With the enactment of
the Pension Protection Act of 2006 (PPA), plan sponsors were given a freedom
they didn’t have before. The legislation, which William Arnone of Ernst &
Young calls “the most far-reaching legislation impacting benefits since ERISA,”
enables plan sponsors to offer employees investment advice without exposing
themselves to liability for the outcome of that advice. However, to avoid
fiduciary liability, plan sponsors still must follow rules and regulations regarding
the selection of a provider/advisor.
Arnone and Lynn
Finkelstein, both Employee Financial Services Practice Leaders with Ernst &
Young, say you should be thinking about whether offering investment advice is
the right decision for your organization. They presented their seminar on
401(k) investment advice and the PPA at the 20th Annual Benefits Management Forum
& Expo in
Five Employee Missteps
A good way to gauge
whether employees would benefit from your providing advice is to consider employees’
investment missteps. Arnone listed the top five mistakes employees make
regarding their 401(k)s:
1. They don’t enroll.
Thirty percent of eligible employees aren’t participating in employer-provided 401(k)s, noted Arnone.
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2. When they do enroll,
many employees don’t contribute enough. As a result, many employees aren’t receiving
the available maximum employer match.
3. They borrow against
the 401(k) plan.
4. When employees leave
the employer, instead of rolling over their 401(k), they cash it out and
swallow a huge penalty.
5. They invest in a way
that doesn’t make sense. For example, many young employees invest too
conservatively while many older employees leave themselves overexposed by their
investment choices.
Determining Whether to
Give Advice
Finkelstein explained
that there are a number of questions you should ask to determine whether to
provide investment advice. These questions all center on “knowing your
employees.” Here are some examples:
What kind of culture
does your company have? Is it a paternalistic culture in which the organization makes
a lot of choices for its employees? Perhaps the company used to have a defined
benefit plan or is now making the transition to a 401(k). These types of employees
could be good candidates for benefiting from assistance in making their
investment decisions,
Finkelstein suggests.
What is your workforce
composition? Do you have an aging workforce with a large number of older workers
who could benefit from help with their investments for the small amount of time
they have left as your employees? Do you have a younger, more mobile workforce?
If so, are they not saving as they should because they have a “live for today”
mentality? Perhaps they need the proper encouragement to invest their money the
right way.
What are your current
401(k) participant patterns? As Arnone pointed out, participation rates in
401(k)s aren’t great, but they are on the rise. Still, Finkelstein cautions,
when you “peel back the skin” on this trend, you’ll see that there is also an
increase in 401(k) loans and hardship withdrawals. Many employees need to start
viewing their 401(k) as a “retirement vehicle” again, not as “revolving credit.”