Dentaltown November 2020 - 77

Fiduciaries are often less expensive
than brokers, yet they offer an extra layer
of protection for the 401(k) plan owner/
operators. Many owners/operators fail to
grasp that they can be held liable for plan
losses that affect their employees. If you
have a 401(k) provider that is not explicitly
defined as the plan's fiduciary, that means
you, the owner, are the fiduciary for the
plan and all of its employee participants.
In short, you are personally liable for plan
losses caused by a breach of your fiduciary
responsibilities and can be called upon to
restore plan losses and pay costs attached to
any inappropriate actions committed-even
if you didn't take those actions yourself.
For instance, a plan provider might
suggest an inappropriate portfolio for an
older employee, such as one stuffed with
risky investments. If the plan provider isn't
the fiduciary, then the owner is by default.
Should those investments fall short, you are
at legal risk, even years later. (See Fig. 1.)

Fig. 1

Risks associated with
acting as the fiduciary

Form 5500 is not a simple form to
complete. It is time-consuming, the late
filing fees are high and the 2016 instructions
covered 82 pages. Additionally, errors in
reporting increase the chance of audit, which
will cost at least $10,000 for a small practice
and can cost medium-sized businesses up
to $75,000.
One of the main reasons small businesses
do not provide a 401(k) to their employees is
the sheer cost of reporting and keeping up
with legal and regulatory changes. Recently
there have been changes to allow organizations such as chambers of commerce and
state governments to band together to create
larger pools of like businesses to lower costs.
This is a welcome change, but so far not a
complete answer. The modern 401(k) cuts to
the core of the problem by partnering with
professional service providers to eliminate
this burden for owner/operators, even while
keeping fees in check.

Employers (plan sponsors) typically
have fiduciary responsibilities over the
performance of the 401(k). To mitigate risk
to the dentist, the fiduciary risk should be
shifted to an investment manager. If you do
not have a plan where the provider acts as a
fiduciary, then you should consider switching.
If you are currently the fiduciary, the risks
and responsibilities of making investment
decisions for your employees lies with you.
Class-action lawsuits against employers
with poorly managed 401(k) plans are on
the rise, and plan participants (employees)
have been rewarded significant amounts of
money because of their employer paying too
much in 401(k) fees or because returns end
up being meager.
As the unwitting fiduciary of the plan,
small business owners end up at risk of facing
legal action over a 401(k) plan that they
have little practical control over. Choosing
a plan where the provider is the fiduciary
provides a level of security to the business
owner. Legacy 401(k) plans often do not

Broker

Fiduciary

Sales driven
Lack of pricing transparency
Prioritize commission
High fees

act as the fiduciary automatically, despite
their higher fees. If your 401(k) provider
is one of the paycheck company providers
or a large bank, then it's likely that you are
the fiduciary.

Managing regulatory risk
and associated reporting

Advice driven
VS.

Transparent pricing
Prioritize client's interests
Low fees

There is a misconception that switching
providers involves terminating your current
plan and then setting up a new one. This
is not the case, due to the IRS regulations
around what's known as a "successor plan."
Instead, the new provider will take over
administration of your current plan.

Conclusion
When reassessing your current 401(k)
plan, or deciding which plan to choose, it
is important to put any loyalties to known
financial advisers to one side and assess what
is best for you and your employees.
* Make sure you know exactly what
fees and costs you are paying. Direct
fees provide a level of security that
many brokers do not offer.
* Look for a plan that assumes
fiduciary responsibility. This
will reduce owner liability and
will ensure that your adviser is
acting in your best interest.
* Look for a plan that incorporates
reporting and management costs
into the fees. Not only will this save
you time, it will also reduce the
chances of error and audit risk.
* Decide which investment vehicle is
best for your level of risk tolerance. n

Switching 401(k) plans
Once established, employers infrequently
change or modify 401(k) plans or providers.

Reference
1. https://www.wsj.com/articles/index-funds-still-beat-active-portfolio-management-1496701157

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