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What Employers Should Know About Investment Education and Advice

One of the most significant trends in employment-based benefits has been the increasing responsibility placed on American workers for their own retirement security.  Most 401(k) plans today require workers to make their own investment decisions.  Every year, participants direct an estimated $70 to 80 billion in contributions to 401(k) plans.

It is also becoming increasingly clear that many workers may not be adequately equipped to evaluate, develop and implement investment strategies necessary for a secure retirement.  Many need tools and education to make investment decisions, while others want more — want in fact very specific advice as to what the decisions should be.

Someone who undertakes that responsibility will most likely be an ERISA fiduciary and owe pension participants a special duty of care and loyalty.  One of ERISA’s most fundamental principles is that a fiduciary cannot deal with plan assets in its own interest.  Mutual fund vendors providing advice about their own funds where, for example, different funds have different fees could present a conflict of interest if the vendor is a fiduciary.

PWBA has worked to craft a number of individual exemptions permitting vendors to render investment advice regarding products in which they have an interest which contain safeguards to deal with conflicts of interest.  PWBA has announced that it remains open to additional ways of structuring safeguards through exemptive relief.

The need to maintain safeguards is greater than ever.  The financial markets and transactions have grown so complex that in many cases only the professionals who developed the particular product or service are able to effectively understand and evaluate the accompanying risks.  The resulting gap in experience and sophistication between persons who act on behalf of a plan, such as plan sponsors, and service providers to a plan is probably greater today than it was at the time ERISA was enacted.  Further, the consolidation in the financial services industry has increased the complexity involved in understanding products, providers and their different relationships.  Although PWBA has often relied on disclosures as an effective and efficient safeguard, this complexity in the financial services industry — and the vulnerability of 401(k) participants most in need of advice — makes it particularly important that we not lower important safeguards and place unreasonable expectations on the very participants we need to help.

There are a number of other factors that merit close attention as we go forward on this issue.  For example, obtaining affordable advice is perhaps not the obstacle some suggest. A number of advice providers have said publicly they don’t anticipate charging employers or employees for their advice.  They feel a competitive pressure to get into this market, and want to offer the service for a variety of reasons.

It is also interesting that vendors are looking for multiple relationships with advice providers in order to offer sponsors and participants flexibility and choice.  That sounds like a solid, common sense approach but we must recognize that both sponsors and participants must be able to trust the advice offered or offering the advice will not achieve the results desired.  Without basic trust in the integrity of what is offered, sponsors won’t be perceived as offering a valuable employee benefit, participants won’t feel they were presented with the ability to effectively use a benefit that relies so heavily on their own ability, and vendors won’t be valued and entrusted with non-plan assets with which they can offer overall financial planning.

There are, nevertheless, steps we can take now.  PWBA has offered a number of suggestions for both legislative and other change and we look forward to continuing that important discussion.  There are also some things we want employers to know:

Many workers need investment assistance.  Most workers are not schooled in investment management, risk/return strategies, asset allocation, and diversification principles, yet they are given responsibility for making investment decisions in their 401(k) plans that ultimately will determine the extent of their retirement benefits.

Investment education is an important tool.  In an effort to both encourage and facilitate the provision of investment education by plan sponsors to employees, the Department of Labor issued Interpretive Bulletin 96-1 distinguishing a variety of investment-related education activities from the fiduciary act of investment advice.  The Department also made clear that the designation of a person to provide investment education to participants would not, in itself, give rise to liability for losses resulting from participant investment decisions.

Investment education may not be enough for some workers. Many workers may not wish to assume responsibility for making investment decisions.  This may occur because of a perceived or real lack of sophistication about investing, because of a lack of interest in pursuing investment education, and because of an overwhelming number of investment choices.  These workers may need professional investment advice. A plan may pay reasonable expenses necessary to the provision of investment advice to plan participants.

Employers not liable for acts of investment advisor. In Interpretive Bulletin 96-1, the Department indicated that, in the context of an ERISA section 404(c) plan, the designation of a person to provide investment advice to participants would not, in itself, give rise to fiduciary liability for loss, or with respect to any fiduciary breach, that is the direct and necessary result of a participant’s exercise of control.  As with the selection of any service provider, however, the responsible plan fiduciary is responsible for the prudent selection and periodic monitoring of the designated advisor.

Prudent selection of an investment advisor limits liability of employer. The rules applicable to the prudent selection of one or more investment advisors for plan participants are similar to those applicable to the selection of any plan service provider.  With regard to the selection of a service provider under ERISA, the Department has indicated that the responsible plan fiduciary must engage in an objective process designed to elicit information necessary to assess the qualifications of the provider, the quality of the services offered, and the reasonableness of the fees charged in light of the service provided.  In addition, such process should be designed to avoid self-dealing, conflicts of interest or other improper influence.

In applying these standards to the selection of investment advisors to plan participants, the Department would anticipate that the responsible fiduciary would take into account: the experience and qualifications of an investment advisor, including registration in accordance with applicable federal and/or state securities laws; the extent to which the advisor acknowledges its fiduciary status and responsibility under ERISA to participants; and the extent to which the advisor can provide informed, unbiased, and appropriate investment advice to the plans’ participants.

Monitoring of investment advisor. Plan fiduciaries are expected to periodically monitor service providers to determine whether retention of the provider continues to be prudent.  Generally, such monitoring will involve a determination as to whether there have been any changes in the information, which served as the basis for the initial selection.  In general, it is anticipated that the responsible fiduciary would periodically review: the performance of the investment advisor; whether the investment advisor continues to meet applicable state and Federal securities law requirements; compliance with contractual provisions of the engagement; utilization of investment advice services by participants in relation to the cost of the services to the plan; and comments and complaints about the services.

In conclusion, we believe that employers can be responsive to the investment education and investment advice needs of their employees, without significant burdens or risk of liability.  The selection of providers that offer informed, unbiased and appropriate investment education or investment advice will, in our view, not only serve to increase the likelihood of employees achieving retirement security, but also significantly reduce the potential for employee dissatisfaction and possible litigation.

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