Reinventing Retirement Income in America
Table of Contents
- Executive Summary
- The Importance of Retirement Income
- Determinants of Retirement Income
- The Change in Retirement Pension Plans
- The Performance of 401(k) Plans
- Explaining the Poor Investment Returns
- Other Causes of Low Returns
- The Threat of Future Liability
- Goals for an Effective Retirement System
- Building a Better Retirement System
- About the Authors
The Threat of Future Liability
Why aren't the companies that offer 401(k) plans helping their employees make wise investment choices? A major reason is fear of opening themselves to lawsuits charging they are responsible for employees' investment losses. Federal law encourages this silence. Section 404(c) of ERISA, as amended, says that fiduciaries who successfully comply with a maze of complex rules are generally relieved of any fiduciary responsibility for investment losses, provided all plan participants exercise independent control over their accounts.
"Companies fear opening themselves to lawsuits if they give employees investment help."
As is often the case, words written by regulators to guide us seem straightforward enough at first reading. We are told that to be a successful 404(c) plan sponsor one must (i) give participants the opportunity to choose from a broad range of investment alternatives, (ii) allow them to make elections at least quarterly, (iii) assure that investment options are diversified, and (iv) provide sufficient information to enable participants to make informed investment decisions.
But how much information is sufficient? According to the Commerce Clearing House Pension Plan Guide, fiduciaries are never relieved of their constant duty to consider the prudence of the investment alternatives made available to participants under a plan and to maintain oversight over the investment options.32 If the employer points out that investing 401(k) money in equities offers a better opportunity over the long run to build a sizable nest egg for retirement, and equities have one or two down years, is the employer liable because of giving advice?
In this litigious age, lawsuits are likely to be filed alleging that plan sponsors have given participants too much or too little advice or are otherwise derelict in their fiduciary duties.33 For example, the consulting firm Watson Wyatt has suggested that where 401(k) plans continually underperform, "employees may eventually complain that either the funds or the education offered were inappropriate or insufficient."34
Rep. John Boehner (R-Ohio) has introduced a bill that would allow employers to provide plan participants with access to professional investment advice, and would allow investment firms that manage 401(k) plans to provide advice, with the advisers required to fully disclose their fees and any potential conflicts of interest. The bill is controversial, with opponents contending that the advisers stand to enrich themselves by recommending investment in their products.