Giving Investment Advice to Participants in 401(k) Plans

[LCARUSI]

Does anyone have any statistics as to what percentage of plan sponsors are offering investment advice to participants? (My definition of investment advice is giving participants specific instructions as to how to allocate their accounts among available options in the plan.)

[Guest DPaciorek]

Based on my 14 years of experience, I believe that the percentage of Plan Sponsors that give actual investment allocation advice to plan participants could be as high as 85% to 90%. Unfortunately, I only have my experiences to base this on but I think it is probably an accurate number

[KIP KRAUS]

My experience has been that employers do not generally want the liability of providing direct investment advise to 401(k) plan participants, but will provide employees with the necessary information to make an educated investment decision.

When asked, my advise to participants is not to take investment advise from anyone unless They are paying for the advise.

[Kirk Maldonado]

Kip:

Did they pay you for that advice?

[KIP KRAUS]

What's your point Kirk?

[Greg Judd]

Getting back to Len's original question, the best quantitative info I've found was right under all our noses here at BenefitsLink, in the form of a link to an IOMA survey which indicates about 20% of employers currently offer advice services, with 30% considering it.

Here's an additional source, found via Google:

From 12/98 CFO Net: "Today, 14 percent of plans offer access to advisory services, according to technology research firm Forrester Research Inc., in Cambridge, Massachusetts. An additional 62 percent of human-resource executives say they would consider providing unambiguous, direct-investment advice."

The depth of 401k knowledge Forrester's bright-eyed techsters have you can probably read through, but you go with what you can find.

I believe 401kWire or others of its ilk are trying to sell stats of this kind at their sites.

DPaciorek, are you suggesting employers may inadvertently be supplying 'advice'("invest your money here rather than there") that they label as education ("investing involves risk and making choices")?

[This message has been edited by Greg Judd (edited 01-05-2000).]

[This message has been edited by Greg Judd (edited 01-05-2000).]

[Scuba 401]

it seems the new craze is companies that hold themselves out as investment advisors to participants. the plan sponsor hires the firm to essentially hand hold participants so that they do not have to do so. these firms become ERISA fiduciaries and presumably minimize the liability of the plan sponsor.

one example is 401kcafe.com

what do you think of these companies? i am sceptical.

[This message has been edited by scuba 401 (edited 01-05-2000).]

[Kirk Maldonado]

Kip:

I was simply trying to inject a bit of levity into the situation.

[Larry M]

Kirk,

for shame -

you know darn well there is no place for "levity" in a 401(k) situation....

on the other hand, if this were the cash balance message board.....

[KIP KRAUS]

So was I Kirk. Thanks for your in put.

[This message has been edited by KIP KRAUS (edited 01-05-2000).]

[This message has been edited by KIP KRAUS (edited 01-05-2000).]

[GBurns]

Back to the original question.

Is it the Employer who is giving the advice or is the employer only providing a THIRD party who gives the advice?? BIG difference.

An employer who gives advice is in great legal and regulatory jeopardy. It would be foolish to put oneself in this position when such advice is readily and freely available from reputable sources.

[Kirk Maldonado]

Why do you conclude that it makes a difference who provides the advice?

[GBurns]

Rendering advice and identifying specific investments requires licensing etc. and carries liability for correctness, appropriateness and suitability.

Education without specific products and procedures does not.

[Greg Judd]

Regarding Scuba's comment, while 'for hire' advisors may add to the fiduciary crowd around a plan, complicating the task of sorting out which fiduciaries are most culpable for what category of fiduciary responsibility(s), it seems doubtful that employers shed all, or even the most critical, fiduciary responsibilities with regard to their plans.

What bringing in advisory entities MAY do is support any defense that the sponsor is acting in 'good fiduciary faith'. My skeptic radar would switch on if advisors asserted the main value of their services was sponsor avoidance of fiduciary duties, rather than support for the duties sponsors rightly retain.

[Kirk Maldonado]

I disagree with GBurns. Anybody can give investment advice and become a fiduciary. Now the plan sponsor might be stupid for relying upon the advice of a unqualified person, but that does not preclude the unqualified person from becoming a fiduciary.

[KIP KRAUS]

OK. Now that the commercial messages are over, I'd like to ask a stupid questions. Where in any regulations is there information that says an employer/plan sponsor has any obligation to give investment advise? Maybe I missed it. It has always been my understanding that providing the necessary investment information to participants is the only requirement. I would not advise an employer to give direct investment advise to participants nor would I advise hiring an investment advisor to avoid fiduciary responsibility, because there is no such ultimate avoidance.

I know I'm a kermudgin (how ever you spell it), but I see no need in providing investment advise to participants as long as the plan has a reasonable invetment selection strategy and provides a flexible investment policy.

Why not ask the government for investment advise, they seem to have all the answers when it comes to telling employers how to run their benefit plans. Good golly, is that a political statement?????????????? Sorry.

[GBurns]

It is not a stupid question, in fact, it should be THE question. Why would an employer want to put himself/herself in this position?

[Jon Chambers]

I've done quite a bit of work on this topic. In the interest of brevity, I wont attempt to support my assertions. Three quick observations:

1. Plan sponsor doesn't bear fiduciary responsibility for investment results achieved by participants when they follow advice from an appropriately designated advice fiduciary.

2. Plan sponsor does bear fiduciary responsibility for properly selecting the advice provider (i.e. sponsor must do appropriate due diligence).

3. Anyone providing advice and charging a fee who is not an SEC registered investment advisor is exposing themself and the Plan sponsor to significant liability for regulatory action from the DOL and/or SEC.

Finally, several bundled providers (e.g. Fidelity) are walking a very fine line between "education" and "advice", offering services perceived as advice but positioned as education. In these circumstances, the sponsor should clearly document why they offer the program, and their understanding of the service.

Jon