Is Retirement Planning Advice (versus just investing advice) in the Workplace Now a Possibility?

Betty Meredith, CFA, CFP®, CRC®, Director of Education, and Research, InFRE

Betty Meredith, CFA, CFP®, CRC®, Director of Education, and Research, InFRE

By Betty Meredith, CFA, CFP®, CRC®

Last year I went to the new Costco in Ann Arbor, MI because I could tell that my eyesight had changed so much that it was time for new lenses. I expected a glaucoma test first, but this doctor’s assistant instead used a diagnostic machine to take several pictures of each eye to form an initial prescription, so the doctor had a baseline scrip to fine tune during the exam. Because of this, I spent less than 15 minutes with the doctor, and no changes needed to be made to the initial prescription.

The optometrists at Costco are independent doctors who purchase their own equipment and agree to discount their services in exchange for Costco providing highly visible physical, endorsed access to customers.  Utilization of technology and lower-paid staff to provide the doctor with preliminary information, along with a steady stream of patients, keeps the exam fee down to a very reasonable level. Retirement professionals can be doing the same in the employer-sponsored market. If you are interested in building a profitable business in the workplace that serves the retirement planning needs of the middle market, a long-term roadblock has been removed.

The Department of Labor (DoL) published a final investment advice regulationi effective December, 2011, concluding a 20 year journey for providing the advice most people need for saving and investing in their employer-sponsored retirement savings.  This new regulation amended the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code) by exempting investment advisors who provide certain types of advice to participants of ERISA retirement savings plans from being considered as engaging in prohibited transactions. (A prohibited transaction under ERISA and the Code prevents self-dealing by fiduciaries of ERISA plans and conflicts of interest between plans and their fiduciaries.) With this regulation, retirement professionals can now provide investment advice face to face to hundreds if not thousands of employees every year, even if the retirement professional is compensated with fund commissions, by assuming fiduciary responsibility and using annually-certified/audited software that ensures objectivity. The next step needed – providing retirement planning advice in the workplace versus just investment advice – is now a realistic possibility.

The history of investment advice in the workplace

From their beginning, participant-directed retirement private sector savings plans did not require plan fiduciaries to offer employees investment advice.  Employers therefore stayed away from offering any kind of advice.

This led to a tremendous shortfall in the quality of education and guidance provided employees for making informed saving and investing decisions. For example, until the mid-1990s, merely labeling a mutual fund in a workshop or in print materials as “growth” or “balanced” was feared as giving advice!

Over the years it has been clarified that employers are responsible only for performing prudent due diligence on selection and monitoring of an advice provider who has accepted fiduciary responsibility – the employer is not responsible for the outcomes of the advice provided.  To demonstrate how the new final advice regulation has swung the pendulum to the opposite extreme, here is a timeline of progression of investing advice for ERISA defined contribution plans. It is important to understand how things evolved as they are implicit in the regulations effective today.

Year Event
1992 The DoL releases final 404(c)ii regs on investments in participant-directed plans.  Plans were permitted to transfer responsibility for selecting among the investment options in a defined contribution plan to participants if:

  • Participants actually direct the investment of their accounts
  • The Plan satisfied the requirements of the 404(c) regulations
  • Participants could materially affect the potential return on his or her account and the degree of risk; and
  • Participants had the opportunity to invest in at least three options, change investments at least every three months, diversify within and among alternatives, and obtain sufficient information to make informed decisions about their plan options
1996 Many employers were not offering education programs or offered limited programs because of uncertainty regarding the extent to which the provision of investment-related information might have been considered the rendering of “investment advice,” resulting in fiduciary responsibility and potential liability in connection with participant-directed investments. Interpretive Bulletin 96-1 (IB 96-1)iii distinguished between education and advice as it related to plan information, general financial and investment information, asset allocation models, and interactive investment materials.IB 96-1 made it clear that “designating a person to provide investment advice to participants would not, in and of itself, give rise to liability for losses resulting from the individual participant’s investment decisions,” providing a much needed safe harbor and clarification for plan sponsors.  IB 96-1 made it clear as with any selection of a service provider, that the plan fiduciary is still responsible for the prudent selection and periodic monitoring of the designated advisor.  Fiduciaries must consider a service provider’s qualifications, quality of services offered, and reasonableness of fees. This Bulletin also allowed the provision of “near advice” – or asset allocation advice that was not fund specific.
2001 The Pension Welfare Benefit Administration (PWBA) issued Advisory Opinion 2001-09Aiv in response to SunAmerica’s application for exemption to use an independent advice firm (Standard & Poors) to provide asset allocation advice using model portfolios. The advisory opinion stated that no exemption was necessary because it is not a prohibited transaction – an independent expert (not SunAmerica) was providing specific advice and SunAmerica had no control over recommendations or communication to participants. SunAmerica however would retain the duty to prudently select and monitor the investment advice provider.  It’s important to note here that advisory opinions do not have the force of law of an exemption; an exemption would end the issue of potential legal exposure once and for all.
2006 The Pension Protection Act (PPA) amended ERISA and the Code to add the statutory exemption needed to provide plan sponsors the protective clarity needed to allow “conflicted advice”.v The DoL was tasked with writing the regulations that establish the prohibited transaction exemption. The PPA confirmed plan fiduciaries have a duty to prudently select and monitor an advisory program but have no duty to monitor the specific advice provided or its results. The PPA also provided two new prohibited transaction exemptions allowing fund providers to charge for investment advice on its own funds.
2011 Final advice regulationsvi are issued that state that all prior DoL advice interpretations, exemptions, regulations or other guidance are still in effect. In order for a plan to qualify for the advice exemption, advice can be provided in two ways:

