In "The Quadrennial Fear Of Ideas," Daniel Casse, former special assistant to President Bush and currently a senior director of the White House Writers Group, argues that presidential "campaigns rarely make or propose policy these days. It is considered too risky an undertaking. Ideas still have consequences, but …presidential campaigns keep a safe distance from them." He also agrees with former Clinton confidant Dick Morris that "ideas are nothing more than the proper distillation and interpretation of public sentiment."

Casse also maintains that pollsters, the fellows who actually control the campaign, advise candidates:

So what does the rhetoric of presidential candidates have to do with the investment education versus advice debate that is such a hot topic in the 401(k) arena today? The answer is ambiguity and absence of substance.

It is virtually impossible today to find, among all the materials that mutual fund companies, banks, and insurers routinely distribute to plan participants, a clear explanation of the current classifications of mutual funds and how each category can be used in the portfolio construction process. No money manager worth his salt would walk into a large institutional investor and discuss his brilliant "growth and income" style or his "aggressive growth" style. No informed investor would know what these styles mean, let alone if they could complement her existing manager lineup. 401(k) participants, however, are expected to successfully use an outdated classification system designed solely for its psychological effect on the retail investor.

The ambiguity does not stop there. It has been widely touted that investment education has failed, and advice is what the average participant needs and wants. But what do the terms "education" and "advice" mean to plan providers, plan sponsors, and participants? When it comes to these terms, do these three groups even speak the same language? Unless all the players in the self-directed retirement plan arena clearly understand and accept the meanings of education and advice, fiduciary liability lawsuits will be just around the corner.

The purpose of this paper is not to debate whether advice is better than education. Rather it is to argue that this debate shouldn’t take place until the parties involved:

1. define the goals of the programs they wish to initiate;
   
   
2. assess the feasibility of desired programs in today’s work environment;
   
   
3. recognize that participants must get fair value for the fees they (often unknowingly) pay;
   
   
4. clearly outline to the participants what their responsibilities are;
   
   
5. develop realistic expectations of what can be accomplished.

Underlying issues. Unless corporate retirement programs change dramatically, in the next millennium 401(k) plans will be the primary source of retirement income for most workers. Social Security will be the icing on the cake, but the retirement nest-egg will be whatever the worker accumulates in her 401(k) and IRA accounts. Workers must clearly understand that they are responsible for their own retirement security.

The process workers should utilize in determining their retirement income needs and funding requirements is essentially the same as that used by large defined benefit plans in determining their liabilities and contribution requirements. Unfortunately, the average worker is ill-prepared to take on this task. To make matters worse, he is unfamiliar with the magnitude of his problem.

John Hancock’s Sixth Defined Contribution Survey, Insight into Participant Knowledge & Behavior, clearly demonstrates this. Less than 25% of the respondents consider themselves to be knowledgeable investors. The respondents’ overall knowledge level has not increased significantly, if at all, since the first survey was taken in 1991.

The survey’s authors concluded that most participants have no strategy or goal for allocating their retirement investments. Many participants who have access to investment advice through their employer don’t utilize it, even if it’s free. The increased allocation to stocks over the past several years has probably not resulted from education, but rather from the stock market’s exceptional performance (over 20% per year for four successive years) and the eight-year U.S. economic expansion. They concluded:

At the 1999 annual meeting of the Profit Sharing 401(k) Council of America, Dennis Ackley of J.P. Morgan/American Century said that investment education is in a shambles. He believes that most messages presented in so-called education sessions and materials have little impact, and there is a "blizzard of content-free terms." He maintains that there is a real need to question conventional wisdom and what plan providers call "best practices." Furthermore, he argues it is imperative to learn from the failure of current retirement and investment education techniques. After all, (referring to a 1998 Plan Sponsor article) just 37% of plan sponsors feel their communication efforts are working and only 12% believe their communications reduce employees’ stress about future finances.

At the same conference Mary Rudie Barneby of Delaware Investments’ Retirement Financial Services presented findings of a survey her firm conducted. Perhaps the two most relevant conclusions are:

1. Only 16% of plan sponsors are very confident that their participants with annual incomes of $25,000 to $80,000 clearly understand their investment choices.
   
   
2. 72% of plan sponsors do not have a process in place to evaluate educational materials.

How could attempts at investment education have failed so miserably? ⁵  There are many reasons, but perhaps the most significant are:

4. Written materials are essentially the same as those used in the retail marketplace. They have little, if any, educational substance because they are basically marketing pieces with the philosophy of "leave the driving to us" and "your in good hands with…"

5. Materials are designed with the premise that one-size-fits-all and that one size is aimed at the lowest common denominator of formal education, investment sophistication, and motivation. For example, no one asks if volatility, risk as defined by modern portfolio theory, is the appropriate definition of risk for the average plan participant. For many participants, the likelihood of not having an adequate inflation-adjusted income is probably the greatest risk they face.

6. Plan sponsors and plan providers ignore free agent learners—those independent and highly motivated adults who are taking responsibility for their own ongoing learning, as opposed to relying on employers to provide it for them. ⁶ No one asks what tools bundled providers should provide free agent learners. ⁷  Plan sponsors ignore the fact that it is a fiduciary obligation to spend the participants’ money wisely.

