401(k) education: how much should I say?

• Author: Mehta, Shiv

When employees seek investment advice, should employers put their two cents?

When the 401(k) law was passed, the intent was for employers to give their employees control - and responsibility - for their own retirements.

Today the question of whether this bold experiment in financial democracy has succeeded remains unanswered. Certainly, many of the 30 million Americans covered by 401(k) plans have benefited from the stock market boom, as they've watched their collective retirement cache grow to over $1 trillion.

Employers, and the vendors they've chosen, have done a commendable job in providing tools and education to employees, helping them to make appropriate investment decisions in their 401(k) plans. By and large, the education aspect of the 401(k) plan industry has been its biggest success. Via mass meetings, mailings, financial software, videos, audiotapes and the Internet, the 401(k) plan arguably has become the world's largest informal investment classroom.

Money Talks

And now, the industry is poised at the edge of an even bolder experiment. No longer should employees be left to figure out their own investment strategies, it's argued. They need help - beyond tools, beyond education, beyond teaching them how to invest. They need specific advice on which funds to buy, on exactly what investments they should make.

But there's an important legal distinction between providing "guidance" (general information about the plan; economic and investment commentary; asset allocation models using hypothetical scenarios; and interactive investment material where the participant is in control) and "advice" (investment counsel regarding the value of investments or investment recommendations for a fee or other compensation).

Offering advice has significant legal implications. Advising in the context of a 401(k) plan makes the advice provider a fiduciary, meaning he or she is potentially liable for inappropriate investment decisions, and is certainly responsible for ensuring all actions are prudent and solely in the interest of respective beneficiaries.

Legalities aside, though, interesting and ticklish business issues surround advice-giving. Should plan sponsors allow the advice to include non-plan assets? How effective is advice that focuses on a single goal - retirement - and a single account - the 401(k)? Would advice from mutual fund companies - the dominant providers of education and recordkeeping - be inherently self-serving? What should be the...