Alert reader Tom Obara of Cassidy Retirement Group here in Massachusetts – or as I have taken to calling it during this perpetually snowy winter, East Dakota – passed along to me an article on behavioral finance in January’s issue of PlanSponsor in which I am quoted on the need for plan sponsors to adequately educate and inform plan participants about investment options and the risks they pose. You can find the article, called “Misbehavioral Finance,” here, and this is what I had to say on the matter:

Not delivering a reality check: Some of the wave of participant lawsuits since the 2008 crash could have been prevented if sponsors had delivered the message more clearly throughout to DC participants that they bear ultimate responsibility for their retirement security, believes Stephen Rosenberg, a Boston-based Partner at law firm The McCormack Firm, LLC, who works primarily with employers. “There are some lawsuits that suggest they do not want to rock the boat in telling people who are already concerned about their declining house value anything else that could worry them,” he says.

Employers should have been delivering that reality check all along, Rosenberg thinks. “There is little doubt that years and years of significant asset growth meant that many people did not pay attention to the risks and the fees. It has left people with very unrealistic beliefs and expectations,” he says. “I do not think that they were educated enough in advance. It is easier for plan sponsors, as well as for their vendors, to not really point out the risks or exposures and just let everybody be happy.” Employees need to get the clear message that “you cannot just rely on the company to get you there,” he says of retirement security. They need to know, he says, that a 401(k) “is something different from what your parents had, or what you wish you had.”

Now lets be clear. No amount of information, education and disclosure is going to insulate a plan against class actions if there is a problem in a plan that the class action bar thinks can be targeted (and let’s make sure we are fair: sometimes the class action bar is right and a plan does have legitimate problems that call for class wide relief). They will always be able to find some plan participants who are unhappy enough to serve as class representatives, no matter how much information the plan sponsor had imparted to those individuals. But it is my view and my experience that many individual complaints and individual participant lawsuits can be avoided by educating participants properly about their investments; many suits arise because participants feel blindsided and misled, and that is a dynamic that disclosure and education can defuse. Beyond that, there is little doubt in my mind that an educated workforce that, even when 401(k) balances decline, is knowledgeable enough to understand that risk and even to have foreseen that possibility, is a happier workforce, and one that suffers less damage to its morale in a downturn. Isn’t that a good enough reason right there to expand disclosure and education to plan participants?