hen selecting and evaluating an investment-education vendor, asking the
right questions will get you--and keep you--on track, says J. Michael
Scarborough. As president and CEO of the Scarborough Group, Inc., an
investment-advisory firm in Annapolis, Maryland, he counsels HR professionals to
minimize fiduciary liability by asking:
1. Does the payment method create a potential conflict of interest? If the
vendor is selling a product other than the education program itself, HR must
ensure that the vendor’s goals and objectives are not at odds with the
objectives of the employer and its employees. “Payment based on commissions
may be acceptable,” Scarborough says, “but the employer may assume some
liability if it has not exercised care in knowing the vendor’s interests in
providing the education program.”
2. Is the education program tailored to the plan? “The education program
must address the plan’s specific investment options and contribution limits,”
Scarborough says. “If the vendor tailors the education program to the 401(k)
plan, the employer is in a more defensible position with respect to fiduciary
liability.”
3. Does the program include a range of delivery methods? “Employers reduce
their liability dramatically when they offer the full spectrum of delivery
methods,” Scarborough notes. Offer online options, written materials, and oral
presentations so employees can choose what works best for them.
4. Does the vendor track changes in the plan and the composition of the
workforce and modify the program to meet new needs? “Vendors should assume the
responsibility for updating the program if, for example, new investment options
are added or a substantial number of employees are nearing retirement age,”
Scarborough notes.
Scarborough advises HR to evaluate the education program at least once a
year. Look for improvements in three primary measures of program effectiveness:
participation rates, contribution levels, and the distribution of allocations.
Improvements in allocations include lower dependency on company stock or money
market funds. “If after one year there is no improvement,” Scarborough says,
“explore possible explanations.” For example, has the plan experienced a
significant influx of new employees who might skew the numbers? “If all of the
relevant factors have remained roughly constant but there is no visible
improvement in the key measures of plan success,” he notes, “it would be
entirely fair to replace the vendor.”
Workforce, October 2002, pp. 49 -- Subscribe Now!
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