7. Plan sponsors and plan providers assume that participants understand the magnitude of their responsibilities pertaining to retirement planning. Surveys, such as those done by EBRI,⁸ have shown that this is a fallacy. No one asks if all employees should be given a statement showing how far along the road to retirement security they are. After all, no more than half of all employees have tried to do the calculations themselves. Vendors and plan sponsors forget that people like and need personalized reports.

8. Plan sponsors and their communicators often make the 401(k) plan out to be the best thing after motherhood and apple pie even though participants pay 80-100% of the cost of running the program. To make matters worst, it is often implied that the 401(k) plan is self-completing. Just join and your retirement problems will be solved. This implication reflects the concern of many sponsors that their workforces would be demoralized and in a state of revolt if they truly understood that they assume the full risk of their retirement security.

9. Plan sponsors, due to downsizing and a trend towards concentrating on their core competencies, assume that bundled providers can provide adequate educational services (as they profess). No one stops to ask why an asset gatherer would want an informed clientele. Informed participants would demand lower fees, better performances, and a much more rigorous standard of value.

10. There has been a wide spread myth that education can easily be construed as advice.

The result of these pitfalls is that so-called education programs are often not educational at all. Plan sponsors engaging in this type of pseudo-education, or who are doing little or nothing to educate, often rationalize their behavior as liability management. Their oft-stated concern is that significant education efforts could expose them to liability for doing a negligent job or, worse, providing poor advice. In legal terms, employers are counting heavily on Section 404(c) of ERISA as a shield against liability. However, this protection can be maintained only if, among other things, the plan sponsor gives employees sufficient choices and the minimal amount of required information and otherwise leaves all asset allocation decisions in the hands of the employees.

Forgetting for the moment the many reasons why this "hands off" approach is poor human resources management, it may be that employers who think that providing pseudo-education, or no education, is a shield against liability are living in a fools’ paradise. When (not if) the long-delayed market correction finally arrives or inflation again heats up, and employees who have made poor asset allocation decisions find themselves without adequate retirement income, 404(c) may prove to be more fig leaf than bulwark. Courts are notoriously fickle about respecting statutory boundaries on fiduciary responsibility if a case has "bad facts"; just ask the numerous companies who have complied with all of the technical ERISA disclosure requirements and have nevertheless been successfully sued for failing to comply with "implied" fiduciary duties of full and fair disclosure.⁹

Companies concerned with this potential burden, and aware that their employees are both poorly informed about investments and are making poor decisions, might decide to offer investment advice to employees. The safest approach would seem to be to engage a professional investment advisor to provide the actual advice (either at employer expense or with a substantial subsidy) in a one-to-one fashion, making sure that advisor is able to give advice that is objective, unbiased and consistent with ERISA’s prohibited transaction provisions. ERISA’s fiduciary provisions are generally kind to employers that are "procedurally prudent," and engaging a professional adviser to work directly with employees would seem likely to meet any reasonable prudence burden.

However, many employers who provide advice are doing so in a manner that is no better, and perhaps even worse, than offering no advice at all. This is because the mistakes that have contributed to the pervasiveness of pseudo-education—the inability or unwillingness of plan sponsors and plan providers to define their goals, assess how realistic they are, and then carefully develop an implementation strategy—are being repeated when the desirability of offering Internet based advisory services is assessed.

First, advice must be defined. Is advice just telling a participant how to allocate his money? Or is advice the dynamic interactive process that occurs when an advisor and her client sit down together and discuss the pros and cons of different approaches to solving a problem or formulating a strategy or prioritizing a group of issues?

If advice involves a dynamic interactive process, is it a one-time affair or is it ongoing in nature? In either case, can such a process occur over the Internet by simply filling out questionnaires? If questionnaires are not sufficient, is it reasonable to expect participants to ask questions and articulate their concerns about a topic of which most of them are uninformed? After all, a basic requirement for an Internet based advisory service is the ability of participants to write about complex subjects in clear, concise statements. If press reports as to the low level of literacy in America are accurate, this requirement will never be met by a significant number of participants.

The heart of any of these Internet based advisory services is its optimizer. A plan sponsor must have good reasons to believe that the optimizer will work. Optimizers come in different flavors and their output, given the same input, can be quite different. But what does "work" mean? This is not a trivial question. Harry Markowitz, a mentor of the founder of Financial Engines, William Sharpe, and a pioneer of mean-variance optimization, did not use an optimizer for his own retirement planning.¹⁰

He said:

"I should have computed the historical covariances of the asset classes and drawn an efficient frontier. Instead, I visualized my grief if the stock market went way up and I wasn’t in it—or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions fifty-fifty between bonds and equities."¹¹

Tables 1 and 2 summarize the data in a recent Wall Street Journal article which clearly demonstrates that selecting an advisory service is anything but trivial.¹² In fact, it is a monumental task. The article showed the performance of asset allocation blends recommended by 13 major brokerage houses for the 12 and 60 month periods ending September 30, 1999.

Table 1: One-year Performance of Recommended Asset Allocations¹³

Rank	Brokerage House	1 Year
1	Lehman Brothers	19.95%
2	Morgan Stanley D.W.	18.88%
3	Edward D. Jones	18.21%
4	Goldman Sachs	17.73%
5	Paine Webber	16.69%
6	A.G. Edwards	16.06%
7	Prudential Securities	15.80%
8	J.P. Morgan	14.84%
9	Credit Suisse F.B.	14.37%
10	Bear Stearns	13.84%
11	Raymond James	13.62%
12	Salomon Smith Barney	11.78%
13	Merrill Lynch	7.64%