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Retirement Investment Advice: Removing Roadblocks

12/11/2002 --

ANN ARBOR, Mich.—Since the collapse of Enron, more than 100 lawsuits have been filed against some three dozen companies, based on employee losses in 401(k) plans. But firms might be able to reduce such litigation if their employees have more investment advice, according to a University of Michigan Business School study published in the Berkeley Journal of Employment and Labor Law.

In an analysis of the legal regime that governs the investment of more than $1 trillion of retirement-plan assets in the United States, U-M Business School Prof. Dana Muir found that employees would be better prepared to make investment decisions and enhance their overall returns if companies were not discouraged by law to provide a greater amount of advice to employees about their retirement investments.

“Employers establish, run and contribute to retirement plans, so they have a genuine interest in seeing their employees maximize 401(k) investments,” said Muir, an associate professor of business law. “However, federal regulations governing employer-sponsored plans present roadblocks that discourage firms from providing the investment advice their employees want and need.”

Under the provisions of the Employee Retirement Security Income Act (ERISA), employers who provide investment advice that turns out poorly may face legal liability.Similarly, if an employer hires an investment adviser who offers bad advice, both may be held liable.

In addition, a financial services company that administers a 401(k) plan for a company typically is prevented by federal law from providing investment advice to company employees participating in that plan. In some circumstances, such as in plans where participants make their own investment decisions, employers are obligated to provide some general investment education---for instance, explaining the difference between a stock and bond fund---but face potential liability for providing more specific advice, Muir says. Given the recent volatility in the stock market and the difficulty in obtaining reliable information, even educated investors still must overcome enormous hurdles in their decision-making process, she adds.

The Retirement Security Advice Act of 2001, which is pending in Congress, attempts to address these blockages and to make investment advice more available to retirement-plan participants. However, Muir believes that the legislation inadequately protects employers who offer advice and employees who suffer losses, and fails to sufficiently guard against potential conflicts of interest by advice providers. To fill these gaps, Muir proposes creating a “non-exclusive safe harbor” that would automatically protect employers from liability, provided they meet certain standards, such as offering employees a choice of two investment advisers who are SEC-registered and regulated.

Muir, who is known for her legal research on employee-benefits issues, is a member of the U.S. Department of Labor's Advisory Council on Employee Welfare and Pension Benefit Plans. Her new book, “A Manager's Guide to Employment Law: Protecting Your Company and Yourself,” will be available next spring as part of the U-M Business School Management Series.


For more information, contact:
Bernie DeGroat
Phone: 734.647.1847 or 734.936.1015