WASHINGTON - Few defined contribution plan sponsors risk being accused of giving investment advice under a draft of the Department of Labor's interpretive bulletin on investment education for plan participants.
Indeed, the draft says anything that provides generally accepted investment concepts - such as plan information, general financial and investment information and asset allocation models - is considered investment education material.
The real key is whether the investment decision is truly left to the participant: plan sponsors can get as detailed as they want with asset allocation models as long as the materials provided reveal the underlying facts and assumptions and allow the participant to make the final investment decision. The bulletin did not get into specific types of funds, such as lifecycle funds, because they raised unrelated factual questions and because the bulletin generally covered the educational issues of these funds, sources said.
In an interview with Assistant Secretary Olena Berg, Pensions & Investments was able to obtain the specifics of the long-awaited interpretive bulletin, which provides the parameters for investment education for defined contribution plans.
But while the draft tells plan sponsors what they can do, it doesn't tell them when they've crossed into adviser territory.
Describing investment advice turned into a legal morass for the Labor Department, and it seemed easier to approve of areas considered to be investment education, Ms. Berg said.
"Mostly everyone is concerned that they don't cross the line" into investment advice, Ms. Berg said.
She said the guidance will include a letter from the Securities and Exchange Commission. The letter will say plan sponsors and service providers will not become an investment adviser by SEC standards if they follow the Labor Department's bulletin.
Plan sponsors and service providers were worried about the guidance, mostly because they didn't want to become fiduciaries to defined contribution plans and, thus, be held liable for employees' investment decisions. But Ms. Berg said many of the current education practices for defined contribution plans sponsors will remain under the education umbrella.
In general, asset allocation models and interactive materials must be based on generally accepted investment theories. Also, if a plan sponsor cites a particular fund, say an equity fund, it must also to cite all the other equity funds so that a participant is not steered toward one fund.
And as a safety measure, a plan sponsor needs to tell participants they need to consider other assets, income and investments when making their plan investment decisions, the draft says.
Here is what's considered to be investment education:
Plan information, such as terms of the plan; information on investment alternatives, including descriptions of the investments, their objectives and risk/return characteristics; information on the benefits of being a plan participant and increasing plan contributions; and explanation of the impact of pre-retirement withdrawal.
General financial and investment information, including general financial and investment concepts like risk and return, diversification and dollar cost averaging; historical differentials in rates of return between asset classes; effects of inflation; estimated future retirement income needs; investment time horizons; and risk tolerance determinations.
Asset allocation models, such as charts, graphs, case studies, including models of asset allocation portfolios of hypothetical situations; facts and assumptions that models are based on including retirement ages, income levels and inflation rates; and information telling participants to consider their other assets when applying any asset allocation model.
Interactive investment materials, be they questionnaires, worksheets and software that will help figure out future retirement income needs and the impact of different asset allocations on retirement income.
The information on various assets needs to be based on generally acceptable investment theories that include historical returns over defined periods of time, the draft said.
The bulletin does say an investment adviser is anyone who is paid to give investment advice and gives advice to a participant or a beneficiary on the value of investments, or makes recommendations on investing or selling assets. An investment adviser also has control over assets for the participant, or gives advice to a participant on a regular basis.
Ms. Berg said she hopes the bulletin is helpful to plan sponsors who want to give investment education to plan participants.
"Ninety percent of returns are driven by asset allocation," she said. By helping plan sponsors understand the educational tools they're allowed to give participants, this, in turn, will help participants become more comfortable in making asset allocation decisions, Ms. Berg said.