Recent changes to federal law helped employers feel more comfortable providing investment advice to their workers. However, some confusion remains over the legal distinctions between financial education and investment advice, which triggers extra  fiduciary responsibilities.

Randy Welch, director of investment services for Principal Financial Group, says employers "may have a lot of questions. Sometimes the line between advice and education gets blurry. [Employers] are aware that they have to be careful."

The Pension Protection Act amended the Employee Retirement Income Security Act by adding an exemption that allows greater flexibility for employers to provide investment advice to workers. One of the ways advice may be given is through the use of an unbiased computer model, which must be certified by an independent expert under rules to be prescribed by the Department of Labor.

Since PPA was enacted last year, "we've seen more activity [on advice] because there is clarity and legislative protection," Welch observes. He expects a growing number of employers to offer investment advice in the fugure.

Advice tells workers specifically where they should invest their money, while education does not involve specific recommendations, Welch explains. Education can include asset allocation models, profiles to assess your risk tolerance, historical return information and interactive materials and tools, such as financial calculators.

Education can include information on investment options, how they work and how they compare to each other. A DOL official says there appears to be a good amount of understanding and awareness among employers about the difference between advice and education. But Peter Gulia, an ERISA attorney and founder of Fiduciary Guidance Counsel in Philadelphia, says some employers aren't getting it. "Purchasers don't understand the difference, and employers don't believe there is a difference," he says.

What are the potential consequences of getting the distinctions wrong when it comes to advice and education? "The real risks for employers are participant lawsuits, in particular class-action lawsuits. Somebody will teach [plan participants] how to find somebody to blame, and the employers are next in line," Gulia remarks.
Employers are required to act prudently and in the interest of plan participants when they select a provider of investment advice or education and decide to continue to that business relationship.

For a full explanation of the federal guidance on investment advice, read the Department of Labor Interpretative Bulletin 96-1, available at www.dol.gov/ebsa/regs/
fedreg/final/96_14093.pdf.

Avoiding legal trouble

In selecting and monitoring a financial education or advice provider, a good first step  is to ask lots of questions about how the parties involved with the plan get paid and where their financial interests lie. "The most common mistake for employers is not understanding how everyone who touches the plan gets paid," Gulia observes.

The next step would be to communicate the appropriate information to plan participants. "Employers will always be better off when they provide more information to participants" about investment options, conflicts of interest and other matters, Gulia asserts. "Anything we can do to help participants make better [investment] decisions will make things better."

He advises employers to keep control of the messages sent to plan participants, rather than leaving that task to the broker or financial services provider.
"There's no substitute for the fiduciary taking responsibility for managing communications with participants," he comments.

Gulia also recommends employers hire their own attorneys to handle issues relating to investment advice and education, rather than relying on advice from lawyers hired by a broker or financial services provider. "Always think independently. You can't ask the fox to guard the hen house, and employers need to recognize that."

DOL has been collecting and analyzing public comments about the new advice provisions, and a DOL official says providers have expressed strong interest in working with employers to provide advice to workers. However, Gulia observes, employers are moving more toward managed accounts. "The marketplace has surpassed what Congress was doing last summer" with the PPA, he says. —L.S.

Investor views on broker advice

About 86% of U.S. investors think a stockbroker should be required to disclose prior to an investor purchasing an investment product, any incentives or other forms of compensation (such as cash payments and vacations) that the broker receives as an inducement to recommend the investment product, according to a new poll from Zero Alpha Group.

In addition, 54% of investors say they would be much less or somewhat less likely to use a stockbroker providing investment advice, if that individual is subject to weaker investor protection rules than a financial planner.

Unfortunately, less than 30% of U.S. investors understand that the "primary service" provided by stockbrokers is the buying and selling of investments, not investment advice.

About 29% think that financial advice is the "primary" service offered by stockbrokers, and 25% say advice and transaction assistance are equally important services provided by stockbrokers.

Roughly 91% of U.S. investors think that stockbrokers and financial planners who provide investment advice should be subject to the same investor protection rules, the survey shows.