It’s a Process and Not A Result

Ary Rosenbaum
Contact

Ary Rosenbaum - The Rosenbaum Law Firm P.C.

Advisors ask me all the time of 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 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 are 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.

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 helps a plan sponsor minimize their liability under ERISA §404(c). While I always stress education as an important part of the fiduciary process, it’s not about achieving a specific result from participants directing their own investments. Offering participant education is like the old proverb, “You can lead ahorse 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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ary Rosenbaum, The Rosenbaum Law Firm P.C. | Attorney Advertising

Written by:

Ary Rosenbaum
Contact
more
less

The Rosenbaum Law Firm P.C. on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.