Bill Seeks Better Advice Within 401(k)s
Most of today’s workers are at least partly responsible for managing their own retirement nest egg. And many have absolutely no idea what they’re doing.
Part of the blame, it would seem, lies with the employers who set up and help fund retirement savings plans. The vast majority of employers do not provide the kind of specific, personalized advice that could help an employee navigate the often-confusing world of investments.
Instead of telling workers how they might divide their money among the mutual funds a company has chosen for their plan, for example, a firm’s benefits department will pass out colorful brochures, distribute pie charts and hold seminars that repeat the same generic advice about risk tolerance, time horizon and asset allocation.
Sound familiar?
The reason for this is that companies are terrified of being sued if they, or someone they hire, give bad advice. Frankly, employers are afraid of being sued even if the advice is good but employees decide it could have been better.
The solution, according to some in Congress, is to let the investment companies that administer 401(k) plans also provide specific advice--even if their recommendations involve their own products. Thus, Fidelity Investments would not only furnish your 401(k) plan options, it could suggest how you allocate your money and which funds to use.
(The fact that Fidelity is already pretty much providing specific suggestions is part of the story, but we’ll get to that later.)
The bill that would authorize the provision of such advice, HR 4747, would be a significant change in the rules that govern retirement plans. Currently, plan investment providers such as mutual fund companies are forbidden from giving advice that involves their own funds unless they get a special dispensation from the U.S. Department of Labor.
Labor has granted few such exemptions in the 25 years that the rules have been in force. Perhaps not surprisingly, the department has expressed reservations about this bill.
Labor unions, the AARP, the Clinton administration and several online investment advice companies flat-out oppose the legislation, saying it significantly weakens safeguards against investment company self-dealing when it comes to workers’ nest eggs.
These opponents say workers would have to choose between getting no advice or getting potentially conflicted advice, especially if an investment company chose to direct plan participants to the funds that generate the highest fees for the firm.
Financial Engines and MPower, two Internet companies that provide personalized advice for 401(k) plan participants, have been particularly vociferous in fighting the bill. Obviously, such a law could cut into the future growth of their businesses.
Rep. John A. Boehner, the Ohio Republican who introduced the bill, says the goal is to make professional financial advice readily available to people who need it and who may not know where else to turn.
By allowing investment plan providers to give specific advice, liability would be shifted from employers to the advisors, Boehner says. That would lead to more employers authorizing such advice, he says. The advisors would be personally liable for any failure to act in the best interests of the workers, Boehner says.
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But even some objective sources have raised questions about the measure. Dallas Salisbury, chief executive of the nonpartisan Employee Benefit Research Institute, contends the bill would not significantly change employers’ exposure to lawsuits, despite proponents’ claims to the contrary.
Salisbury said companies would still be held responsible for choosing and monitoring the advice givers, just as they are held responsible for choosing and monitoring the investment provider.
“I can’t figure out how [the bill] makes it easier for the employer. The employer’s fiduciary liability is still there,” Salisbury said. “If they [employees] are going to sue, they’re going to sue everybody.”
A key question is, are employees really at a loss today for detailed help in making investment choices in retirement plans--or do they just not know where to look?
A cruise through the Internet shows that several Web sites are already offering the kind of specific advice that Boehner says workers aren’t getting.
Fidelity’s own PortfolioPlanner, which is available to participants in 401(k) plans it administers, takes investors through a 50-minute interactive quiz that asks the investor to fill in specifics about income, other investments, pension plans, risk tolerance and time until retirement. It provides a probability calculation to determine the chances of success for the investor’s current plan.
After analyzing the quality of the 401(k) plan options--which typically include Fidelity funds as well as non-Fidelity funds--the automated planner comes up with a list of the funds to invest in, along with suggestions for how much to put in each.
Although Fidelity calls the planner an education tool and the site includes a disclaimer that “Fidelity PortfolioPlanner does not provide personalized investment advice,” workers would be understandably confused about the distinction.
In any case, Fidelity wants the Boehner bill to pass, because the company says the law would allow it to be more proactive--contacting plan participants whose asset allocation is out of whack, for example, to suggest a change.
Likewise, other mutual fund giants are eager to help direct workers’ investment choices. The Investment Company Institute, which represents fund companies, has endorsed the bill as well.
How much potential is there for workers to get bad or biased advice? That’s a tough one to weigh. After all, some advice may well be better than nothing for workers who are totally befuddled about their plan choices.
But workers could also lose thousands of dollars of potential returns if they wind up paying too much in fees and expenses because they were pointed to high-cost funds.
Joseph A. Grundfest, co-founder of Financial Engines and a former Securities and Exchange commissioner, contends that the methodology of Fidelity’s automated planner unnecessarily includes a bias toward recommending higher-fee funds.
Whatever happens with the Boehner bill, the need for advice is only likely to grow as baby boomers’ 401(k) assets mushroom.
For now, workers might do well to check out what’s already available to them in terms of Web-based advice services. If you’re worried about biases in any one service, you can easily pop over to other services for second and third opinions.
(See the Financial Planner checklist, at left, for specifics on some of the Web-based services.)
For Grundfest’s and others’ testimony regarding proposed retirement rule changes, visit https://edworkforce.house.gov; click on “Hot Topics” and select “Workforce Issues,” then follow the link to “Retirement Investment Advice for Workers.”
Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
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401(k) Plans, by the Numbers
Employer-sponsored 401(k) retirement savings plans have mushroomed over the last decade, but the advice employees get in making investment choices in the plans is almost exclusively generic.
* Number of plans nationwide: 320,000
* Number of participants: 33.7 million
* Percentage of plans offering general investor education: 86%
* Number of plans offering specific advice: 100
Sources: Profit Sharing/401(k) Council of America, Forrester Research, Hewitt Associates
