As a plan sponsor, you currently have no obligation to provide investment guidance or advice products within your 401(k) plan, although the services are becoming more readily available and expected within retirement plans. As you evaluate service offerings, it is important to have a clear understanding of the difference between guidance and advice and to know what your responsibilities are with each. There are many products available today designed to help 401(k) participants improve their odds of success at retirement - some are free, some pricey, some are valuable and some … well let’s just say sometimes get what you pay for.
Within the realm of a 401(k) plan, the formal definition of investment guidance is: education regarding investment principles and strategies designed to assist investors in making decisions regarding their plan assets. Practically speaking, it means you are giving participants access to information that should help them make decisions about their retirement planning. Guidance can take many forms: brochures, retirement calculators, enrollment meetings - there are numerous resources readily available today to help participants. For the participant who has the interest and time, these tools are valuable aids that will help them to get on the right track.
However, all guidance tools are meant to be just that - guidance. Typically a guidance tool provider will not assume fiduciary responsibility for the information provided, and there will be numerous disclosures about assumptions made and the “education purposes only” stipulation. Basic tools and resources intentionally stop short of telling a participant exactly what to do; they merely provide general information and education. Once you get into specific recommendations, you cross into the realm of advice.
Investment advice provides a more detailed service to participants than guidance. It involves a Registered Investment Adviser making fund-specific recommendations to an individual about the individual’s account with great consideration for that individual’s personal financial situation. A common way in which this advice is individually tailored is through the use of an investor profile questionnaire. During this process, the adviser collects information about the client, including their risk tolerance and investment time horizon. An adviser will generally use an investor profile to make recommendations more detailed than general asset class recommendations (like Large-Cap Growth and International Equity), to provide fund-specific recommendations based on the available investment options within the plan. The adviser legally stands behind recommendations by accepting fiduciary responsibility.
Investment advice has substantial benefits to both participants and plan sponsors when compared with strictly education and guidance programs.
- First – Advice helps take the guesswork out of retirement planning for many participants. With the plethora of information readily available and the universe of investment options, it can be a daunting task for participants to research funds to determine which funds to invest in – even if they have received an asset class recommendation. Investment advice products will provide specific recommendations to each participant based on their personal situation or offer a way to have an investment professional make transactions on behalf of the participants.
- Second – For the plan sponsor looking to mitigate some of the inherent risks associated with offering a retirement plan, hiring an investment adviser to help employees make informed retirement plan investment decisions provides a layer of security that many plan sponsors enjoy today.
Scott Swezy, Vice President
Smart401k is a Web-based investment adviser providing unbiased advice to help employees invest in their employer-sponsored retirement plans. Smart401k provides service to almost 11,000 clients who collectively have more than $1.5 billion in assets. Individuals receive personalized investment recommendations based on the funds in their plan and support of professional investment advisers available to answer all investment questions. Based in Overland Park, KS, Smart401k can be found at Smart401k.com.