 Don't heed this 401(k) advice
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If you could pick someone to give you advice about
how to invest money in your 401(k) plan, whom would you choose?
Would you pick an employee of your plan provider who could profit
by steering you into certain investments? Or would you pick an independent
adviser who would act solely in your best interests?
This is not a trick question. It illustrates two starkly different
solutions as they appear in recently passed House and Senate bills
that address the 401(k) financial-advice problem. The massive 800-page
pension reform legislation contains several provisions relating
to 401(k) plans, but those on advice promise to be most contentious.
In the next phase of the legislative process, a House-Senate conference
committee hammers out differences between the two versions.
"A lot of people think this is going to be the
toughest issue to resolve in conference because the approaches taken
in the House and Senate bills are so different," says attorney
Brian Graff, executive director and CEO of the American Society
of Pension Professionals & Actuaries, or ASPPA.
The way things are now
Because of liability concerns, employers are not eager to provide
advice to their workers. But because workers are in charge of their
own retirement destinies, they could really use some advice. The
problem isn't new, and legislators have been working on resolving
it for several years but have made no real progress until recently.
Under current law, if plan participants do receive
investment advice, they have certain assurances that the advice
they are getting is impartial. That's because under the rules of
the Employee Retirement Income Security Act, or ERISA, anyone who
dispenses investment advice to 401(k) plan participants
assumes the role of a fiduciary.
Fiduciaries must act solely in the interests of plan participants.
They have the duty of loyalty, which requires full disclosure of
compensation; the duty of care; the duty to diversify, and the duty
to adhere closely to the provisions of the benefit plan. In other
words, they are duty-bound to do the right thing.
ERISA prohibits fiduciaries from feathering their
own nests by, for example, recommending investments that would positively
impact their incomes. This would be considered a conflict of interest,
resulting in a prohibited transaction.
"At the present time, you have to avoid giving
investment advice that will cause yourself to be paid an additional
fee," says Fred Reish, a lawyer who spoke last week to a group
of 1,500 retirement-plan specialists at the annual 401(k)
Summit hosted by ASPPA.
Even though fiduciary advisers must put client interests first,
current ERISA rules don't hold advisers responsible for investment
decisions made by employees. However, they are liable for the investment
options in a plan, so they have an obligation to provide good funds
for workers to choose from.
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