Is the Education Component of 404(c) in Need of an Update?


My uncle used to be an attorney and a judge in town. I remember seeing the wall of books in his office and wondering how any one person could remember all of that material. Of course, that was 20+ years ago. Since that time there we have seen the addition of the Pension Protection Act, which itself added a staggering 900+ pages to the Code for our industry alone. And as I look at some of the laws on the books, I can’t help but wonder if there are laws that need to be updated because their application is outdated. As you can guess from the title of this post, I think that you could make a solid case for updating the education component of 404(c).

As the law stands, a fiduciary is liable for the investment decisions of the participants in their plan. However, a fiduciary can claim exemption from that liability if they meet certain qualifications, including an education component. “The participant or beneficiary is provided or has the opportunity to obtain sufficient information to make informed investment decisions with regard to investment alternatives available under the plan, and incidents of ownership appurtenant to such investments”(complete law text can be found here). In short, a participant must have enough information about the investment offerings to make a decision. Originally, this was interpreted to mean that the participant was entitled to the entire prospectus. I was originally licensed in 2000 and have yet to meet anyone who has read a prospectus voluntarily for a reason other than trying to cure insomnia. It wasn’t until Field Assistance Bulletin 2009-03 that it was determined that a one pager would be sufficient to give a participant all of the information that he needs to make an informed decision.

Let’s dig into this for a minute. Part of the assumption around this law is that there is already a process in place to scrub funds to be in line with the goals of the plan. So the assumption is that the funds themselves are good. The second presumption here is that participants need only decide which of the funds appropriately meet their investment objectives. There are numerous studies that demonstrate that with this limited amount of disclosure, participants don’t make optimal choices. Here is one example: here. Most record keepers try to help by building their enrollment kits with a risk assessment. We don’t have time here and now to get into the merits and downfalls of that approach. Stay tuned- we will dig into that in a future blog.

If we look at the current state of financial education, it is no wonder that participants are having trouble. Here are some quick facts:

  • Currently four states (Missouri, Tennessee, Utah, and Virginia) require a high school students to take a personal finance course in order to graduate;
  • Only 19 states require a course in Personal Finance be offered;
  • 24 states require that an Economics class be offered;
  • Since 2011, three states (Hawaii, Illinois, and New York) have dropped Personal Finance as a part of the K-12 standard.

Sources 1 and 2

It is fair to assume that there are a lot of children who are not getting this education at home. If these future workers and participants are unfamiliar with basic personal finance, is it realistic to believe that they have the skills required to read even a summary prospectus? Don’t take that wrong. There are a lot of good, hard-working people in this group. But they may not have the skills required to make these decisions. Let’s drive this home a little further. Many of us have the mental capability to allow us to do electrical work, but we may not have the requisite education to do it safely. I know that I don’t. But let’s go back to the assumption of a plan sponsor. All decisions for a fiduciary are held to a level of prudence. Would a prudent person assume, given the statistics above, that participants have enough finance background to appropriately assimilate the information in a sales slick to make a decision on where to invest their 401(k)? Would a prudent person force a person to make a decision knowing that person lacks the skill and knowledge to make an informed decision?

The advantage to a Fiduciary who claims exemption under 404(c) is that he is no longer liable for the investment decisions of the participants. In all aspects of the law, we have seen an evolution. Fund due diligence has myriad tools available to provide staggering insight into the benefits and shortcomings of an investment. Software packages provide robust tracking and document retention capabilities. Documents have been created to help a responsible plan fiduciary navigate through many of the decisions that he is required to make. A fiduciary is armed to the teeth when it comes to making decisions. Yet, we have, for the most part, stagnated when it comes to arming the individual from whom we are trying to shield ourselves.

It may be unrealistic to think that we could come to a consensus regarding what education should be offered. We cannot even come to a conclusion on the fiduciary standard for plans. And though I marveled at my uncle’s law books as young man, I am not in favor of adding laws or responsibility for the sake of adding them. But doesn’t the question at least deserve to be asked: are we doing ourselves a disservice by not requiring more under the educational component of 404(c)?