DOL Guidance on Investment Education

From Employee Benefits Alert

February 1997

The Department of Labor ("DOL") has issued an interpretive bulletin regarding investment education programs for qualified retirement plans. The DOL guidance is intended to help employers structure investment education programs without incurring fiduciary liability to employees who make investment decisions based on the information provided by the employer.

Many qualified retirement plans (particularly 401(k) plans) permit participants to choose among a variety of alternatives for the investment of their plan account balances. Section 404(c) of the Employee Retirement Income Security Act of 1974 ("ERISA") provides that plan fiduciaries generally will not be liable for any investment losses when a plan participant exercises investment control over the funds in his plan account and has the ability to select from a broad range of investment alternatives. DOL regulations issued under ERISA section 404(c) provide that plan fiduciaries will avoid liability only if the plan participants are given sufficient information to make informed decisions regarding investment alternatives. Consequently employers generally want to provide their employees with sufficient information to make intelligent choices for their plan investments in order to comply with ERISA section 404(c). They do not want to provide "investment advice," however, which would result in fiduciary responsibility and possible liability for investment losses on participant directed investments made based on such advice. Without adequate guidance, many employers did not know what information could be provided to employees without constituting "investment advice," and many employers consequently did not provide adequate investment guidance.

The DOL interpretive bulletin provides guidance to employers concerning categories of information and types of materials that may be provided to educate participants about the investment of their account balances without constituting "investment advice." It provides safe harbors under which employers may provide plan information, general financial and investment information, asset allocation models, and interactive investment materials.

Plan Information

The DOL indicated that many plan participants do not receive adequate information concerning the effect on their retirement savings of delaying participation, reducing contribution levels, and withdrawing funds before retirement. Although these fundamental principles of plan participation are not related to making investment decisions, they can have serious consequences on the adequacy of a participant's retirement income, and they are accordingly addressed in the interpretive bulletin.

The interpretive bulletin states that plan sponsors may provide information and materials about the benefits of plan participation, the benefits of increasing plan contributions, the impact of preretirement withdrawals on retirement income, the terms of the plan, or the operation of the plan. The preamble to the interpretive bulletin also states that employers may encourage participants who terminate employment to transfer their account balances to an IRA or other retirement vehicle. Sponsors also may provide information on investment alternatives available under the plan, including descriptions of investment objectives and philosophies, risk and return characteristics, historical return information, and related prospectuses. This type of general information relating to the plan and the choices available thereunder does not constitute investment advice because it does not counsel participants on the appropriateness of an investment option for a particular participant.

General Financial and Investment Information

Materials in this category include those that inform participants and beneficiaries about: (i) general financial and investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return and tax deferral; (ii) historic differences between rates of return between different asset classes (for example, equities, bonds, or cash) based upon standard market indices; (iii) effects of inflation; (iv) estimating future retirement income needs; (v) determining investment time horizons; and (vi) assessing risk tolerance. This type of information does not constitute "investment advice" because there is no specific reference to investment alternatives available under the plan or otherwise.

Asset Allocation Models

Plan sponsors may provide information and materials that provide participants and beneficiaries with models of asset allocation portfolios of hypothetical individuals with different time horizons and risk profiles. Such models must be based upon generally accepted investment theories that take into account the historic returns of different asset classes over defined periods of time. The models must be accompanied by all material facts and assumptions on which they are based, such as retirement ages, life expectancies, income levels, financial resources, inflation rates, and rates of return. If an asset allocation model identifies a specific investment alternative available under the plan, it must be accompanied by a statement that other investment alternatives having similar risk and return characteristics may be available under the plan and indicating where information on those alternatives may be obtained. Any asset allocation models must also be accompanied by a statement indicating that, in applying a particular asset allocation model to their own situations, participants and beneficiaries should consider their other assets, sources of income, and investments in addition to their benefits under the plan.

Interactive Investment Materials

The final category of information covered by the safe harbors, includes questionnaires, worksheets, software, and similar materials which permit participants and beneficiaries to estimate future retirement income needs and assess the impact of different asset allocations on retirement income. If such materials are provided, they must satisfy the same criteria as, and be accompanied by similar statements and materials as, those that must be provided with respect to asset allocation models.

Structuring a Participant Education Program

Employers sponsoring plans with participant directed investments should carefully structure education programs to provide sufficient information to satisfy ERISA section 404(c) and will benefit their employees by giving them as much information as possible within the scope of the investment education guidelines. Structuring such a program might begin with a review of existing participation and contribution levels, the types of investments currently being made by participants, the use of plan loans, and the manner in which terminating participants take distributions. After evaluating these factors, an education program can be structured that is targeted to educate participants where it is most needed. An employee education program should be ongoing and dynamic. Participants should be reminded on a regular basis of the importance of participating in the plan as fully as possible and of making proper investment decisions. The effectiveness of the program should be reviewed periodically by the employer and it should be revised as necessary to focus on areas of weakness.

If you would like assistance in structuring a participant education program or in reviewing an existing program, or if you have other questions regarding the DOL investment education guidelines or ERISA, please call Paul J. Powers, Jr. or Kirk H. O'Ferrall at 212-818-9200.