chalk talk | PLANADVISER August/September 2014

When We Think We Know Best

Are you guiding participants to the right investments?

By | August/September 2014
Dadu Shin

Our industry has arrived at an intersection: Three avenues converge, yet the right of way for participant outcomes, ethics and law has not been clearly defined. Today’s defined contribution (DC) plan participants stand at the center of this “choice architecture” dilemma and depend on advisers for direction. The retirement plan adviser who fails to recognize this conundrum—focusing on only one component—is ill-equipped to assist retirement plan committees.

Advisers can see how plan participants direct their own investments, using data widely available from mutual fund companies, custodians, recordkeepers and a small number of trade associations. It’s the adviser’s job to guide participants to the right asset allocations. The choices they offer can influence plan participants, via their language, on paper, on video or through game-based technology. Richard Thayler, an economist and a professor with the University of Chicago Booth School of Business, has emphasized that defaults, outcomes and errors are ever-present when any decision is made because of choice architecture.


By now, most retirement plan advisers are speaking the language of outcomes, from improving outcomes to desired outcomes. The days of participants thinking, “I just need a million dollars in my 401(k) plan and I’ll be fine,” are being replaced by the outcome-oriented goal. The term “outcomes” needs to be in the lexicon of the adviser—and introduced to the plan sponsor—preferably tied to a participant’s income replacement ratio.


A component of ethics must always be a consideration of doing the right thing—but unfortunately that can be clouded by perspective. Is it acceptable to influence how someone will choose to invest his retirement savings?

Choice architects are continually forced to take a stand. Relating to ethics, is it acceptable that the designer/programmer of a 401(k) provider incorporate his own bias or experiences into the design for all 401(k) participants who will use that software or technology? If the decision to incorporate one’s own bias into the decisionmaking logic that participants will experience is white-boarded in the office of a mutual fund company executive vice president, is that acceptable?

The ethics question, and subsequent decision, becomes a different problem when it is considered in tandem with the concept of improved outcomes. Both the plan provider—its programmer, systems designer and management—and the participant desire the same outcome: for the participant to reach an acceptable asset level to build sustainable retirement savings. Ethics make it perfectly acceptable to care about and take an interest in the outcome of another person.


Given that the intended outcomes of a mutual fund company or another provider may, or may not, be in lock-step with the desires of plan participants—and we know that, ethically, it is acceptable to have concern for the actions and outcomes of other people—what is the impact of considering the Employee Retirement Income Security Act (ERISA) “map”?

ERISA contains clear, if not concise, language concerning the prohibitions around self-dealing, exclusive benefit rule infractions and prohibited transactions.

The scenario is simple to construct:

  • The provider believes, with a high confidence level, that a 70% equity/30% fixed-income portfolio will outperform a 100% money market portfolio over a 30-year period;
  • The provider designs the technology—logic, screens and communications—for plan participant usage on the 401(k) platform;
  • The provider knows that 25% of the participants of a plan direct 100% of their own deferrals and the resulting company match into a money market investment;
  • The provider is not serving in the role of investment adviser or investment manager; and
  • The provider firm earns 4,900% more on the investment income when a participant chooses a 70/30 mix over a 100% money market investment.

What is the acceptable amount of guidance a provider can direct into the logic of participant software before it is considered self-dealing? Is writing and using balanced account-biased software considered investment advice? Is incorporating an equity bias into in-house software considered a prohibited transaction? What amount of equity-bias would violate the exclusive benefit rule? It’s up to the adviser to help the sponsor make these determinations.

Steff C. Chalk is CEO of Fiduciary Consulting and Governance Group Inc., a fee-only fiduciary consulting practice serving corporations and nonprofits. A judge for the PLANSPONSOR Retirement Plan Adviser of the Year Award and a faculty member of the PLANSPONSOR Institute, he is also co-author of “How to Build a Successful 401(k) and Retirement Plan Advisory Business.”