  • If the advisor is paid on a “level fee” basis, or in other words, compensation to the advisor does not vary depending on investment selected
  • Through use of a computer model/software certified as unbiased by an independent expert.

 The arrangement must also qualify as an “eligible investment advice arrangement,” which requires a fiduciary advisor to provide written notification of all fees or other compensation relating to advice. The requirements to meet the prohibited transaction exemption are detailed and extensive. If any conditions are not met regarding a particular transaction, the exemption will not apply

How does all this facilitate retirement planning advice in the workplace?

“Enough about the assets,” says Michael Falk, CFA, CRC®, founder of MSF Asset Consulting and partner with Focus Consulting Group in Chicago. Michael was perhaps the pioneer in the 401(k) managed account’s arena when he published an article promoting the concept in the Employee Benefits Journal’s December 1998 issue. “We need to go beyond the uncertainty of solely investment advice in the workplace and include things people have more control over such as pre-retirement debt reduction, shrinking other fixed expenses and working longer.  Furthermore, today’s advice is too often limited to only providing counsel on the defined contribution assets pre-retirees have accumulated.”

The fact is, the value of the assets middle-market consumers have in their defined contribution plans trails the present value of their Social Security benefits and their home equity (see table 1 belowvii).  What does that mean for retirement professionals? We can provide much more value than we’re being allowed to in the workplace by guiding or validating their decisions on when to retire, or continue working part time or full time; when to claim Social Security depending on whether they are married or single, in good health or not; evaluating how a home equity conversion mortgage and credit line might help manage retirement income risk; and identifying retirement risks and opportunities to better secure their retirement income through the use of longevity annuities or other tools.

At a recent conference on women and retirement, I thanked Phyllis Borzi, Assistant Secretary of Labor at the DoL for her efforts in publishing the final investment advice regs.  I asked her if retirement planning advice in the workplace was on their radar, since the groundwork laid for using investment advice software can easily be applied to retirement planning software that helps people make informed decisions about when to stop working and when to take Social Security. She thoughtfully admitted it hadn’t occurred to her before.

Retirement planning advice in the workplace is only a short jump from where we are now. It’s time to provide retirement planning advice through software that objectively allocates product types for desired outcomes (timing of Social Security, how to fund health expenses, long-term care, and longevity insurance in addition to investments) versus just modeling systematic withdrawals from managed retirement accounts.  The mid-market needs help making informed decisions about all the resources they have available for retirement.

Betty Meredith, CFA®, CFP®, CRC® is the Director of Education and Research for the International Foundation for Retirement Education (InFRE), and Managing Member of the Int’l Retirement Resource Center, LLC. She participates in and incorporates research findings and best practices into InFRE’s Certified Retirement Counselor® certification study and professional continuing education programs to help professionals meet the retirement preparedness and income management needs of middle-market Americans. A shorter version of this article was published in the December, 2012  Journal of Financial Planning (

(c) 2012, Betty Meredith

Posted in: PLAN for Retirement Readiness, PROVIDE Retirement Income, Retirement Counseling/Coaching, Retirement Distributions/Withdrawals, Retirement Income Planning and Spending

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