Employer retirement plan liability can stem from plan choice (e.g., a traditional “defined benefit” pension that requires the employer to commit to a specified level of retirement benefits no matter how the plan’s invested funds perform).
Liability can also spring up from not providing access to investment advice when the employer provides a defined contribution plan (e.g., employees defer salaries into the plan and choose their own investments; their retirement benefit depends on the combination of contributions and fund performance with no guarantee from the employer).
Clearly, the trend away from defined benefit plan liability has only been accelerated with the enactment of the Pension Protection Act of 2006 (“PPA 2006”). PPA 2006 requires employers to fully fund defined benefit plans, which means employers are not only less likely to adopt such plans going forward, they are freezing existing plans (ref. Hewlett Packard) and implementing defined contribution plans (like 401(k)s) in their place.
As to investment advice liability, Enron is a case in point.
Enron employees who held Enron stock as part of their 401(k) plans initially were doing well…then the stock collapsed along with many retirement dreams. Apart from the accounting scandal issues, the question is: did Enron have a duty to proactively:
a) inform employees about investment options and diversification or risk?
b) recommend specific asset allocations or investments (other than employer stock)?
Under the Employment Retirement Income Security Act of 1974 (“ERISA”), employers do have a fiduciary responsibility to retirement plan participants. Fiduciary responsibility (and the legal liability that goes with it) also extends to those offering investment advice. Traditionally, then, these factors made employers reticent to offer investment advice to employees. Rather, they offered only general employee education.
PPA 2006 alleviates this responsibility from employers to encourage them to provide genuine investment advice – whether internally from tested and unbiased computerized models, or externally by engaging an outside investment adviser. In either case, the employer now has an exemption from liability – in fact, interestingly, liability may actually increase for employers who DO NOT provide investment advice…
To be sure, earlier legislative attempts tried to reduce employer liability for employee investment decisions (specifically, Sec 404(c) of ERISA added in 1992), but PPA 2006 provides more specific relief for employers, providing that investment advisers can offer “personally tailored investment advice”.
For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436