It’s a classic HR conundrum: Your company wants to help employees save forretirement by offering a 401(k) or other pension plan. And since these plans areincreasingly laden with options, your company wants to offer education to employees,so they can make responsible decisions. Your company does not, however, want tobe held legally liable by employees whose investments don’t reap the expectedbenefits. So how do you give employees the information and tools they need tomake smart retirement-investment decisions without exposing the company to lawsuits?
Representative John Boehner (R-Ohio) recognized the problem when he introducedthe Retirement Security Advice Act of 2000, which is intended to “clarifyexisting federal law to give employers the green light to provide their employeeswith access to high-quality investment advice.” But the legislation failedto pass the House and was not reintroduced this session. So what to do now?Michael Nassau, head of the employee benefits and executive compensation practiceat Kramer, Levin, Naftalis, & Frankel in New York, gives guidelines to safepension-investment counseling.
- Are a lot of employers concerned about offering investment advice?
- Many companies feel that it’s proper to help employees save for retirement.And that, to make the plan work, they ought to offer education about the plan.But employers recognize that whenever you do anything that you don’t haveto, there’s some legal risk. Employees who feel it’s worked out badlyfor them may feel more misled than they would have if the employer had nevertried to offer any education. But you get to the question: If you really wantyour retirement program to work, and we’re giving participants a huge responsibilityin how it will work out, can your program meet its goals if you don’t givethem some basic concept of what they ought to be doing?
- Are there any government guidelines that protect employers from liabilityfor offering investment advice?
- In 1996, the Department of Labor decided it didn’t want fears of liabilityto deter employers from helping employees pick among different investment options.So it came out with a bulletin intended to give comfort, Interpretive Bulletin96-1 [posted in full on the DOL Web site, www.dol.gov]. The bulletin basicallyoutlines the information employers can offer without being considered fiduciaries.
- What does being a fiduciary mean and how can it lead to liability?
- Fiduciaries have discretionary authority over running the plan. It’s possiblethat by advising participants as to what investing is all about, or hiring someoneelse to do so, either you or they are acting as “fiduciaries.” Ifyou’re a fiduciary, you have certain burdens. You have to act prudently,which means you have to do your job right. It basically raises the stakes forliability under ERISA.
- The DOL tried to address that?
- Yes. It recognized that fiduciaries are held to certain standards, and if theydepart from them they can be subject to liability. The DOL realized that employersmight not want to give information unless they’re assured they won’tbe viewed as fiduciaries. So it offered an outline of the information you canimpart, information that won’t make you a fiduciary and therefore won’tleave you subject to liability under ERISA.
- What kind of information can an employer offer?
- The bulletin outlines safe harbors for employers to provide four specific categoriesof investment information and materials: plan information, general financialand investment information, asset allocation models, and interactive investmentmaterials.
- Let’s take these piece by piece: What does plan information cover?
- Here’s a no-brainer. It’s how the plan works and the consequencesof doing things under the plan. Information like: if you take out money pre-retirement,you’re going to have less. You can also explain the benefits of plan participation,the benefits of contributing more rather than less, the way that withdrawalsbefore retirement can hurt your income. All of that is perfectly fine.
- What’s covered under “general financial and investment information”?
- It’s basic information regarding the plan. For instance, the differentobjectives of different funds, the concept that investing involves a trade-offbetween risk and potential return. All that’s clearly OK. Then there’sthe basic primer on what investing is all about. So that’s the explanationfor concepts like dollar cost averaging, tax-deferred investments, compoundedreturn, the effects of inflation, and how to estimate future retirement-incomeneeds.
- What do “asset allocation models” include?
- You may give a participant a mechanism such as worksheets, pie charts, or graphsto allow the employee to figure out what his or her asset allocation model wouldbe. These include materials like model portfolios of hypothetical individualswith different time horizons and risk profiles. These models should be basedon widely accepted investment theories that take into account the historic returnsof different asset classes — such as equity, bonds, and cash over periods oftime. As long as you’re not counseling any particular individual as towhat specific investment decision he should make, offering those models is nota fiduciary activity.
- And what are interactive investment materials?
- Questionnaires, worksheets, and software that help the employee estimate hisor her future income needs in retirement, and estimate the impact of differentasset allocations on retirement income. Again, these should be based on widelyaccepted investment theories that take into account historic returns.
- If HR plans to use an outside company, like an investment firm, to handlethe education on 401(k)s, what should HR consider?
- If the company offering education is also offering the menu of investment options,there’s an issue of appearance (of conflict of interest). A mutual-fundsponsor, for instance, makes more money from stock funds than from bonds ormoney market funds. So you don’t want a situation where there’s arguablyan incentive on their part to skew the advice. This is an issue the mutual-fundssponsors are well aware of, however, and if they’re offering investmenteducation, they can avoid that problem.
- So in the end, what’s the risk level?
- I don’t believe the legal risks of offering an investment education programare great enough to deter you. If an employer wants to offer a 401(k), the employerwill probably want to offer education about it. If you’re going to do something,you ought to do it right.
Workforce,July 2001, pp. 54-55 — SubscribeNow!