The New Fiduciary Rule—Advisors Who Only Educate Might Put Plans at Risk

At a recent 401(k) summit in Nashville, I was surprised to hear the number of advisors who said they are considering offering only education to participants, so they do not have to comply with the new fiduciary rule.

As many now know, under the new fiduciary rule announced by the Department of Labor, anyone who provides investment advice and receives a fee will be subjected to the more stringent, fiduciary standard of care. The fiduciary standard of care requires that all decisions and actions that affect a participant’s account balance be in the best interest of the plan’s participants.

In contrast, education activities will continue to operate under an exemption to the new rule.  But advisors who merely educate participants about investment choices and strategies are potentially missing the mark on preparing participants for retirement.

Plan Sponsors Could Inadvertently Breach Fiduciary Duty

As the plan sponsor, you are the gatekeeper of the plan’s assets. It is your responsibility to select, monitor, and hold accountable any and all service providers who are paid from plan assets. Simply allowing the advisor now to be considered an “educator,” without a basis for measuring results, is potentially a fiduciary breach for which the fiduciary can be held personally liable.

Advisors are reluctant to take on the personal liability of acting as a fiduciary. Providing only education, rather than advice, may be an out for them. But it may not be the same out for plan sponsors.

The plan’s act of selecting an educator could be a fiduciary act, which requires diligence and care. True, participant education is not considered advice under the rule. But if the education is funded from plan assets, the best practice is to determine what’s in the best interest of plan participants.

Tools for Assessing Educator Effectiveness

Identifying the expected or desired outcome from any endeavor establishes a basis for evaluating the progress toward the stated goal. Education is no different.

A decision matrix could be instrumental in providing an organized structure and procedural process to determine an expected outcome. Such a matrix might evaluate:

  • What’s the purpose of participant education, and what is the desired outcome?
  • What problem is it intended to solve?
  • What scoring method will be used to define a successful outcome?
  • How many providers will be evaluated before finalizing the selection?

A starting point for plan sponsors is to conduct a survey of all eligible participants to see if they feel they are on track for retirement. A number of organizations publish national results each year, so benchmarking your participants to a national study can identify potential areas for improvement.

National surveys may be somewhat qualitative. For a quantitative approach, instead calculate the current average replacement ratio of all participants. Other key information to gather includes identifying a baseline of how the participants feel toward retirement readiness, and a quantifiable replacement ratio. From there, plans can build out a decision matrix to determine the effectiveness of current and future endeavors.

The desired outcome is not just a higher participation rate, but rather a greater sense of retirement security and higher average income replacement ratio.