There is an increased focus by the Securities and Exchange Commission on fraud and abusive investment practices by people who sell investments to 401(k) participants and retirees. In an October 22, 2009 speech, Mary L. Schapiro, Chair of the SEC, said the following:

Retirement Investments
Enforcement activity alone will not fully restore investor confidence. Curtailing fraud is critical but just as critical is curtailing industry practices that do not put the interests of investors first. This is particularly important as an ever increasing percentage of America’s workers are relying on their own investment decisions to fund their retirements.

The statistics bear this out. During the three decades between 1975 and 2005, the number of active participants in traditional defined benefit plans dropped from 26 million to 21 million. Meanwhile, those who actively participated in defined contribution plans increased five-fold from 11 million to 55 million.

In my view, financial service firms should engage in responsible product development in the retirement market. Barraging investors with retirement products that feature the latest financial gimmick or marketable fad will not ultimately serve investors’ interests.

America’s future retirees deserve products that they can understand and evaluate. This means that complex fee arrangements or product descriptions should be discarded in favor of simple, clear disclosure.

Our future retirees should have access to products that will help them meet their retirement goals without imposing inappropriate risks. Products offering enhanced leverage and avant-garde investment techniques may be appealing to those investors that want to speculate. But they are not the type of investment products that belong in the retirement portfolio of the average American seeking to provide for security in retirement.

In addition, extolling the eye-popping results of the short-term performance of certain investment products, without focusing on the long-term implications or risks, can result in disappointed investors and potentially angry plaintiffs—not to mention an SEC prepared to be aggressive in enforcing the investor protection rules.

These types of disclosure, product development and marketing issues surrounding retirement products will be areas of focus in the coming year for those of us at the SEC. The burden imposed on those investing for retirement is significant, especially after the market events of last year and we must be committed to assisting those investing for retirement.

As a word of warning to plan sponsors, be careful about the people to whom you give access to your facilities and employees. If they are giving investment advice on your 401(k) or 403(b) plans, you have a duty to prudently select and monitor them. Have you fulfilled that duty? What are you doing to monitor? Even if they give advice only on other investments, and don’t involve the retirement plan, you may have “endorsed” those salespeople by giving them access—since you didn’t give access to other salespeople. While allowing some salespeople onto your premises, but excluding others, you may have implicitly endorsed them to your employees, suggesting that you have properly vetted their credentials and practices. Are you prepared to stand behind that?

The message is not that plan sponsors should avoid using advisers to help their employees. Instead, it is that, as with your retirement plans, there is a responsibility to properly manage the situation. From a risk management perspective, if you don’t want to do the needed investigation and proper documentation (including disclosures to your employees), then don’t give access to those advisers. On the other hand, if you want to help your employees, then be prepared to take charge of the situation, do a proper investigation and impose reasonable requirements on the advisers to provide your employers with full disclosure, including compensation and conflicts of interest.

We have helped employers with these investigations, disclosures and agreements. Where the employer is willing to undertake the task, an advice program could provide a valuable service to the employees.


Disclaimer Required by IRS Rules of Practice:

Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.

Source: Report To Plan Sponsors