Plans are adding personal financial advice for employees.
The brutal bear market beating in recent years has led to significant innovations in 401(k) plans offered by small to mid-size employers. One of the driving forces for these innovations is a re-emergence of trustee awareness with regard to their fiduciary liability.
The volatile market environment has placed a spotlight on this fiduciary liability. Department of Labor 404(c) regulations under ERISA offer trustees some protection from this fiduciary liability, while giving employees greater control of their financial futures.
The DOL 404(c) regulations may limit fiduciary liability with regards
to investment performance if four conditions are met: 1)
Participants have the opportunity to choose from a broad selection of
investment options; 2) Participants have access to their accounts at
least quarterly (most plans allow daily access); 3) Participants have
the opportunity to transfer their account balances at least quarterly
among the investment options (most plans allow daily transfers); and,
4) Participants are provided sufficient information to make informed
decisions with regard to their investments.
However, according to the latest Roger Casey/IOMA survey, less than one-third of employers provide their employees with investment advice. Still, while many plans attempt to qualify for 404(c), the failure to adequately educate participants on their investment options may expose them to fiduciary liability. For this reason, there has been greater interest in providing semi-annual or annual, on-site personal education. Gone may be the days when plan trustees could simply send out a brochure and expect participants to understand their options. Most participants are simply too overwhelmed with the number of investment options and how to diversify their accounts.
A new trend is developing to offer a "core" list of 15 to 20 investment options that are actively monitored by the plan's trustee or investment committee. For those participants seeking a greater list of options, a "fund window" becomes available, which can offer hundreds of other investment options.
Many trustees also recognize the desire to offer a multiple-investment-platform approach for the investment options; less frequently are participants are offered investment options from a single provider. The preference, of course, is to seek out the best money managers from a variety of investment companies.
While some participants will research their investment options, many do not have the time or interest. For this reason, it is becoming popular to offer "lifestyle asset allocation" models. These models typically range from conservative to aggressive, and are rebalanced quarterly. Many of these models are "passive" in nature. Once the target asset allocations are determined, they are rarely changed.
However, a new breed of "active" lifestyle asset allocation models have arrived. With "active" models, the asset allocation mix is tailored to a participant's risk tolerance and actively monitored and controlled by a money management firm. This dynamic asset allocation strategy will focus on an investor's time horizon, risk tolerance and the relative strength of different asset classes.
With these models, participants now have three investment approaches to choose from:
Employee selects from a diversified list of investments to personally design their asset allocation mix, and should personally monitor their portfolio.
Employee selects a passive "Lifestyle Asset Allocation" model that typically is automatically rebalanced quarterly.
Employee selects an active "Lifestyle Asset Allocation" model where a money management firm selects and monitors the investments.
As we were recently reminded, the investment markets can be very cruel and unforgiving. Trustees are now recognizing that employees need and deserve professional education when it comes to managing their retirement assets and future well being.
Gerald C. Steffes, CPA/PFS, CFP, is an advisor in Shawnee Mission, Kan. He has more than 15 years of experience and oversees $110 million in assets.