Prudent Man with a Plan

Most 401(k) reforms before Congress don't address a critical source of risk: fiduciary duty.

This tends to result in employees who are, for better or worse, the ultimate buy-and-hold investors. A study by the Employee Benefit Research Institute shows that even during 2000, when equities showed their biggest declines in years, employees did not shift their plan asset allocation out of underperforming stocks. One reason for this, say experts, is that some employees may still believe that their employer would never provide them with a retirement vehicle that would lose money or put their personal assets at risk. This is clearly a hangover from the days when the vast majority of companies offered defined benefit plans, in which employees were guaranteed a retirement benefit of a specific amount upon retirement, no matter what happened to the company or the market.

“The thinking is that if the company offers these investment options, then they must be OK,” says Mary Turk-Meena, a principal and employee-benefits specialist with Deloitte & Touche. “You hear people say that there’s no employee loyalty these days, but there’s clearly an expectation of leftover paternalism.”

That may soon change, however. Some of the proposed legislative changes to ERISA seek to alter the fiduciary liabilities of plan sponsors that arrange for investment advice for their employees. These changes face some of the stiffest opposition of any of the reforms. There is serious concern among some observers that companies would most likely seek this investment guidance from the same third-party investment managers they use for investing plan assets, a situation ripe for conflict of interest — not to mention unintended consequences. For example, “if you’re a plan sponsor with significant employee stock in the plan,” says Curt Morgan, senior vice president of Pittsburgh-based Mellon HR Solutions, “are you going to be willing to pay a third party to tell your employees to diversify out of your stock?”

As fiduciary-risk mitigation becomes an ever more important focus of corporations, it is likely that the answer to that question will increasingly be yes. —K.F.

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