Many 401(k) plan sponsors seek to reduce their potential fiduciary liability by electing to be a Section 404(c) plan. Under Employee Retirement Income Security Act (ERISA) Section 404(c), a fiduciary is not liable for losses in the plan resulting from the participant’s selection of investments in his or her own account, provided that the participant exercised control over the investment and the plan has met the requirements in the U.S. Department of Labor (DOL) regulation.
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One of the requirements in the DOL regulation (25 C.F.R. §2550.404c-1) is that the fiduciary provide the participant with sufficient information to make an informed investment decision. Specifically, the participant is to be given a description of investment alternatives available in the plan, including a general outline of the investment objectives and risk-and-return characteristics of each alternative. But if the plan fiduciary fails to satisfy the requirements in the regulation, the corresponding protection does not apply.
While it is important to make sure that participants get sufficient information, it may be more critical to make sure that they are able to understand and take action based on that information. This column takes a closer look at the plan sponsor’s mission of providing understandable plan and investment information.
Background
While the plan fiduciary is expected to give attention to the development of participant education materials, additional effort may be necessary to close gaps in comprehension. Employees, especially those at smaller companies, often express confusion about their 401(k) plans and related financial terminology, according to Dream Forward, an independent 401(k) plan manager that provides an artificial intelligence (AI) interface to answer plan questions for participants at small and medium-sized businesses.
In the years since DOL Interpretive Bulletin 96-1 (released in June 1996, aimed at making a distinction between investment education and advice), there has been consistent regulatory and industry focus on the ever-present responsibility of educating plan participants. As a result, a wealth of education materials in many forms—including welcome letters, enrollment packets, newsletters, videos, statement messaging, push emails, enrollment meetings, seminars, and webinars—have been delivered to participants.
Yet we are finding that some of these participants are not comprehending messages that have been prepared with terms commonly used by retirement practitioners. For financial-novice participants who are not familiar with such terms, these well-meaning messages can get lost in a fog of industry jargon.
The financial services and retirement plans community strives to assign names to key components of retirement plans and traditional investments to eliminate participant confusion, educate, and offer consistency.
For example, “elective deferral” and “required minimum distribution (RMD)” are terms pulled from applicable regulations, while “brokerage window” and “target-date funds” (TDFs) are other terms agreed upon by investment providers. But it seems that ensuring consistency in how a concept is described may not be enough to ensure that a plan participant—the end user—fully understands what’s meant and the impact of that on his or her investment decisions.
Adding to the participant’s general angst over making investment decisions is the realization of possible long-term effects if he or she does not make the right decisions during the years spent working and accumulating retirement savings.
A Personal Financial Planning Trends Survey, conducted by the American Institute of CPAs (AICPA) and concluded in September 2018, found that running out of money (41%), maintaining their lifestyle (28%) and rising health-care expenses (18%) during retirement top the list of concerns that Americans have for that phase of their lives. While these statistics are not surprising, they may help to explain why the average participant feels anxious and unprepared to make plan contribution and investment decisions intended to maximize his retirement savings and eventually replace his or her livelihood.
Participant Education
Participant education is not a one-and-done phenomenon. It is important to note that, similar to lifelong learning, participant education is most effective when approached as a continuous offering. Gaining a true understanding of 401(k) plans and how they are administered, including the investment component, is best achieved through a program that starts with the basics. In particular, it may be advisable to start with 401(k) Basics and Investments 101, then build on those fundamentals by offering periodic sessions that provide more complex and detailed information later.
Taking into account the reality of employee turnover, it is also prudent to repeat any courses developed, either as new information or as a periodic refresher, to allow participants to revisit familiar concepts before covering additional content. And because not all participants learn the same way, the program format should be multifaceted, with print, audio, and video formats, as well as delivery by mail, on-screen, and electronically on mobile devices.
Where feasible, retirement plan and investment course content may be incorporated into the company’s new-hire training, stored on the training database, and made available to each employee who has access to a company computer to perform his or her job function.
Interactivity is key, and one of the best ways to gauge understanding. When participants can ask questions and receive responses in real time, they tend to stay engaged in the process, and that enhances their learning about retirement saving. The information exchange may be enhanced by letting participants respond to questions through a chat room via computer or other mobile device, which may reduce the intimidation factor because questions may be posted anonymously.
Artificial Intelligence
Still another approach to increasing understanding is using AI to identify what information is needed to help a participant act to maximize his or her retirement savings rate. Similar to the electronic feed that starts filling up one’s email account following online shopping, information related to your 401(k) plan transactions or a client service call regarding your contribution percentage may be tracked as input.
As an example, with AI, a participant’s call to the client service center to discuss the plan’s company match amount may be returned in the form of an email prompt. As a follow-up, the inquiring participant who is contributing 5 percent may receive an email reminding her that an additional company match is available if she increases her contribution percentage to 10 percent.
Increased use of electronic communications and participants’ ability to make online plan investment transactions allow providers to gather, track for trends, and use AI to prompt participants to take action. Using AI as an interactive tool may help participants because the data can be customized. Aligned with any prompts from a participant’s prior search or action, this approach is more likely to keep them engaged. Best of all, the tracking can begin with information obtained during participant enrollment.
One last way to gauge participant understanding is to monitor how she reacts to a prompt, which might be received by text to a mobile device, and whether she takes action. The resulting action may be speaking to a client services rep to request a prospectus or making an investment reallocation. By taking action, the participant indicates that he understood the messaging and felt comfortable enough to implement a change.
When a retirement plan educational effort leads to the desired results, the provider may positively reinforce the action taken by sending a positive message. Imagine receiving an email with a subject line that reads: “You are awesome,” “Good job,” or “You are on track to maximize your savings.”
It follows that understanding and positive reinforcement combine to empower a participant to make plan and investment decisions intended to maximize retirement savings. The hope is that this newly broadened understanding can also serve to ease participants’ deep concerns about retirement revealed in the AICPA survey.
 Arris Reddick Murphy is an attorney with experience in the employee benefits and executive compensation practice area, and she is senior counsel with FedEx Corp.’s Tax & Employee Benefits Law group. Before joining FedEx, she held the position of associate with the law firm of Potter Anderson & Corroon, LLP, and worked in-house with The Vanguard Group and the City of Philadelphia as counsel to its Board of Pensions and Retirement. She is contributing editor of The 401(k) Handbook. |