Workers who need help deciding how to invest the money in their 401(k) retirement plans soon may be able to have an employer-provided financial advisor make those decisions for them, thanks to a recent Department of Labor ruling.
The Labor Department, which regulates the burgeoning 401(k) industry, ruled last week that employers can provide full-service investment management within their 401(k) plans, as long as there are safeguards to protect participants from self-dealing by the financial advisors.
The ruling could be a boon to both providers of financial advice and to millions of 401(k) account holders--but the advice won't necessarily come cheap.
"There are some people who are so intimidated by having to make asset allocation decisions that they don't even participate in the 401(k) plan," said David Wray, president of the Profit Sharing/401(k) Council of America in Chicago. "This ruling provides companies with more flexibility to build advice-giving into their plans, as long as they set up safeguards."
The Labor Department ruling came in a case involving Los Angeles-based financial services company SunAmerica Inc., a unit of insurance giant American International Group, but it applies across the retirement-planning industry.
Under the SunAmerica decision, companies can structure 401(k) programs that allow individuals to opt for managed accounts, in which a paid financial professional will divvy up the employee's 401(k) assets among the available investment choices based on age, assets and ability to tolerate risk.
The new rules could help ease the problem of how to help unsophisticated investors manage their 401(k) retirement savings.
As it stands now, 401(k) participants who want advice on the best way to allocate retirement savings often are referred to generic investment materials, or self-help Web sites. Individuals intimidated by finance often end up choosing to put their money in safe, but low-yielding investment choices, such as money market accounts and guaranteed interest contracts, said Brian Tarbox, a Minneapolis-based financial consultant, who set up SunAmerica's program.
However, with individuals increasingly on the hook for their own retirement security, that can be a costly mistake. These low-yielding accounts traditionally barely keep pace with inflation, which could leave workers far poorer than they would have been if they'd been savvier investors.
The new rules won't change the investment choices now available to workers in their 401(k) plans. The difference will be in who decides how to divide the worker's payroll deductions between the available investment options--the worker or an investment advisor.
Those who want an investment advisor to make the choices would fill out a form detailing the account holder's ability to tolerate risk and investment time horizon. The advisor would call the employee every three to six months--to get more information about the worker's financial goals and personal situation, Tarbox said. The advisor could then reexamine and, if necessary, reallocate that individual's retirement portfolio.
Investment advisory firms want to provide this service because they can charge as much as 1.25% of invested assets for it, Tarbox said. These fees could be paid by companies that sponsor 401(k) plans, or could be passed on to workers, who in many cases already are paying some of their plans' management expenses.
Notably, the ruling comes as the 401(k) market is in flux. Although 401(k) plans have grown tremendously in the last decade, the recent bear market hit plan assets hard. Industry experts predict that total 401(k) assets will show a decline in 2001 for the first time in history--despite the fact that more people are contributing to 401(k) plans than ever. Moreover, the souring economy has caused many plan sponsors to cut company contributions to the plans.
Congress also is weighing legislation to further expand the ability of companies to provide investment advice to 401(k) participants.
The Department of Labor said in its ruling that nothing has changed with respect to company liability for 401(k) plans, said a spokesman for the Employee Benefit Research Institute, a nonprofit benefit research firm in Washington.
Companies that do not provide proper safeguards or sufficient investment choices could end up liable for losses in participant accounts--a factor that may stifle some firms from offering managed accounts, despite the ruling.
Still, said Wray of the Profit Sharing/401(k) Council, losses do not automatically translate to liability. "The system is not judged on results. It's based on proper process. The question is whether the employer acted prudently and in the best interest of participants."
(Begin Text of Infobox)
Web Sites Offer Advice on 401(k)s
Here are Web sites that provide advice for managing 401(k) plans, ranging from how much to contribute to the plan to how to invest the money.
* www.financialengines .com provides specific investment advice, as well as a program that handicaps your chance of having enough money at retirement.
* www.quicken.com provides a series of financial calculators to help determine whether you're saving enough.
A variety of mutual fund companies provide calculators and financial advice. Some popular fund sites:
Source: Times research