Crossing the Line with Financial Advice

Crossing the Line with Financial Advice

The dangers of doling out financial advice rather than just information

MANY, IF NOT ALL, HR departments at colleges and universities offer some type of financial education to employees. This can cover everything from how a retirement program operates to describing investment options. But at what point does financial education turn into financial advice? And does crossing that line, which often is blurry, position a school as an organization that cares about its employees, or expose it to potential employee lawsuits?

Not everyone is in agreement. Paul Strebel, a partner at Strebel Planning Group in Ithaca, N.Y., and an adjunct lecturer on financial planning and wealth management at Cornell University, believes schools enter dangerous territory when they cross that line.

"If you offer advice, you have to understand the participant's situation fully," he says. In other words, does the advice giver have a complete understanding of each employee's risk tolerance, balance sheet, asset allocation, diversification of assets outside the plan, and goals and objectives? "If you don't understand all of that, you're providing advice in a vacuum," he adds.

Employees will inevitably
ask HR staff questions
like, "Should I buy this
stock or that one?"

Instead, Strebel suggests that HR professionals stick to offering information in four basic categories:

Plan information. This may include explaining the plan's benefits, the impact to employees of increasing their contributions, and the types of investment alternatives offered by the plan.

General financial information. Financial educators may introduce general financial concepts, such as the relationship between risk and return. Other key concepts include the importance of diversifying investments, the effects of inflation over time on investments, and how employees can assess their own risk tolerance. HR must ensure that a presenter of financial information is unbiased or has no ties with any particular plan, stock, or compensation arrangement.

Asset allocation models. Providing employees with hypothetical situations, each reflecting different risk levels, investments, and investment goals, allows them to compare their situations to the people in these mock scenarios and choose what the best options are for them.

Interactive computer models. A computer simulation may allow employees to plug in their age and the amount of money they want to invest to see if they'll have enough for retirement.

Despite all of this information, it's inevitable that employees will still ask HR staff questions like, "Should I buy this stock or that one?" Some HR managers and executives are tempted to answer because they want full participation in their plan. By handing out free advice, they think, their employees will be more inclined to invest.

Others resist this temptation because they're fearful of lawsuits filed by employees who have lost money based on that advice. But there may be some employees who still sue because no advice was ever offered. Their defense? "You didn't offer any advice, so I took the information you gave me and made some wrong decisions, which cost me money."

Considering the controversial business of giving advice these days, the reality is that no matter what HR does, the department-and the institution-could still land in trouble. The only point everyone agrees on is that employers have a fiduciary responsibility to their employees. But how that's interpreted and applied differs from school to school.

"It's a very gray area," says Strebel, who is also a certified financial planner and certified public accountant. "Employers are aware that there's this line, but it's so gray, they're not sure where the line is."

Making matters more confusing is the opinion of Peter Gulia, an Employee Retirement Income Security Act (ERISA) attorney who also founded the Fiduciary Guidance Counsel law firm in Philadelphia. Gulia says there may be no difference between investment education and investment advice.

Why? He says those labels relate to Department of Labor interpretive bulletin 96-1, which describes the types of employee communication or information that the DOL believes is not investment advice. The bottom line is that this is merely the DOL's opinion, not anything a federal court would have to enforce. As simply a form of guidance, a court may or may not agree with it.

What's more, Gulia is not exactly sure employers should make that distinction, because to employees, he says, they're one and the same thing.

Confusing, isn't it? This is exactly why the topic is surrounded by controversy.

Regardless of which approach a school takes, Gulia, who also works with colleges and universities, says the worst risk of all is to do nothing. Now that's easy to comprehend. At the very least, doing something - anything- even if it's not the best decision, moves you out of neutral territory and demonstrates that you are actively trying to help employees prepare for their future.

"The reality of litigation in America is that when bad things happen, somebody's responsible," he says, adding that if a school doesn't offer financial advice, it can count on employees making foolish decisions. "So the employer that thinks it will do nothing and that it will all be the participant's problem, I think they're in for an awakening."

HR administrators may be better off worrying more about whether employees are making contributions to their plan and less about where or how their funds are invested. That sort of advice can be really valuable for people who don't realize they need it or who are doing nothing, Gulia notes.

This is where push messages can help. Gulia says HR leaders need to send out messages to employees who are either not making any contributions or are contributing a low percentage-say, 2 percent-of their pay. Explain to them in plain language, and with help from color graphs and illustrations, how they need to start saving for retirement to avoid financial problems when they reach retirement age.

Gulia says the next generation of lawsuits will be about employees who are blaming their company because they don't have enough money to retire. Their argument will be, "You knew I wasn't getting the job done. You should have told me. You should have done something to help me see that."

When those cases start popping up, Gulia wants to defend the employer who sent workers an annual report of their account activity to their home and office and made suggestions about what they needed to do to save for retirement. Now does that communication fall under investment education or investment advice? It actually falls under the category of a smart strategy that protects employers and helps employees make informed decisions. This is also smart because the expense of hiring qualified investment advisors or financial planners can be charged against the retirement plan's assets. It doesn't cost the school one cent, Gulia explains.

You don't want to be
employing staff who want
to retire but can't do so
because they're broke.

Besides, what HR manager ever wants to be in the position of employing staff who want to retire but can't because they're broke? It's not a healthy situation for HR, the school, or those employees, who could end up as business operations liabilities.

"Rather than worry about good defenses and technical answers as to why the employer isn't responsible, I'd much rather have the lawsuit not come," Gulia says. "The one way to do that is for the participant to achieve good results. So I'd rather [have employers] do what they need to do to help the person achieve good results."

Binghamton University (N.Y.) offers financial education to its 3,200 employees. But does it offer financial advice? If you ask Sylvia Hall, assistant vice president of HR, she'll tell you that her school simply provides sound information.

When employees first come on board, someone in HR meets with them one-on-one or in small groups to explain the various pension plans offered. Employees can also attend monthly sessions with representatives of each plan for more details and can sign up for a free consulting meeting with a financial advisor who's not affiliated with the university. But under no circumstance do staff members give advice.

"I don't allow my staff ever to say, 'Why don't you consider this?' " Hall says. "We explain the various plans, then hand them over. [We] can still have a personalized, seamless delivery without having liability on our hands." Still, every employee must sign a pension application form. A clause on the form releases the school from any liability pertaining to fluctuating balances in their retirement accounts.

Another free HR service is a pre-retirement program that covers the basics for employees of all ages. Hall says the school doesn't offer these services to protect itself but because it's the right thing to do.

She says schools that shy away from offering financial advice because they're afraid of lawsuits are not following the right path. At many of Binghamton's pre-retirement programs, she says employees-especially the 30-something-year-olds-just "suck up this information." Whether it's due to Enron-type headlines or because their parents experienced retirement problems, they value the information and advice.

"Don't be afraid to offer good, sound information to people that helps them be [financially] better," Hall says. "If they're more at ease with how they're going to retire someday, then they'll be a better employee for you. So it's a win-win."

Now that you know the pros and cons, will your institution cross that imaginary line?

Carol Patton is a Las Vegas-based freelance writer who specializes in covering HR issues.


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