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 investment advice to employees without exposing themselves to liability for the outcome of that advice. However, in order to avoid fiduciary liability, plan sponsors still must follow rules and regulations regarding the selection of a provider/advisor.
While the Department of Labor has forthcoming regulations that will further clarify a plan sponsor's responsibilities, Arnone and Lynn Finkelstein, both Employee Financial Services Practice Leaders with Ernst & Young, say you should be thinking about whether offering such 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 Dallas, Texas.
Arnone listed the top five mistakes employees make regarding their 401(k)s:
- They don't enroll--Arnone noted that 30 percent of eligible employees aren't participating in employer-provided 401(k)s
- When they do enroll, many employees don't contribute enough. As a result, many employees aren't receiving the available maximum employer match
- They borrow against the 401(k) plan
- When employees leave the employer, instead of rolling over their 401(k), they cash it out and swallow a huge penalty
- They invest in a way that doesn't make sense. For example, many young employees invest too conservatively while many older employees leave themselves too overexposed by their investment choices
Finkelstein explained that there are a number of questions you should ask in order to determine whether or not to provide investment advice. These questions all center on "knowing your employees." For example, she says you should think about your company's culture--what kind of culture is it? Is it a paternalistic culture where 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, do they have a "live for today" mentality where they aren't saving as they should? Perhaps they need the proper encouragement to invest their money the right way.
What are your current 401(k) participant patterns? As Arnone had pointed out earlier, 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 a "revolving credit."