Posted: 04.17.2007
By James Wampler
Retirement Planning Advisor
Prior to ERISA becoming law in 1974, government, employer-sponsored and fully funded retirement plans were directed by a plan sponsor, usually with the help of an investment professional. Participants had no voice in how the funds were invested.
ERISA enabled employees to contribute to their retirement plans out of their own compensation, and soon employees wanted to direct their own investments. As more participants gained direction over their investments, employers began to shift the investment process to the employees, and the new market of self-directed plans was established.
Uneducated and novice investors, however, often made poor choices based on less than sound reasoning, and as a result suffered large losses, as was evident with technology stocks during the 1990s.
As time progressed, the government heard from many employers about the liability they incurred and the tasks they were charged with in managing their pension plans. For example, a participant could go to the Department of Labor and complain about “bad returns” or “poor decisions” made by their plan sponsor for any reason they chose, from general feelings of malcontent to their friend’s return being better, and the plan sponsor would have to defend the investment selection process.
Employers began looking for ways to lessen this burden and avoid the personal liabilities associated with plan sponsorship. As a result, there is now a shift back toward investment professionals guiding participants’ investment decisions. The days of the “self-directed investor” without any educational or professional guidance are gone. ERISA still governs the fact that plan sponsors have to document the choice process for what funds they make available to their participants, but not the actual returns a participant receives.
Employers need to offer participants education and tools to ensure they make prudent decisions, including:
- One-on-one participant education meetings
- Mailings discussing investment topics including definitions of the markets, asset classes and diversification
- Individually actively managed accounts
- Fund lineups that have asset allocation and/or target maturity funds available
Most employers want their team members to do well for themselves and their families. Part of their success is having a thriving retirement plan. When investments are handled properly, employees feel better about their future and that contentment brings a sense of accomplishment and security. This can lead to more productivity, less malcontent and a feeling that the future is bright. Let ALCOS help by providing the right retirement plan for your company, along with all the educational materials necessary to ensure your employees make wise investment decisions.
