Dental 401(k) Plans: Retire Sooner, and Avoid Costly Lawsuits
Lawsuits linked to 401(k) plans are becoming more common, and it’s not just large companies on the line. Small businesses are facing more of these lawsuits, and it is often the business owner who is liable in court when employees sue, even years later.
It is you, the dental practice owner, not the 401(k) plan provider, who is liable for the breach of fiduciary responsibilities. In the case of legacy 401(k) plans, it is unlikely that the provider will act as the fiduciary automatically, despite charging higher fees. This is almost certainly the case if your 401(k) provider is a paycheck company or a large bank.
Employees tend to file 401(k) lawsuits because they believe that high fees, low returns, or poor transparency have negatively affected their retirement outcome. Unfortunately, it’s easy to find a lawyer to agree and take on these cases. Bloomberg Law estimated that the number of cases in 2020 alone was set to quintuple.
The result of this could be that you become responsible for restoring plan losses and costs associated with any inappropriate actions committed, even if these issues were caused by a stockbroker. In the last several years many employees (plan participants) have been rewarded significant financial settlements after it was determined that their employer was paying too much in 401(k) fees or that they were receiving meager returns on their investments.
These settlements don’t just cover plans with high fees and poor returns. They include plans that hold high levels of risk in the investments, and cases where the 401(k) plan provider suggested a portfolio that was inappropriate for older employees.
Meanwhile, too many small business owners do not understand that they can be held liable for plan losses that impact the plan and the employee participants. This is because the risks and responsibilities of making investment decisions for your employees lies with you—if you are the plan fiduciary.
Employers such as dental practice owners typically have fiduciary responsibilities over the performance of their own 401(k), but they rarely make decisions that lead to underperformance or excessive fees. They are liable nonetheless.
What is a fiduciary?
When managing a 401(k) plan, a fiduciary advisor is required by law to put the participants’ interests ahead of their own and ahead of the interests of their employer. Unlike stockbrokers, fiduciaries are not motivated by commissions they might earn and therefore are not incentivized to put their own interests first. A fiduciary relationship is not an industry standard in a 401(k), but it should be.
The main benefit of having a fiduciary manage your 401(k) plan is that they can provide a level of protection to you as the owner and a participant in the plan. Surprisingly, fiduciaries are often less expensive to use than brokers while offering an additional layer of protection for business owners. If your 401(k) provider is not explicitly defined as the plan’s fiduciary, then you, the owner, are the fiduciary for the plan and all of its employee participants, and therefore, you are potentially liable for any losses in the plan.
401(k) plan-related risk is not limited just to the fiduciary relationships. 401(k) plans come with complicated reporting requirements. A great example of this is the Form 5500. The 5500 is not a simple form. It’s time consuming, it has high late filing fees, and the instructions in any given year can be more than 80 pages. To make matters worse, errors in reporting, which are common for small businesses, increase the chance of audit. Audits cost at least $10,000 for small practices and can rise up to $75,000 for medium-sized practices.
Don’t be liable
Making sure that you are not liable should be a priority for all plan owners acting as fiduciaries. You may be surprised to learn that avoiding this risk is easy and can be cost-efficient. As 401(k) plan costs can fall, retirement savings often rise, even as owner risk is reduced. This is the case because of recent changes in the private 401(k) provider market that favors small businesses.
It is usually advantageous to offer your employees a 401(k) plan, and as the owner there are also attractive tax benefits for you. However, it is prudent to ensure that you are not liable for issues related to its investment performance or management. Moving to a fiduciary structure will reduce this risk, lower fees dramatically, ensure that the advisor is working in your best interest, and create cost efficiencies that can lead to high returns.
I would recommend any dental practice owner who is acting as the fiduciary to switch 401(k) providers and reduce their liability. Transferring liability to another party is simple and can be done just by changing to a different investment manager. Switching can be done anytime of the year, so there’s no reason to put it off.
If you are not sure whether you are the fiduciary of your dental practice’s 401(k) plan, feel free to email Amanda Thurman at [email protected]. She is well equipped to conduct a comprehensive review to ensure that you are not taking unnecessary risks in your 401(k) plan.