A consideration for a successful retirement plan, in meeting the expectations of employees as well as the Department of Labor’s (DOL) enforcement of ERISA, is the implementation of an employee education program. Plan sponsors should consider how to best provide comprehensive and unbiased retirement plan education for their employees.
Offering participant education helps a plan sponsor minimize their liability under ERISA §404(c).
Section 404(c) is a specific part of the law that permits employees to direct the investment of their own retirement accounts, without the plan sponsor’s maintaining the liability for the participant’s investment directives. An employee is empowered to direct their own retirement account so they can control how their savings is invested, in consideration of their own unique needs and preferences. Proper compliance with Section 404(c) ensures the avoidance of the employer being seen as having provided “investment advice” which would give the employer the liability for investment selections.
An important step a company must take when working with compliance around ERISA 404(c) is helping employees understand the investment options available to them. The DOL considers this to be the obligation of the employer.
Employees who understand the scope of their employer's retirement plan benefits and are actively engaged in saving for retirement, improve their odds of achieving their retirement income goals. An effective plan participant education strategy can ensure that all participants have been provided the support necessary to understanding the features and benefits of their retirement plan while creating a process for them to have access to utilize the options available within the plan.
A feature of many plans on which participants should be educated is the varying methods that may be available within the plan for assisting in the implementation of a suitable asset allocation.
Plan sponsors can provide for the availability of multiple methods of asset allocation with the assistance of both the recordkeeper and the advisor. Here are some examples that can be made available simultaneously for use by participants of varying needs and sophistication:
* Self-mix funds
A lineup of various investment alternatives often consisting of standalone mutual funds of various style types that can each be selected on their own to assemble a portfolio at the discretion of the participant. This menu would often include both actively managed fund options and indexed fund options.
* Target date funds
Composed of professionally managed mutual funds or exchange-traded funds (ETFs) that are structured to allocate assets in a way that is optimized for a specific projected retirement date and beyond. The managers adjust the allocation over time in a way that is believed to be consistent with a retirement that is approaching or has since occurred.
* Risk-based models
These are designed to allocate investments along a spectrum from conservative to aggressive depending on the investor’s goals, risk tolerance and retirement timeline. These are generally somewhat static broad allocations between equities and bonds that is set according to the participants’ determination of their own risk tolerance.
* Professionally- managed accounts
The money or investment manager has the authority to buy and sell assets on behalf of the client, as long as they act according to the client’s objectives and Fiduciary duty.
An advisor can assist participants by engaging them in a group setting as well as giving them the opportunity to meet one-on-one. Plans might utilize the following education methods to comply with ERISA §404(c).
This will provide an overview of the plan’s characteristics, while helping employees understand how to put the plan’s features and investment options to work for them. These meetings may include a discussion of plan types, contribution limits, employer contributions, vesting schedules, investment options, taxes, rollovers, loan or withdrawal options, and fees.
Broad Financial Education
This can illustrate how a retirement plan fits into an individual’s retirement planning and how their retirement planning fits into their overall financial picture. This may be done on-site or via video or website-based learning.
One-on-one Financial Education
Employers may engage an advisor to directly offer personal counseling to employees. The help the advisor provides may range from resolving account login issues logging into their retirement plan to selecting investments on the recordkeeper’s website.
Proper financial education can turn employee inaction into positive savings behavior and increase a plan's participation and contribution metrics.
This material has been provided for general, informational purposes only, represents only a summary of the topics discussed, and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice or recommendations. Rather, they simply reflect the opinions and views of the author. D. B. Root & Company, LLC. does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation. There can be no assurance that any particular strategy or investment will prove profitable. This document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such sources, and take no responsibility therefore. This document contains certain forward-looking statements signaled by words such as "anticipate," "expect", or "believe" that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that the expectations, beliefs, views and opinions expressed in this document will come to pass. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. All investment strategies have the potential for profit or loss. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The impact of the outbreak of COVID-19 on the economy is highly uncertain. Valuations and economic data may change more rapidly and significantly than under standard market conditions. COVID-19 has and will continue based on economic forecasts to have a material impact on the US and global economy for an unknown period.
Steven J. Kaczynski, Jr.
CFA®, AIFA®, CPFA®, MST, MBA