“Companies are concerned that even if they and their investment adviser do everything right, they may be sued,” says David L. Wray, PSCA president. “But now employers are looking at the evidence, which indicates that they can provide investment advice in a prudent way without being sued. There is still some reluctance, but it is declining. Within the next five years, we will see half of the plans offering investment advice.”

Making the decision
    Wray advises HR to consider two consequences when faced with the decision about whether to offer investment education, investment advice, or both. “The first consequence is legal,” he notes. “There is no governmental anticipation that employers will offer investment advice to 401(k) plan participants, but there is an expectation that employers will provide investment education. In fact, if you don’t provide education, you open yourself to liability, because you haven’t provided sufficient support to participants who must make investment choices.” Wray believes that employers are more likely to be sued for inadequate education and support than they are for advice-giving.

    The second consequence is practical--a more important but more often overlooked factor, Wray says. “The point of offering a 401(k) plan is to build a sense of partnership with employees. Companies spend a lot of money on these plans. If you do not provide proper support and employees mismanage their accounts, the plan may become demotivating and will not produce a proper return on the company’s investment in it. If you don’t provide advice, the practical consequence is that you won’t receive the full value of the 401(k) plan. An effective advice program is one of the best ways to increase participation and contribution rates and improve allocations.”

    Although Wray believes that the fear of lawsuits arising from advice programs is largely misplaced, Christopher Kopka, counsel for American Express Financial Advisors in Minneapolis, notes that “down markets have a funny way of increasing litigation in our already litigious society. Employers should be concerned about the risk of liability associated with providing advice, but more and more they have to weigh that against the possibility of litigation flowing from uninformed or under-informed 401(k) participants.”

    Allen Steinberg, a Hewitt Associates retirement and financial-management consultant in Lincolnshire, Illinois, advises HR managers to evaluate their specific workforce needs when deciding whether to add advice programs. “To the extent that employers have long-term employees, or want to have long-term employees, employers have a stake in how employees manage their 401(k) accounts. Employers must ask, ‘How well are employees using the plan?’ If the allocations are good, the employer can stick with education alone.”

Different needs
    Freddie Mac feels less pressure to offer investment advice than many other employers. An impressive 94 percent of its employees participate in the 401(k) plan, and they invest 80 percent of their savings in equities. “This is a clear sign that our employees are investment savvy,” Herzog notes. The company reviews employee investments in all 10 401(k) funds quarterly to monitor the appropriateness of allocations.

    Freddie Mac offers an extensive 401(k) investment-education program through two delivery methods--a secure Web site and quarterly workshops--and monitors both closely. “We meet on a quarterly basis with the third-party Web site provider to review the number of employees who use the site,” Herzog says. The most recent review found that 80 percent of the plan participants had logged on to the site during the previous quarter.

    The company measures the success of the workshops through employee surveys conducted immediately after the sessions. In addition, it conducts an annual employee survey that includes questions about the 401(k) education program. Some Freddie Mac employees have asked the company to add an advice program, but for now, Herzog says, the company “is taking a wait-and-see attitude.”

    Like Freddie Mac, the Tiller Corporation offers an extensive 401(k) education program, but it takes a different approach to advice-giving. The company, which produces road-construction materials in Maple Grove, Minnesota, discovered that a large segment of its employees were poorly diversified, and brought in an investment adviser to help employees manage their accounts. “Through education, the adviser has been able to improve allocations,” says Steven Sauer, Tiller’s vice president of finance. “Our employees receive one-on-one investment advice, tailored to their specific issues and other financial holdings, at no charge.” If an employee does not enroll in the 401(k) plan, Sauer personally picks up the phone and calls the employee to explain the benefits. Every one of the company’s 242 employees is enrolled in the company’s 401(k) plan.

    Tiller educates its employees about the 401(k) plan with meetings held at least once a year. In addition, the company’s outside investment adviser prepares and distributes a customized quarterly newsletter. “This newsletter describes what’s happening in the market in general and specifically by fund,” Sauer says. “The adviser also constructs four lifestyle funds--aggressive, moderate, conservative, and income-based--on the funds available within our plan, and goes into greater detail on the performance of these tracks.”

