Labor Dept. to Make Some 401(k) Rules Clearer
The U.S. Labor Department this month plans to publish new rules designed to get employees better, more useful information about investing in their 401(k) plans.
The department’s “interpretive bulletin” will actually be a clarification of longstanding rules about what employers can say about the plans. These rules are important because they determine the company’s legal responsibility to employees who participate in 401(k) plans. These plans are the fastest-growing type of employee pension; they now cover about 19.7 million individuals and account for roughly $640 billion in retirement savings.
In a nutshell, if a company behaves improperly by giving too much advice or too few choices to plan participants, it becomes a fiduciary. That means the company could be liable for investment losses--or even inadquate investment returns--in employees’ self-directed retirement plans, a situation most company managers shudder to even contemplate.
A few years ago, the Labor Department issued clear rules about how many choices are enough--three or more. But until now, the government had never said just where companies might put themselves at risk in giving out investment information. Companies have justifiably been petrified of going overboard. As a result, many provided nothing more than information about when employees qualify to participate, when company contributions become vested and other very general data that did little to help employees plan adequately for retirement.
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“For a long time, companies have offered little or no investment education for fear of crossing the line,” says Jim Sullivan, principal at the national accounting and consulting firm of Arthur Andersen & Co.
However, with 401(k) plans quickly replacing traditional pension plans as the mainstay of America’s retirement savings, many experts believed that more information was needed.
The government’s response, telegraphed to industry last month, was to detail informational “safe harbors.” The department stresses that companies are in no way required to give any advice or provide any education. But if they do want to provide investment education and they stay within the safe harbors, they cannot be held accountable for a participant’s investment misfortune.
It’s important to note that the Labor Department says companies can provide a wide array of detailed data about diversification and so-called “asset allocation,” an area that many investors find difficult to understand, says Krista Andrykowski, a spokeswoman for the Profit Sharing Council in Chicago.
Specifically, companies can now show employees a series of asset allocation models--pie charts--that suggest just how much of your savings you might want to devote to stocks, bonds, cash or other investments. The company can also explain which of its 401(k) investment options fall into each category, making it far easier for employees to invest.
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In addition, the company can provide employees with computer programs that can help individuals figure out just how much money they’ll have at retirement, how much they’ll need, and how the value of their nest egg might change should they shift their investments around.
Corporate 401(k) sponsors can also hire consultants to come in and advise workers on retirement planning and investing. If the company chooses to hire a consultant, however, it must be careful to choose someone who is objective and whose advice is in the best interest of the plan participants. Hiring a consultant is a fiduciary activity, according to the Labor Department. Hire someone who doesn’t disclose that he or she has something to sell and the company lands on the hook.
Companies are already responding to the department guidelines, revamping their investment materials and devising computer programs that could help with retirement planning, Sullivan notes. Arthur Andersen, for example, expects to put together new materials for its own workers within the next couple of months.
“This really goes a long way toward allowing employers to provide better investment education,” Andrykowski adds.
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PENSION NOTES: The Pension Benefit Guaranty Corp. is establishing a clearinghouse for finding workers who are due pensions from former employers. About 1,000 prospective pensioners disappear each year from the roughly 4,000 plans that terminate operations. Companies are still responsible for remaining in touch with prospective pensioners and for trying to find those that have become lost in the shuffle. The few who prove impossible to find simply have their funds set aside and waiting for them, however.
If you’ve lost track of your former employer but think you’re due a pension from a plan that has been terminated, you can write to the Pension Benefit Guaranty Corp. at 1200 K St. NW, Washington DC 20005. The letter should include the participant’s name, address, daytime phone number, Social Security number, date of birth, name of the employer and, if possible, dates of employment and the employer’s nine-digit Employer Identification number.
Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Send a message to kristof@news.latimes.com on the Internet.
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Readying for Retirement
Assets in U.S. employee 401(k) plans have more than doubled since 1990.
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No. of participants Assets Year No. of plans (in millions) (in billions) 1990 164,000 13.1 $300 1991 172,000 14.4 345 1992 188,000 16.0 410 1993 210,000 17.5 475 1994 242,000 18.5 525 1995 268,000 19.7 640
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Source: Access Research
