A recent study by the International Foundation of Employee Benefit Plans shows that by instituting a financial education and advice campaign, 42 percent of employees have a better understanding of the benefit. Education can also have a bottom line impact to a company’s profitability.
With more knowledge of their financial future, employees are often relieved of financial stress, thus in the day-to-day, they can be more productive at their job.
Typically, as a 401(k) advisor, you offer group education sessions to discuss general topics like diversification, asset allocation or budgeting. In this setting, you might discuss options based on averages, “On average, if you are at this age or stage of your life you should do X, Y, or Z.”
However, very few people in any given room actually are average. So, it’s ideal to offer plan participants the opportunity to speak individually with you about their personal situations. This can help participants receive specific advice about how to reach their unique goals and objectives.
Individualized advice enables employees to understand the options available, thereby maximizing contribution and participation rates. The best way to get specific and customized advice to employees is to work with an advisor that’s willing to do so.
In addition, offering a 401(k) education seminar can help a firm become ERISA Section 404(c) compliant, which provides some protection for plan fiduciaries related to the investment decisions that individuals make in participant-directed retirement plans. For plans that are completely participant directed, by complying with the rules of Section 404(c), plan sponsors are relieved of some liability for what may be seen as poor investment decisions by the individual participants.
401(k) advisors can help plan sponsors to do a few things to comply with Section 404(c).
First, advise the sponsor to offer a broad range of investments, including at least three investment alternatives that are diversified and offer various risk-return profiles. This could include, a cash option (money market), a bond option (bond mutual fund), and a stock option (stock mutual fund).
Section 404(c) also requires that plan participants receive information about how to direct their investments. They should be provided with risk-return characteristics of each investment, expense characteristics, understand the fees involved and have access to prospectuses on each of the investment available. They should be given “sufficient information” to make informed decisions about their investment options.
Once this criteria is met, plan sponsors can claim compliance with Section 404(c). Of course, the benefit for being compliant with Section 404(c) is relief from certain fiduciary liabilities. Some may view providing sufficient information to plan participants to make informed decisions and educating them on the investment options as an added responsibility for plan sponsors.
However, businesses can work with advisors that offer employee education about the plan to help to meet the compliance requirements necessary to relieve some liability from a plan sponsor.
Nathan Boxx, AIF, CFP, is director, retirement plan services and financial advisor at Fort Pitt Capital Group.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
