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Don’t Provide Investment Advice to Employees Under 401(k) Plans

November 5, 1999
Employers that sponsor 401(k) plans are increasingly allowing employees who participate in the plan to select how the funds held in individual accounts are invested. Employers may be encouraged to empower employees to exercise control over their account investments by the fact that the plan administrator or other plan fiduciary will not be liable for any losses that result from employees’ exercise of control over their accounts. But employers must be aware that they may be vulnerable to fiduciary liability if they provide participants with investment advice. Employers need to be especially concerned about unanticipated liability that could result if they retain outside consultants to provide investment education.

Provide information that's sufficient enough to make an informed investment decision.
Employer administrators or other fiduciaries will be shielded from liability for investment losses under a participant-directed plan if the employee or beneficiary had an opportunity to exercise control over assets in his or her individual account, and actually exercised "independent control" over those assets. Employees or beneficiaries will be treated as exercising control over their individual accounts only if they're provided with sufficient information about the plan and available investment alternatives to make an informed investment decision. Information that must be provided to plan participants includes:

  • a description of the investment alternatives available under the plan; and
  • a general description of the investment objectives and risk and return characteristics of each "designated investment alternative" (e.g., mutual fund or collective trust fund),including information regarding the type and diversification of assets.

Investment advice subjects plan sponsor to fiduciary liability.
However, the responsibility to provide a broad range of investment alternatives and information does not obligate an employer to also provide investment advice or investment education. Employers need to be aware that, even if they comply with the participant-directed account rules of ERISA Sec. 404(c), providing investment advice or education may subject them to liability for losses resulting from the investment decisions of plan participants.

Safe harbors allow employers to provide investment information.
A Department of Labor (DOL) Interpretive Bulletin allows employers to provide certain types of investment information without incurring fiduciary liability as investment advisers. Employers may provide:

  • general plan information
  • general financial information
  • asset allocation models
  • interactive investment materials, such as worksheets, calculators and risk questionnaires.

However, information in excess of that authorized by the DOL safe harbors, such as specific investment recommendations, may subject the employer to liability for losses realized by plan participants who have relied on the employer's "investment advice."

Outside service providers present special concern.
The potential for unanticipated liability is especially acute among employers that hire outside consultants—including Internet-based investment-advice services that can be accessed via a company's intranet—to provide investment education. The DOL Interpretive Bulletin specifically states that providing investment education by an outside service provider would not constitute investment advice. However, the safe harbors do not specifically protect an employer that retains an outside service provider from liability. Accordingly, an employer that hires an outside service provider must be careful to select and monitor the service provider in a prudent manner in order to avoid liability. Specifically, because a service provider who provides advice to participants is acting as a plan fiduciary, the employer should select a service provider who has received a prohibited transaction exemption from the Labor Department that authorizes it to provide investment advice.

Cite: ERISA Sec. 404(c)(1); ERISA Reg. Secs. 2550.404c-1(a), 2550.404c-1(b)(2)(i)(B)(1), and 2550.404c-1(c)(4); and PWBA Interpretive Bulletin 96-1, 6-11-96.

Source: CCH Incorporated is a leading provider of information and software for human resources, legal, accounting, health-care and small-business professionals. CCH offers human resource management, payroll, employment, benefits, and worker-safety products and publications in print, CD, online and via the Internet. For more information and other updates on the latest HR news, check our Web site at http://hr.cch.com.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion.