Keep Tabs on Legal Shifts Affecting Your 401k Plans

Practices must stay abreast of legal changes affecting 401(k) plans to ensure they don’t face legal action for not properly monitoring them.

A recent Supreme Court ruling and a Department of Labor (DOL) proposed rule change will significantly impact how 401(k) plans offered within businesses and medical practices are managed.  The upside of offering the benefit of a 401(k) plan to physicians and staff are many, such as increased employee loyalty, productivity and reduced tax burdens. Yet, practices must ensure that those administering their plans are fully apprised of these new legal developments.

In May 2015, the Supreme Court unanimously ruled in Tibble v. Edison International that 401(k) plan trustees have a “continuing duty…to monitor and remove imprudent…investments.”  Acknowledging in his opinion that “expenses, such as management or administrative fees, can sometimes significantly reduce the value of a [retirement] account…,” Justice Breyer called for more frequent reviews of 401(k) plan investments by plan sponsors - such as practices - as well as plan advisers. 

Additionally, the Court ruled that the six-year statute of limitations on suing 401(k) plan sponsors and plan administrators over investment choices and plan management was inadequate.  A longer statute of limitations will be established by a lower court.  When making investment decisions, plan sponsors and plan advisors must be aware that they can now be held legally responsible for investment decisions for more than six years. 

Another legal shift potentially affecting the management of 401(k) plans is a DOL rule change that would make the ethical standard to which 401(k) plan sponsors and their advisers are held more stringent. The White House Council of Chief Economic Advisers has asserted that conflicts of interest result in $17 billion dollars in annual losses to American consumers.  In a July 2015 statement, Department of Labor Secretary, Thomas Perez said that “losses due to conflicts of interest, on average, reduce returns for affected savers by 1 percentage point per year.”  Over 35 years, he explained, such losses can reduce savings by more than 25 percent.

Currently, broker-dealers in the retirement savings industry are held to a “suitability standard.” They need only to recommend products that are “suitable” for 401(k) plans and other clients.  Consequently, broker-dealers are permitted to make recommendations that pay higher commissions - even if a better option for plan participants is available.

The DOL wants those advising 401(k) plans and all retirement industry financial advisers to adopt the “best interest standard” (often referred to as the fiduciary standard).  Under this stricter standard, advisers would be required to act solely in the interest of the participants and their beneficiaries and to carry out their duties with “care, skill, prudence, and diligence….”

One group supporting the new fiduciary rule is the Financial Planning Coalition, which is made up of the National Association of Personal Financial Advisors, the CFP Board and the Financial Planning Association.  They believe the rule would “protect American retirement savers.” 

Yet opposition to the DOL’s proposed new fiduciary rule has been significant.  Those in the broker-dealer industry have lobbied strongly against the rule’s implementation, saying it would increase their administrative/oversight costs - and these increased costs would be passed on to plan participants.  House Financial Services Committee Chair, Jeb Hensarling (R-Texas), said the proposed rule would “make financial advice and retirement planning less available and more expensive for low and middle income Americans.” 

Many contend that the SEC should rule on the issue rather than the DOL, but SEC chair, Mary Jo White, believes that the power over rules for retirement plans “…belongs to DOL alone.” She and Perez report that the SEC has been consulted throughout the rule-making and comment review process. 

In late October, the House passed a bill to stop the DOL from finalizing its proposed fiduciary rule until the SEC acts on the issue.  The Obama administration has threatened to veto the bill.  At this time, the future of the DOL’s proposed fiduciary rule is unknown, but the administration seems committed to requiring more of the retirement savings industry regarding 401(k) management. 

With so much at stake – from possible legal action if a plan is not properly monitored to higher standards for plan sponsors and advisors – medical practices offering 401(k)s are well advised to stay abreast of new requirements and regulations.  While these legal shifts should ultimately benefit plan participants, they will inevitably require more oversight from 401(k) plan sponsors and advisors.     


Michael Joyce, President of JoycePayne Partners of Bethlehem and Richmond, Va., is responsible for overall investment strategy, management of investment portfolios and financial counseling services.  He can be reached at

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