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7 responses to “Should 401k Plan Sponsors Ban Risk Tolerance Questionnaires?”

  1. Chuck Miller

    The biggest problem with risk tolerance quizzes is they only assess one type of risk, and attempting to minimize one kind of risk may maximize another type. It’s like trying to hold water in your hand.

    Large investment funds like corporate DB plans or college endowments realize they have to balance all the various types of risk to reach their objectives.

  2. August 15, 2013 | The Morning Pulse

    […] Should 401(k) Plan Sponsors Ban Risk Tolerance Questionnaires? Warning Clients On 401(k) Loans Target-Date Funds Post ‘Respectable’ Results Transamerica: Underemployed, employed draining 401(k) accounts Rekenthaler Comes to 401k’s Defense PENSION PLANS […]

  3. James Watkins

    Risk tolerance questionnaires serve no purpose, as they are usually poorly constructed, both in terms of the questions and, in some cases, the weighting given to certain Q&As.

    From a liability perspective, under FINRA and supporting legal decisions, the answers to such questionnaires do nothing more than provide a false sense of security to any of the plan’s advisers and fiduciaries subject to FINRA, as FINRA has consistently stated that it is the rep’s duty to properly assess a customer’s risk tolerance, both in terms of the customer’s willingness and ability to bear investment risk. If a client is financially unable to bear market risk, then the customer’s answers to any questionnaire are irrelevant. We are also seeing the emergence of a third threshold question that a rep/adviser must address – the need for a customer e.g., HNW customer, to accept market/investment risk at all.

  4. Scott Kubie, Chief Strategist, CLS Investments, LLC

    My view is three basic attributes drive a client’s risk allocation. They are subjective risk tolerance, objective risk situation, and goals. Different people emphasize one of these over the others. I would put Finametrica, an Australian research firm, in the first camp. They emphasize the psychological aspects of risk. Most 401k questionnaires emphasize the objective risk tolerance and focus on time horizon and income needs. The writer of the article is firmly in the goals camp. I favor a questionnaire focused on the first two combined with financial counseling in the years leading up to retirement.

    The article is of mixed value. Some of the deficiencies of questionnaires, were based on the client not liking the results and ignoring them and choosing something more conservative. From my view, this was a powerful argument for questionnaires. They are a low-cost way to encourage people to take decent risk.

    The goals approach also incorrectly identifies the goals as fixed and every other item as flexible. In reality all three of the attributes are flexible. If faced with a disconnect between subjective risk tolerance and goals, clients will often tack on a little more risk, work a little longer (increasing the time horizon while lowering the income percentage), and reduce their goals. Many times it is easier to adjust their goals than to take risk beyond their comfort zone.
    [These opinions are mine personally and do not necessarily represent the views of my employer.]

  5. Fred Farkash

    Chris, thanks for starting an interesting discussion but I’m not sure I agree with some of the article’s assertions. If an investment questionaire qualifies as “interactive investment materials” under the DOL education vs. advice regulations (see 2509.96-1(d)(4), it would qualify as education (not advice). There is also certainly no legal requirement for 401k plan sponsors to provide investment advice to plan participants just because you give them education. One of the key points of the DOL guidance mentioned above is that in lieu of taking their entire financial picture into account (e.g., getting information about all their outside accounts), you can just tell participants that they need to consider their outside assets in addition to those in the plan in determining their asset allocation.

    So how could providing a questionnaire that properly qualifies as education (not advice) result in liability for the plan fiduciary? Are you saying 2509.96(1)(d) is somehow inapplicable because most questionnaires don’t qualify as education in practice, or are you saying that somehow this DOL guidance would not hold up in court?

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