Advisors ask me all the time about 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 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, who could offer investment advice that an advisor can’t if they won’t comply with the investment advice regulations.