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Don't heed this 401(k) advice
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House bill: Fox guards the hen house
The House bill changes the rules and allows investment advice to be provided by the financial institution and its agents, even if there's a financial conflict of interest. Only once would advisers be required, in the context of an advisory session, to announce the fact that they would stand to gain from the advice they are dispensing. After that, each adviser can advise to his heart's content and not mention it again. Oh, and they're obligated to say that employees are free to seek independent advice on their own.

Well, we are always free to do that, aren't we? The problem is, few of us actually run out and get this advice.

On top of that, the bill gives free rein to financial institutions to advise businesses about what investment options should be offered to their workers. In other words, they would exert a lot of influence at both the plan level and at the participant level.

As a matter of fact, if the employer were offering funds from multiple fund families, but the adviser worked for only one of the families represented, it would be permissible, in fact downright hunky-dory, for the adviser to discuss only the funds from his own fund firm to plan participants under the provisions of this bill.

So, is it a good idea to get biased investment information from an adviser that stands to profit from the advice given? I don't think so. Financial institutions, which are making a big push for this legislation, argue that they can offer this service at a reasonable cost because it will be wrapped up in the management fees that they're already charging. These advisers don't have to be licensed experts, by the way; they can just work for the financial services firm that sells the products.

From an employer's standpoint, this would be the cheapest way to go. Employers wouldn't have to monitor the advice given to their employees, but they would be responsible for selecting and monitoring the adviser periodically.

But how cheap is this from the employees' standpoint? If they are being directed into investments that can legally pay an adviser bigger fees, why, it wouldn't be cheap at all now, would it? In fact, it could be extremely expensive.

Reish predicts that a turf battle will ensue between investment managers and broker-dealers, neither of whom would have to worry about conflict-of-interest provisions currently in place with regard to investment management fees and 12b-1 fees, respectively.

"I think it's hard to predict exactly what the outcome will be, but I see a fight over the participants' money," he says.

Who loses here? Employees, because of the likelihood that they'll be steered into higher-cost funds. They'll end up feathering their advisers' nests to the detriment of their own. But proponents say the regulatory agency that oversees financial services firms -- the Securities and Exchange Commission -- will protect plan participants. As if it doesn't already have enough on its plate policing crooks in the industry!

Next: "This isn't easy stuff, and they can do a lot of harm here."
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