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Bill Seeks Better Advice Within 401(k)s

August 11, 2000|LIZ PULLIAM WESTON

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.


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.

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