Writing a new fiduciary formula

If anybody who had something to do with employee retirement plans needed a dose of reality regarding the level of understanding and knowledge participants had about their money, how it was being invested and what the outcomes were, a recent poll provided it.

Results of the poll, which sought input from HR professionals and investment counselors, demonstrated dramatically that a large portion of those who invest in company-sponsored retirement plans do not comprehend how their money is being invested.

Worse, they seem to make no effort to learn. Or, maybe it's that corporate America has not provided the appropriate tools. I believe it is the latter.

And we're not talking about complicated issues here. The poll didn't seek to find out whether investors are savvy when it comes to the nuances of specific products. Instead, they asked broad questions designed to measure the levels of knowledge that exist on basic topics. Without fail, both benefit directors and investment professionals reported a surprising dearth of comprehension of issues that the employees should know surrounding investing their money.

For instance, when asked whether plan participants understood the difference between "investment advice and education," 60% of HR professionals reported that 25% or fewer of their workers could make a distinction. That's a staggering number, considering another 23% said 50% or fewer could do it.

You might think investment advisers would be a bit reticent to admit that their clients have any gap in knowledge, but their honest answers - given after a promise of anonymity - indicated a more significant lack of education. Among them, 69.5% said 25% or fewer people couldn't distinguish between investment advice and education.

"I have given well over 1,000 education meetings," one respondent said. "The participants do not have a clue!"

As you might imagine, the numbers get even more dramatic as the questions get a little harder. For instance, 61.8% of HR professionals reported that 25% or fewer people knew what "asset allocation means and how it works," while 68.3% of investment counselors said the same.

When asked whether employees "requested additional assistance or a meeting," 67.4% of HR pros said that 25% or fewer did that, while 64.1% of investment folks reported that figure.

"People depend on their employer and take little effort to understand their responsibility as it relates to their retirement account," one survey participant said.

The fourth question addressed target-date funds and whether people understood them. A whopping 81.2% of HR professionals said 25% or fewer of employees grasped the concept, while 83.6% of investment experts reported a similar figure.

As you might expect, a question about investment fees was most revealing. When it came to whether employees understood what fees they paid to invest through their plans, 88.2% of HR executives said 25% or fewer of their employees knew that, while 89.3% of investment counselors reported the same level of "knowledge."

The climate of knowledge - or lack thereof - that prevails among employees who invest in company-sponsored retirement plans could be summed up by one comment from an employee that was related by one human resources manager in the survey: "I hear so many bad things about the financial world that I don't know who I can trust," he said. "So, I do nothing."

PPA changed everything

Ten years ago, this lack of knowledge, while shocking, might have been of little concern to employers. That you-can-lead-a-horse-to-water attitude was forced to change with the passage of the Pension Protection Act of 2006. Employers and HR/benefits pros were no longer just providers of information and schedulers of lunchroom meetings with investment counselors. They had started to take on a full fiduciary responsibility for the education of employees.

In other words, if someone is putting money into a company-sponsored 401(k) or 403(b) plan and doesn't really know what's going on, you are a fiduciary and liable personally. CYA used to mean Cover Your "you-know what." Now, it stands for "Call Your Attorney."

No matter how earnest or committed employers might be, PPA provided a dangerous weapon that could be used against them. Employees had to have set, accurate, reliable avenues on which they could rely for information. If they didn't understand asset allocation, giving them a pamphlet or telling them about a half-hour meeting in six months wasn't going to cut it. A serious dip in the market that brought losses to retirement plans could result in a raft of lawsuits from employees who blamed their problems not on their own unwillingness to learn, but on the company itself.

The Department of Labor has brought a serious call to action for companies and their HR/benefits departments. To protect themselves from any future repercussions, it is vital that every HR/benefits department create a better avenue to help their participants.

I am suggesting that in order to CYA, employers need to create an "REPS," or Retirement Education Policy Statement. Such a statement delineates exactly how employees can gain access to the information they need to become educated on generic terms and financial concepts associated with their retirement plans. Do that, and both the companies and participants win. Fail to do so, and uneducated employees have all the power, even if they don't have all the knowledge ... yet.