're doing, they can be making a lot of mistakes.

If you are a partner in an independent group, you are probably contributing to your group’s retirement plan — typically a 401(k)/profit-sharing plan. Or you may be a physician partner in your group and have been designated as your group retirement plan’s trustee.

When was the last time — if ever — that you closely examined your group’s retirement plan? I’ve looked at many group retirement plans and have discovered that most of them are broken. That’s a shame because for many physicians your group’s plan is a large part of your overall retirement portfolio.

Most plan participants and trustees have no clue about the process for selecting investments in the plan, the role of various parties in administering and advising on the plan, or the fees associated with the plan. If you are a plan trustee, I bet you don’t know what your responsibilities are. Over the next several articles I’m going to uncover the mistakes you’ve been making in your group retirement plan and what you can do to fix them.

Goals of a group retirement plan

The goals of a group retirement plan are simply to:

1. Ensure a successful long-term investment experience for all plan participants

2. Maximize the chance of achieving every plan participant’s retirement goals

To determine whether your plan meets these two goals, ask yourself these two questions:

1. Are the plan design, features and investment choices committed to these goals?

2. Are the outside parties involved in the plan and the way those parties are paid in line with these goals?

The focus should only be on the plan participants — in other words you.

Defining the service providers

Lots of people have hands in your group’s retirement plan. You need to know who they are before figuring out whether your plan needs help. The main players include:

Plan trustees

Usually one or two physician partners in an independent group, they control and manage the assets of the plan.

Financial advisors

This includes either independent registered investment advisors, stockbrokers from large brokerage firms (called registered representatives) or insurance agents that sell group retirement plans.

Third-party administrators/record keepers

A company that administers the plan, designs the plan, provides the platform on which plan participants make investment choices, and report plan assets to the IRS.

Custodian

The company where plan assets are kept.

Mutual fund companies

The providers of the investment choices to the plan.

Government

The Employee Retirement Income Security Act of 1974 (ERISA) is the law that sets the standards for retirement plans and the Department of Labor (DOL) enforces ERISA.

Who are the fiduciaries?

Every plan will have at least one fiduciary starting with the plan trustees. According to ERISA the fiduciary responsibilities of plan trustees include:

• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them

• Carrying out their duties prudently

• Following the plan documents

• Diversifying plan investments

• Paying only reasonable plan expenses

The duty of a plan trustee to act prudently is the central philosophy of ERISA, particularly as it relates to expertise in investing. As much as I highly regard my physician colleagues, I think the vast majority of you lack this expertise. So ERISA allows a plan trustee to hire an outside entity such as a financial advisor to carry out certain investment functions, such as selection of mutual funds and ongoing investment advice.

And that’s where things tend to fall apart in group retirement plans.

Plan trustee liability

While the plan trustee is a fiduciary, it is possible the plan trustee has hired a financial advisor who is not a fiduciary. In this case the financial advisor is not required to act in the best interests of the plan participants and is not held to the ERISA fiduciary responsibilities that plan trustees are held to. In other words if the plan trustee hires a financial advisor who himself is not a fiduciary, then the plan trustee is still the responsible party for the choice of investments in the plan. The whole point of hiring an outside party to manage plan investments is to transfer part or all of that responsibility to that outside party.

Not hiring a fiduciary advisor to manage plan investments puts the plan trustee at risk since the DOL states that plan trustees “may be personally liable to restore any losses to the plan.” In other words you, as the plan trustee, can be held liable for the investment choices selected in your group’s retirement plan even though you thought you outsourced that to a financial advisor. Think about this: you’re already subject to tremendous risk by seeing patients in the hospital or in your office. Do you want to take on this additional liability and put your personal assets at greater risk?

Think this fiduciary duty doesn’t matter much? Just ask the employees of Wal-Mart, who filed and won a $13.5 million class action lawsuit against Wal-Mart last year claiming that Wal-Mart breached its fiduciary duty to nearly two million current and past Wal-Mart employees for using Merrill Lynch’s platform for its retirement plan.

Next time, I’ll discuss the first steps you need to take to get your group retirement plan in top shape.