June 02, 2012(Original publish date) • By Dennis Beaver
Readers Cathy and Sharon live in different cities, and while they have never met in person, during our conference call it became all too apparent that these registered nurses have much more in common than age and occupation.
For over 30 years, each has enjoyed working in small medical practices, Cathy in Fresno and Sharon in Visalia, describing their employers as “well thought of in the community, extremely competent, caring and generous doctors.”
Based on the numbers shown to You and the Law, the physicians have indeed been extremely generous with their contributions to profit-sharing plans established when they first went into practice. Unlike a 401(k) — where both employer and employees contribute — our nurses benefited from employer-only contribution plans. Not a cent was paid into the retirement plan by any of the employees.
The women were not in a union, and there was no contractual obligation requiring the doctors to pay into the plan. So it’s fair to ask why an employer would fund such a plan out of his own pocket? Steve Smith, vice president of marketing at Pasadena-based Pension Services Corporation, gave us the answer:
“It’s something that intelligent business owners realize early on; your most valuable assets are the people who work with you. It’s about keeping good people on the job and sharing with them the fruits of all your labor, especially in fields which historically have generated significant income. While not the same today, medicine has been one of those professions where quite a number of doctors have these types of plans.”
Don’t I have some control over investments?
At one point in time, each nurse had well over $1 million vested in their plans, all of the money resulting from a combination of employer contributions and professionally managed investing. But that was “at one point in time, but not now,” Sharon explained.
“I feel like I am reliving the years 2000 and 2008 all over again. Something has happened to our office retirement money — once more! The annual statement we just received showed a huge loss — almost one third.
“We just learned that the boss had taken over management of the plan’s money from our experienced stockbroker. Back in 2000, we lost over half of the retirement money because he put everything in high tech, Silicon Valley companies, most of which went bust. He promised not to do that again and gave the account to a really competent investment expert, who made it all back for us and then some. But now the doc is back playing Russian roulette with our money.”
Cathy sounded even more depressed:
“We just found out that, like the big Wall Street investment banks, our doc got it into his head that he was an expert in foreign currencies and began making bets which way the euro would go. For us, it all went south. He apologized and said that he would try to increase contributions to make up some of the losses, but we have all been hurt badly.”
“You can take these stories and multiply them by the thousands, all across America,” Smith points out. “In a profit-sharing or defined-benefit plan, where the employee does not contribute money, the responsibility of managing the money lies with the employer. The employee has no say over where the funds are being invested, and this often comes as a real surprise when substantial losses are revealed,” he adds.
The employer wears all the hats
Smith was quick to point out that under federal law — the Employee Retirement Income Security Act, or ERISA — employers have a legal obligation, referred to as the “prudent person rule,” which governs how retirement money should be invested.
“The employer is a trustee — what we refer to as a fiduciary — of plan money and needs to avoid the ‘all the eggs in one basket’ mindset, for example, putting a large portion of funds into speculative or highly risky investments.
“If you are in charge of a plan, then you must act with care and skill in investing and exercise good judgment. But how many employers have those skills?” Smith asks.
“The employer wears all the hats of responsibility towards the employees. The problem that your readers have run into is very common, especially with employers — such as doctors — who are used to making all of the decisions and being in control. They may be excellent physicians, but clearly some do a poor job of investing the retirement money.
“In some cases, employers have been ordered by the Department of Labor to make up the difference of what the plan would have earned had money been in safer, more diversified investments,” he points out.
Next time: What questions should you ask about your office retirement plan? How do you obtain information and not get fired?
Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.