Writing a new fiduciary
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
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
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
"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
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
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
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
© 2011 Employee Benefit News and SourceMedia, Inc.
This article originally appeared in Employee
Benefit News, a SourceMedia