PenChecks Blog

The Educated Participant-how Employers Can Improve Retirement Readiness

This is the first installment of a three-part series on participant education. The next two installments will discuss best practices to structure an effective program and how plan design may be used to assist participants in reaching their retirement goals.

By Carol Buckmann

There is a real need for participant education – and not just about investments. A recent Fisher survey found that 71% of those tested failed a 401k IQ quiz, and over 60% lacked confidence when picking investment options. U.S. Census Bureau researchers have concluded that two-thirds of Americans aren’t contributing to a 401k or similar retirement account, even though 79% have access to such a plan at work. The consequence is a gap between anticipated retirement income and expenses. Fidelity Investments tried to measure this gap, and recently gave Americans a grade of C in “retirement readiness”, meaning they won’t be able to fully cover their retirement expenses.

Headlines like this just keep coming, and they underscore the need for plan sponsors to recognize that they must engage in more effective participant education now that 401ks and similar plans have become the primary source of retirement income for most employees.

Don’t Participants Already Get This Information? ERISA has no specific provision requiring participant education. However, plan sponsors considering educating their employees or providing them with advice know that some information is already made available to participants through their:

  • Annual fee and investment notices
  • Summary Plan Descriptions
  • Other notices pertaining to safe harbor plans and qualified default investment alternatives (“QDIA”)

There is also a website where participants can get more information. Isn’t that enough? Why should employers do more?

Doing What is Required is Not Enough. The fact is, participants have to make an effort to study these disclosures and extract the relevant information, and we all know that most do not. Further, nothing in the law requires plan sponsors to provide information about determining optimal investment allocations or to provide projections of the annual income a participant’s contributions will generate. Participants need this specific information to make good decisions, so doing only what is legally required does not provide good participant education.

What About Fiduciary Liability? After plan sponsors recognize that their participants need more help, the next question is almost always: Do we expose ourselves to liability for participant investment losses if we voluntarily provide participant education? Fortunately, the Department of Labor (DOL) provides a number of protections for plan sponsors who provide education or more personalized advice, and the safe harbor for participant-directed investments may provide additional protection.

General Education is Not a Fiduciary Activity. The DOL does not consider providing general information about investments and how they work to be a fiduciary activity. This includes making available asset allocation models for hypothetical individuals and interactive investment materials. The DOL has long recognized this, and nothing in the controversial Fiduciary Rule (if it does come into effect) would change that, although there are restrictions on recommending specific investments. The best way to educate participants is through live sessions that allow participants to ask questions. However, computer programs are also available.

More Individualized Advice Can Be Protected as Well. Participants at the same age and pay levels can still have very different financial profiles based on factors such as their spouse’s income and outside investments. Therefore, the best programs give participants an opportunity to consult individually with an independent adviser to receive more tailored advice. Under current law (though this would change if the Fiduciary Rule ever comes into effect) one-time provision of advice in and of itself would not result in fiduciary status. However, the person giving the advice may already be a fiduciary because of other relationships. To avoid conflicting advice, an adviser’s compensation should not go up or down depending on which investments are selected – regardless of whether the advice is given by a person who satisfies ERISA’s definition of “fiduciary”.

Additional legal protections exist for plan sponsors who elect to provide or contract for qualifying individualized advice programs. Section 408 of ERISA contains specific prohibited transaction exemption for two types of these programs: computerized advice that has been certified by an independent expert and level fee programs where the adviser doesn’t get paid more for making particular recommendations. Certain programs approved in DOL opinions also may be used. Consulting an ERISA attorney is advisable when setting up any advice program because satisfying the conditions for protection is complicated.

Hiring the Right Person is Important. These protections are valuable, but it is also important to recognize that all educators and advisers are not equal. If plan sponsors hire outside service providers to interact with their participants, as most do, it constitutes a fiduciary activity regardless of whether the educator or adviser is acting as a fiduciary or the exemption for investment advice arrangements is in place. Plan sponsors have a fiduciary responsibility not only to hire a competent provider, but also to monitor that person’s performance.

These fiduciary responsibilities mean that hiring an educator or adviser requires more than just checking off on a “to do” list. Hiring someone who claims to provide “investment education” without investigating that person’s qualifications and program, as well as potential conflicts of interest, will not pass muster as a prudent process under ERISA. It is important to review the details of the provider’s program and fees and to sit in on some actual sessions to see first-hand what your employees are being told.

Next time: How to Structure an Effective Program
Guest author Carol Buckmann is a partner at Cohen & Buckmann PC, and has practiced at major law firms specializing in the areas of employee benefits and executive compensation for over 30 years. She has worked extensively in all areas of employee benefits, including fiduciary advice, tax qualified and non-qualified plans, welfare plans, ESOPs, employee benefit issues in mergers and acquisitions, and ERISA issues arising in investment fund formation. Carol frequently blogs, writes articles and is quoted in the media about current employee benefit issues.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust, its subsidiaries or affiliates.

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