Advisors ask me all the time of the role of education in participant directed 401(k) plans and it's an important question. 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, who could offer investment advice that an advisor can't if they won't comply with the investment advice regulations.
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 an 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.
When I had the idea of starting a National ERISA practice 10 years ago, I knew I would have a tough time in getting clients especially when the law firm I was at had partners that weren't interested in selling my services to their clients. So I figured an easy way to market myself and network with other providers around the country is to provide content. You help a plan provider with articles that they can help themselves or market their services; they're going to remember you when they have retirement plan clients that need an ERISA attorney. I also had and still have an open door policy for providers to just give me a call without a bill due. It's straight talk and this article is also straight talk about some of the challenges of being a retirement plan provider.
I always say that the reason I've never hired an employee is because I was an employee once too. I say that the problem with the employee-employer relationship is that no employee thinks they get paid too much and no employer thinks they pay their employees too little.
If you're a financial advisor, more assets under management equal more money. It's pretty simple to me. So that means a financial advisor working in the 401(k) plan space should do their best to making sure that their Plans get bigger n the asset department.
A good chunk of my work as an ERISA attorney is working with financial advisory firms in managing their retirement plan practice especially with 401(k) plans. I have many registered investment advisory clients around the country and I counsel them all areas of their practice. I always caution about share classes in mutual funds offered to plan participants and the need to find the lowest costing share class possible.
