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Most 401(k) Investment Advice Is General, SHRM Poll Finds
Issues include fiduciary vs. non-fiduciary advisers, compliance with DOL's investment advice rule

By Stephen Miller  9/7/2010

Far more organizations provide defined contribution retirement plan participants with general educational materials about the plan and about investing than provide participants with individual investment advice, accordng to a poll by the Society for Human Resource Management (SHRM). The poll of randomly selected HR professionals from SHRM's membership was fielded from July 20 to Aug. 2, 2010.

Education

The poll reveals that 87 percent of organizations that provide their employees with a 401(k)-type plan make some type of investment education available to plan participants. Among those that offer investment education, the top formats are:

Brochures or other written materials delivered online or through mailings (98 percent of respondents).

Computer modeling, including web-based interactive tools (90 percent).

Call centers or help desks to answer questions (87 percent).

Group seminars (80 percent).

Individual sessions (60 percent).

The top subjects of investment education are:

Plan information, such as the terms of the plan (97 percent).

A listing of all funds available in the plan (97 percent).

General financial and investment information, such as assessing risk tolerance (94 percent).

Interactive tools, such as those that help participants estimate retirement income needs (87 percent).

Non-individualized asset allocation models (59 percent).

Advice

In addition, 51 percent of organizations provide or make available some form of investment advice, such as guidance to help plan participants make decisions about fund selections and contribution rates. Among respondents that offer investment advice, the most common formats for delivering this advice are:

Brochures or other written materials (82 percent).

Computer modeling, including web-based interactive tools (81 percent).

Call center or help desk (74 percent).

Individual sessions (71 percent).

Professionally managed accounts (68 percent).

Group seminars (57 percent).

Not-for-profit organizations (88 percent) are more likely than publicly owned for-profits (53 percent) to report using individual sessions to present investment advice.

The most common subjects of investment advice are:

Fund investments (94 percent).

Contribution level (90 percent).

Asset-class allocation (88 percent).

Advisors' Fiduciary Capacity

One aspect of being a fiduciary under the Employee Retirement Income Security Act (ERISA) is the responsibility to offer investment-selection advice that is in the investor's "best interest"—a higher standard than the "suitability" standard that advisors and sales people who are not ERISA fiduciaries are held to. When asked about the type of advice providers they used, HR professionals gave the following breakdown: 

Type of Investment Advice Provider

% that Answered Yes

Investment advice provided directly by the plan as defined under applicable U.S. Department of Labor rules and regulations (for example, individualized recommendations to invest, purchase or sell investments and funds based on the needs of a plan participant).

39%

Investment advice provided through an independent third party, where a third party serves in an ERISA fiduciary capacity.

23%

Investment advice provided by or through an independent third party where a third party does not serve in an ERISA fiduciary capacity.

21%

DOL Proposed Regulations

In February 2010, the U.S. Department of Labor (DOL) announced its revised proposed rule on investment advice for U.S. workers covered by 401(k) plans and other retirement arrangements (see “DOL Issues New Proposed Rule on Investment Advice). The proposed rule permits investment advice to be given under the Pension Protection Act's (PPA) statutory exemption from liability only if the advice is provided in one of two ways:

Through the use of a computer model that must be certified as unbiased by a plan fiduciary independent of the investment advisor or its affiliates, to be audited annually by an independent auditor.

Through an advisor compensated on a "level-fee" basis so that fees do not vary based on investments selected by the participant. To satisfy the fee-leveling requirements, organizations providing investment advice and their employees may not receive compensation from any party, including any affiliate of the advisor, on the basis of their recommendations.

HR professionals responded as shown below when asked whether they would provide advice that adheres to the new rule: 

Which of the following practices, if any, does your organization provide or expect to provide for investment advice services to 401(k) plan participants in light of DOL regulations published under the Pension Protection Act (PPA)?

 

Currently provide

Do not currently provide but plan to provide

Do not provide, do not plan to provide

Unsure

Computer-model-based advice, pursuant to a PPA-eligible investment advice arrangement.

42%

6%

17%

35%

Level-fee-based advice, pursuant to a PPA-eligible investment advice arrangement.

15%

8%

33%

44%

To view the complete poll results, including a breakdown by industry, sector and staff size, see "SHRM Poll: 401(k) Investment Education and Advice Organizations Are Providing to Plan Participants."

Stephen Miller is an online editor/manager for SHRM.

Related Articles: 

Younger Workers Concerned About Keeping Defined Benefit Plans, SHRM Online Benefits Discipline, September 2010

Automatic Shift: More Employers Add 401(k) Features to Drive Participation and Savings,SHRM Online Benefits Discipline, August 2010

401(k) Loans and Hardship Withdrawals on the Rise,SHRM Online Benefits Discipline, August 2010

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