    Tiller’s investment committee, composed of both management and employees, meets quarterly with the investment adviser and the plan administrator to monitor the appropriateness of employee allocations. “We also monitor individual fund performance, place funds on a watch list if their performance suffers compared with their peer group or if they change managers, and drop or add funds if necessary,” Sauer reports. “Our actions minimize any potential for major fiduciary issues.”

Minimizing liability
    Investment education and investment advice are two different animals, and HR must be able to distinguish between them and understand the different risks involved. Kopka suggests that HR professionals begin by closely examining service-provider contracts with their attorneys. “Investment-education contracts will most likely include references to the Department of Labor’s investment education safe-harbor guidelines,” he says, “and those contracts will likely say loudly and clearly, ‘I am not a fiduciary!’ By contrast, investment-advice contracts will typically acknowledge fiduciary status.” Employers that offer an advice program should receive a copy of Securities and Exchange Commission Form ADV from the adviser, documenting the adviser’s required SEC registration.

    Kopka also advises HR to focus on one key point of differentiation: Does the program lead to a specific investment recommendation, or is it giving more general information on model asset allocations, perhaps coupled with a breakdown of funds in the 401(k) plan that fall into those asset allocations? “If you see something like, ‘We recommend you invest in XYZ mutual fund,’ the program is entering the world of investment advice,” Kopka warns.

    Employers with education programs should follow the Department of Labor’s Interpretive Bulletin 96-1, says David R. Weaver, advanced planning attorney for Edward Jones, the St. Louis-based investment-education provider. IB 96-1 lays out the parameters for an investment-education program so it does not become investment advice. “It allows an education provider to go so far as to offer specific sample asset-allocation models using investment choices available under the plan,” Weaver notes. Employers should also seek protection by complying with ERISA 404(c), which helps shield the employer and trustees from responsibility for investment choices in self-directed plans, he adds.

    Minimizing liability in advice programs is not as difficult as many employers believe. Weaver advises employers to select third-party providers with care, as that selection is a fiduciary act. “The obligation is to use ‘prudence,’ ” he says. “Prudence requires making a sound decision and using the appropriate procedure, which should be documented. The concern is the competence and appropriateness of the provider.”

Congressional clarification
    As more employers offer investment-advice programs, pressure grows for Congress to settle the issue of whether the law should only allow independent advisers or also allow companies that provide record-keeping services and mutual funds to provide advice. “If Congress does not move beyond an independent-only model,” Kopka believes, “the practical result will be a continuation of the ‘advice gap’ between participants who want advice and employers who will continue to play it safe and err on the side of not offering advice. The end result will be that participants will miss out on tools they need to help them better understand both the need to save and what to do with the money once they have set it aside for retirement.” Kopka favors the proposal advocated by Representative John Boehner, which goes beyond independent advice “but offers very strong protections for 401(k) participants should an investment adviser be foolish enough to provide biased, self-serving advice.”

    The demand for investment advice will continue to grow as 401(k) plan participants face ongoing market volatility and account balances that may not provide sufficient savings for retirement. HR can respond by evaluating allocations and plan performance, finding the right mix of education and advice to meet plan objectives, and following basic steps to minimize fiduciary liability.   

Seven Basic Steps for Minimizing Liability

    The following list of ways to minimize fiduciary liability in 401(k) investment-education and advice programs is drawn from 401(k) experts and U.S. Labor Department documents:

    1. If you don’t have an investment-education program, get one. Underinformed participants pose a risk.

    2. Make sure your education program is specific to your 401(k) plan, periodically updated to reflect any plan or workforce changes, and monitored for effectiveness.

    3. Comply with ERISA 404(c) guidelines for self-directed plans and state your compliance in plan materials.

    4. If your education program does not produce optimal participation, contributions, and allocations, consider adding an investment-advice program.

    5. Select your investment adviser with the prudence required by ERISA, using an objective process to determine the advice-provider’s qualifications, the quality of services offered, and reasonableness of the fees charged.

    6. Document your adviser-selection process, paying particular attention to the steps taken to avoid any adviser self-dealing, conflicts of interest, or other improper influence.

    7. Periodically review the adviser, including any changes in the information that served as the basis for the initial selection, utilization of services by the participants, and participant comments and complaints.     

Workforce, October 2002, pp. 46-49 -- Subscribe Now!