Why Participant Education is about a process and not a result

Advisors ask me all the time of the role of education in participant directed 401(k) plans. Participant directed 401(k) plans that are governed under ERISA §404(c) offer the plan sponsors liability protection based on a participant’s gains or losses on their account when they direct their own investment.

There have been so many misconceptions that plan sponsors and advisors have had concerning ERISA §404(c) plans. They had this belief that if they just give a mutual fund lineup and some Morningstar profiles to plan participants that they are exempt from liability. ERISA §404(c) protection is about following a process and Morningstar profiles is just not enough education to give to plan participants. On the flipside, education to participants doesn’t have to amount to an MBA education.

I think an effective education component to ERISA §404(c) plans should include enrollment meetings where the characteristics of the plan are discussed, as well as the investment options, and offering the building blocks of financial education to assist participants to get a better understanding on how to choose investments.

Advisors that may have issues in offering education should always consider using some of the online resources out there such as rj20.com and smart401k.com.

In addition, written materials such as plan highlights and some Morningstar profiles should always be distributed.

Also while many advisors dislike, one on one meetings to participants should always be offered. While most participants will probably shun such meetings, they should always be offered to those that want them because as we know, every participant has a different financial goal and need.  One on one meetings offer participant individualized attention on asset allocation and fund choices; it can be an effective means of educating plan participants more than what a general enrollment meeting can offer. It can help participants understand how retirement plan assets relate to their other assets as part of a comprehensive financial plan.

Advisors should always look at education as liability protection, because offering participant education help a plan sponsor minimize their liability under ERISA §404(c). While I always stress education as important part of the fiduciary process, it’s not about achieving a specific result from participants directing their own investments. Offering participants educations is like the old proverb, “You can lead a horse to water, but you can’t make him drink.” So no matter how great the education component is, there is no guarantee that it will help plan participants achieve a better financial result because like they say, there is no guarantee in life, except maybe death and taxes. The participant who put all his money into a mid-cap fund because he considers it the “average of the market” may still do so even after getting education at the enrollment meeting and through one on one meeting. As with most things with retirement plans, it’s about following a process and not guaranteeing a result.

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7 Responses to Why Participant Education is about a process and not a result

  1. Mike Rogers says:

    While I agree that it is about process, we also do need to monitor results. If the message we are sending is not getting across, then we must look at alternative methods for delivering that message.

  2. John Whaley says:

    There seems to be a fair amount of evidence that participant education, however it is delivered, does not result in the prudent management of a significant portion of defined contribution accounts.

    If industry professionals continue to offer only education and generic advice, are they not setting themselves up for future fiduciary litigation? I can envision a strong legal argument that we knew a process was not working, yet we continued to insist on using that process.

  3. I find it increasingly more difficult to navigate the aparent differences of purpose between the Securities Industry and the Retirement Industry.

    The Retirement Industry, and ERISA regulation seem to be heading toward new levels of transparency and access to information. Meanwhile the Securities Industry (particularly as represented by FINRA…progressive organization that it is!) seems to rely on obfuscation, lack of access to information, and on giving the client as little alternative information as possible.

    It seems that even a discussion (with a client) regarding the merits of a fiduciary vs. suitability standard is labeled as potentially “unfair” by FINRA, even though the DOL, SEC, Dodd-Frank writers, every trade organization out there, and nearly anyone else with an opinion is spending a lot of time on the issue.

    Therefore the conundrum…in an education process, where a discussion of various types of asset classes may be proper in order to help a participant make a wise investment allocation, how is this done without incurring the rath of the likes of FINRA? Further, how are plan participants properly served when their advisors (remember, most RIA’s are sub-operations of Broker/Dealers who cower at the mention of FINRA) are unable or unable to frankly advise a participant? To them, sadly, the only option seems to hand over a Morningstar report.

    Finally, who’s really in charge here??? DOL (gets my vote) or FINRA?

  4. Pingback: Why Participant Education is About a Process and Not a Result « Industry Articles « Insight Employee Benefits Communications

  5. Sean Ruehl says:

    Michael, you raise two terrific questions that caught my eye:

    1) How do you render investment advice to participants without incurring the wrath of FINRA?

    2) How are participants going to find appropriate help if the plan advisor is not comfortable doing it (or their b/d is not comfortable etc.)?

    Answer to the first question is you advise the Sponsor to compare third-party, totally independent ERISA fiduciaries to only serve the participants’ interests, and have the ability to provide specific and totally customized advice to them. This way you have the appropriate structure free of conflicts, and the horsepower to give the participants what they need, specific advice…not another calculator or general tool littering the marketplace already that no one uses. Also, the fiduciary to win the business should have their services broken out line item by line item as to what the participant gets and at what cost per participant, and how the fee and service equates to the competitors. With 408(b)2 on the horizon this work protects the Sponsor upfront on the due diligence for the participant services etc.

    The answer to the second question is by using this fiduciary service in answer #1, the participant can get what they need. Moreover, this fiduciary won’t compete with you so you have a trusted arrangement and separation of duties with no overlap, but seamlessly complimenting one another for a true win-win-win. Win for the Sponsor and Participants, win for the advisor or b/d, and a win for the fiduciary to fill a need in the marketplace thereby raising the standard of the industry as a whole.

    We have market data we are happy to share if anyone is interested regarding these arrangements discussed.

  6. Pingback: Great Article By Ary Rosenbaum On Participant Education « RJ20's Online Participant Advice & Financial Planning Blog

  7. Jimmy Masters says:

    If you are my individual client there is no issue with me suggesting you buy Exxon, GE or Fidelity Contrafund. Yet if you are my 401k client I’m allowed to stand up in front of a group of employees and inform them of the differences between stocks, bonds & cash, and international & global. I can tell them how target dates funds are managed and what they do. I can explain the difference between large, mid & small cap stocks, and I can tell them that they need to invest in this plan because Social Security tells us right on the front page of our statement that it was never intended to be our sole source of retirement income.

    Their boss, our client, wants (and expects) us to help them figure out how to invest in this great plan that they provide for their employees. Yet in 6 or 12 months when we come back to do a follow up education meeting, many of these employees will arrive statement in hand. We’ll see that some of them invested at least two target date funds, several have selected at least 10-12 funds from the menu and have no idea why, some picked the “hottest” fund from last year, and the others are sitting in the money market fund but don’t know why…and maybe a few did the right thing.

    What FINRA and the DOL fail to understand is that we are charged as advisors with doing the right thing for our clients, and the right thing for these clients is to help them do the right thing with their money, based on risk tolerance and time horizon. Yet if we truly perform this duty in the way that we know we should, we are committing a prohibited transaction or some other transgression. But in the employer’s and the participant’s eyes it will be our fault if things go south for the participant’s account.

    I have no idea how this actually gets reconciled.

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