New rules highlight 401(k) education lapses

Anthony Kippins, President, Retirement Plan Advisors LLC

Federal rules have long required employers to provide employees participating in 401(k) plans with enough information to manage their investments and make informed investment choices. But many employers ignore the spirit, if not the letter, of these rules — assuming that they’re aware of them in the first place.

Commonly, employers sponsoring plans are unaware of their responsibilities under the Employee Retirement Income Security Act (ERISA) of 1974. This lack of awareness is coming into sharp relief now that the federal Department of Labor (DOL) is instituting new rules regarding 401(k) plans. The new rules require plan sponsors to assure that the fees of service providers are reasonable, as these fees ultimately come out of the pockets of their employees. To the extent that advisors charge plans for educating participants on how to get the most out of their plans, the new regulatory era raises the question: Are these advisors delivering the education services that employees are paying for?

Frequently, they aren’t. This will become increasingly apparent beginning this summer, when service providers will be required to disclose — and plan sponsors, to ascertain — all fees and the specific services being provided for them. Many employers will find that in cases where plans are paying advisors for education services, these advisors aren’t even providing participants with the most superficial information required by ERISA. As the DOL rules shine light on employers’ responsibilities as fiduciaries (a legal/regulatory status that carries substantial liability), this lapse could expose employers to potential penalties from regulators and lawsuits from employees.

Plan sponsors are accountable for assuring at least minimal compliance in this regard. They aren’t required to have plan advisors. But if they do, they are responsible for holding these advisors’ feet to the fire to deliver contracted services, including the disclosure of basic plan information required by ERISA. Otherwise, plans are violating rules of ERISA and potentially new DOL rules, because fees can’t be reasonable if advisors are charging for something they aren’t delivering.

Even when employees receive basic plan information, they typically have no idea what to do with it because they aren’t getting substantive instruction on the investing basics.  The reality is that employees often emerge from plan educational programs ill-equipped to make investment choices most likely to assure optimal retirement planning outcomes.

Maintaining effective plans with a strong education component isn’t just the right thing to do; it’s the foundation of a retirement plan that complies with federal rules. If plans are not delivering participant-driven education programs, they’re not equipping their participants to make informed decisions about their investments. Therefore, these plans are not compliant with federal rules and thus, they set up sponsors for potential lawsuits.

This summer, when service providers supply plan sponsors with the required list of services they’re providing for their current compensation, companies should take note of whether education programs are included in their services. In many cases, they won’t be.

This shortcoming, along with various others showing how little many plans are receiving for the fees they’re paying, will prompt many sponsors to seek more reasonable fees. The best way to do this is to:

  • Issue a request for proposal (RFP).
  • Compare the scope of services to those offered by other providers for the fees being charged, with emphasis on individual employee assessment and education.

If effective, deeper financial education can empower employees to assess the required basic disclosures through the lens of fundamental financial knowledge. Only then can 401(k) plans ultimately achieve their true purpose: to assure retirement security.

Anthony Kippins is president of RETIREMENT PLAN ADVISORS, LTD., a Cincinnati-based financial services company that provides retirement-plan fiduciary services and employee-benefit solutions to small companies. Kippins holds the AIFA (Accredited Investment Fiduciary Analyst) designation. He can be reached at [email protected]

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