Mercer: More Hazards for Non-Advice Providers

May 19, 2004 ( - Even though fear of being sued has scared many plan sponsors away from offering participant investment advice, they may actually be better off taking the advice plunge.

The danger, wrote Mercer Investment Consulting senior consultant Scarlett Ungurean in a research report, is that plans without advice components will be laid bare for lawsuits from disgruntled older workers claiming the company didn’t properly guide them to save for retirement.

Stated Ungurean: “In this time of financial uncertainty, complex markets, and retirees with long time horizons, it is in the best interest of plan sponsors to offer well-structured advice programs to 401(k) plan participants.”

Making things more challenging for plan sponsors is the movement to participant-directed investing that Ungurean said “has put pressure on participants to make the ‘right’ investment selections, on plan sponsors to provide sufficient information to participants, on regulators to manage and protect these investors and on the markets to contend with these inexperienced investors.”

In addition to summarizing the regulatory framework governing advice – notably that from the Employment Retirement Income Security Act (ERISA) – and providing an overview of online and managed account service delivery models, the Mercer report also touches on two pending Congressional advice bills. Sponsoring those measures are U.S. Representative John Boehner (R-Ohio) (See House OKs Advice Bill ) and U.S. Senator Jeff Bingaman (D-New Mexico).

“It is surprising how such an easy concept of providing advice becomes very complicated once the legislation and the different advice business models are considered. The plan sponsor’s fear of litigation has stalled many plan sponsors from offering advice to participants, “Ungurean wrote. “Although the cost of not offering advice should be factored into the equation, such as the cost of employees staying in positions because they cannot afford to retire, the cost of severance or early retirement programs to get employees off the regular payroll, and the eventual cost of litigation when employees show that the information received from the plan sponsor is not sufficient to allow the participant to make the ‘right’ investment choices.”

The paper, 401(k) Plans: Are Employers Taking on More Risk by Providing Investment Advice to Participants may be downloaded here . A free registration is required.