Bill on 401(k)s Raises Worries

House leaders want to eliminate a longtime safeguard against conflicts of interest in retirement planning, creating a major sticking point in efforts to overhaul the U.S. pension system.

The proposal, championed by House Majority Leader John A. Boehner (R-Ohio), would lift a barrier to firms that run 401(k) retirement plans that keeps them from giving employees investment advice if they stand to benefit financially.

The change would allow mutual fund companies such as Fidelity Investments to both manage 401(k) plans and advise workers to steer payroll deductions into their own funds.

Boehner said his proposal would make it easier for workers to get professional investment advice. As more companies abandon their traditional pensions, there is widespread agreement that people need help to ensure that their 401(k) accounts will meet their needs in retirement.

But the provision is facing resistance in the Senate, where leaders fear that fund companies would put their own interests first.

“Allowing conflicted advice would be a step back for employees and our pension laws,” said Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee.

At the center of the disagreement is a growing pot of gold: More than 44 million workers have invested more than $2.7 trillion in 401(k) and similar retirement savings programs, a figure expected to grow steadily in coming years.

Lawmakers who want to preserve the anti-conflict rule say it protects workers from self-serving and dishonest advice that has been at the heart of past Wall Street scandals.

Supporters of the longtime ban worry, for example, that unscrupulous mutual fund companies could steer workers into their own funds to reap lucrative management fees, regardless of whether the investments are appropriate.

“We don’t want people with a financial interest in the products giving you recommendations on how to invest,” said David Certner, legislative counsel with the AARP, the largest lobby for older Americans. “We want the advisor acting solely in the interest of the worker.”

The conflict-of-interest dispute stands apart from other issues as Congress deliberates over ways to overhaul the nation’s beleaguered pension system.

Most of the bill is aimed at shoring up the system of old-style “defined benefit” pensions that guarantee payments for life. The advice issue, by contrast, is among the provisions that address “defined contribution” plans, such as 401(k)s.

Employees in 401(k)s are responsible for making their own investment decisions, and bad choices can have severe consequences. A common mistake, financial planning experts say, is for employees to invest too heavily in their employer’s stock -- which can wipe out their retirement savings if the company goes belly up.

“The examples of Enron and WorldCom painfully illustrate that workers need quality advice to help them make sound investment decisions about their retirement future, and the House approach provides an important new retirement benefit to working families,” Boehner said in a statement.

Companies that manage and invest 401(k) accounts have long sought to overturn the legal provision. They say they would dispense advice with integrity, and that the marketplace would tolerate nothing less.

“There are a number of advice providers out there currently, and if we didn’t offer legitimate, impartial advice, we wouldn’t be used for that service,” said Charles E. Vieth, president of Retirement Plan Services for mutual fund company T. Rowe Price Group Inc.

“There’s always the employer looking over our shoulder,” said Stephen Utkus, a principal with Vanguard Group’s Center for Retirement Research.

The proposal would enable companies managing 401(k) plans to offer “personally tailored advice to meet the unique needs of individual workers,” Boehner said. The measure requires companies to disclose potential conflicts of interest and makes them liable for any misconduct.

It first passed the House in 2001 and has passed the House three other times as part of larger pension packages. It has consistently died in the Senate.

Benefits experts have long contended that many Americans don’t know how to manage their retirement investments. A recent study by benefits consultant Hewitt Associates, for example, found that the youngest workers placed a higher percentage of their savings in money market funds and other investments that pay low returns.

This is the opposite of conventional financial advice, which calls for younger workers to put more of their money in stock funds -- which can be volatile but are also more likely to pay greater returns over time.

“They look at it as something that they don’t really worry about today, because they don’t have to retire anytime soon,” Lori Lucas, Hewitt’s director of retirement research, said of younger workers.

Consumer advocates are wary about changing the law, despite the lack of investment know-how among workers, because they fear it may be difficult for an employee to see through a self-interested pitch, even with disclosure rules.

“There’s a clear need for advice,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “The threat is that you give people something that looks like advice and really is a sales pitch.”

Currently, firms that oversee the corporate plans may arrange for independent research companies to offer guidance to those who seek it. The Senate plan would expressly encourage these relationships by offering employers added protection from lawsuits brought by workers who may feel they were led astray by the independent advice. The Senate bill would not, however, allow investment advisors to recommend their own funds to workers.