Most employers realize it is important for them to provide their employees with investment -elated education, but they do not realize it is better for them as well.
More and more companies these days are offering participant-directed investment retirement plans such as 401(k) plans However, many employers are hesitant to offer education programs because it can be interpreted as offering investment advice, which could make them legally responsible for participants’ investment performance while minimizing their liability as well. This article will discuss the importance of investment education programs and how employers can use the existing Safe Harbors so as not to be liable for giving investment advice under ERISA guidelines.
Why should an employer offer an investment education program? As opposed to a traditional pooled investment retirement plan, a participant directed investment retirement plan requires employees to make not only decisions on participating and the amount they want to contribute, but asset allocation decisions among the plan’s investment options as well. Educating employees will help them gain a better understanding of risks and returns. This will provide them more incentive to improve their understanding of the plan and make them less likely to blame the employer for disappointing investment performance. One caveat; it is the trustees of the plan’s responsibility to offer competitive investment options. Otherwise, even an good investment education program will not keep employees happy if the investment options are mediocre.
Educated participation will be better equipped to meet their retirement income goals and limit the employer’s liability for the consequences of their decisions. Also, if the education program encourages lower-paid employees to participate in the plan, higher-paid employees may be able to contribute more money without violating nondiscrimination rules.
How the Department of Labor helped? In June of 1996 the Department of Labor (DOL) published guidelines helping employers keep their education programs from violating ERISA rules concerning advice and employers’ liability. The DOL bulletin states that employers are providing investment advice, and are therefore liable under ERISA, if both of the following statements are true:
- The person running the education program gives advice concerning the value of securities or other property or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property; and
- The person running the education program controls the purchasing or selling of securities or other property for the plan participants or gives advice to the participants on a regular basis, and this advice serves as a primary basis for participants’ investment decisions.
Upon determining whether the education program rings true or false with the above statements, the next step to address is: Safe Harbors. Following are four categories of investment-related information and materials that employers can use in their programs, and, according to the DOL, will not be considered “advice giving” under ERISA.
1) Plan Information
This information on benefits available to the plan participants, how they can increase their retirement plan contributions, the impact of preretirement withdrawals on their income, terms and operations of the plan, and the investment alternatives available to them under their plan.
2) General Financial and Investment Information
This is information on risk and return, diversification, dollar cost averaging, compounded return, and tax-deferred investment. General financial and investments, etc. based on standard market indexes; effects of inflation; estimating future retirement income needs; determining investment time horizons; and assessing risk tolerance.
3) Asset Allocation Models
This is information and materials concerning hypothetical cases given to plan participants so they can compare and study cases that are similar to their own situations; and
4) Interactive Investment Materials
This includes questionnaires, work sheets, software, and other materials participants can use to plan their retirement investment strategies.
Lastly, it does not matter how these four categories, or Safe Harbors, of information are presented to plan participants-meaning that anyone can present the information, the plan sponsor, fiduciary, or service provider. It also does not matter how often the information is presented. The bottom line is that it is in the plan sponsor’s best interest to educate employees on how they can reach their retirement goals through their participant directed plan.
Next month we’ll look at developing a participant investment program and selecting someone to run an investment education program.
For more information on Safe Harbors and participant directed investment retirement plans, call Lou Stanasolovich at (412) 635-9210.
Louis P. Stanasolovich is founder and president of Legend Financial Advisors, Inc., a North Hills Securities and Exchange Commission registered investment advisory firm that provides asset management and comprehensive financial planning services on a fee-only basis to individuals and business. Legend Financial Advisors, Inc.’s website is located at www.legend-financial.com. He is a member of the ICFP, the IAFP, NAPFA, and is a co-founder of the Alpha Group. He graduated from the Pennsylvania State University. Mr. Stanasolovich was selected as one of the 200 Best Financial Advisors in America in Worth magazine’s October, 1996 issue and as one of the 250 Best Financial Advisors in America in Worth magazine’s October 1997 issue.
