Employers can now
offer more 401(k) advice
If you're like many 401(k)
investors, you could use some help in deciding how to invest the
"Most participants desperately
want someone to help them decide what to do," says Rick Meigs,
president and publisher of 401khelpcenter.com,
a Portland, Ore.-based online provider of information on the popular
Now, as a result of a change in government regulations,
you might find that advice right in your workplace.
Here's how it could work: Your employer would determine
a universe of funds from which you and other employees could invest.
Another company, independent of the 401(k) plan provider,
would develop model portfolios to help you decide how much to invest
in each fund, given your age, salary, risk tolerance and goals.
In addition, the company could develop general education
material, such as information on asset allocation or diversification.
This information might be available online, over the phone or through
one-on-one meetings. You could use the recommendations or ignore
An increasing number of companies offer such third-party
information, thanks to what's become known as the "Sun America
letter." In December 2001, the Department of Labor issued an
advisory opinion; these opinions provide guidance on existing regulations.
This particular opinion (2001-09A, issued Dec. 14, 2001, by the
labor department's Pension and Welfare Benefits Administration)
responded to a request by SunAmerica Inc., a financial-services
firm based in Los Angeles.
SunAmerica had asked whether it could, acting as a
retirement plan provider, hire an independent third party to provide
employees participating in a 401(k) plan with investment
advice. If so, the employees would be able to get advice through
their workplace, without having to find advisers on their own.
The answer was yes.
"The DOL said the process of offering third-party
advice is OK, as long as the process is developed appropriately,"
says David Wray, president of the Profit Sharing/401(k)
Council of America, a Chicago-based nonprofit organization.
This was significant. Previously, the department had
to review third-party advice offered by firms providing 401(k)
plans, such as SunAmerica. While the review was intended to ensure
that the plan provider didn't benefit from the advice offered, it
added time and expense to the process, says Wray. As a result, many
employers decided not to offer advice.
The Sun America letter made it easier for employers
to offer employees investment advice. "It provided a prescription
in writing under the DOL's signature. It said that if you provide
advice in the following manner, you as a provider are not violating
ERISA, and the plan sponsor is not taking on additional fiduciary
risk," says Christopher Covill, president of Scarborough Retirement
Services LLC, Annapolis, Md. ERISA stands for Employee Retirement
Income Security Act, the 1974 federal law that established private
pension plan rules.
Currently, about one-third of employers offer some
advice to participants, says Wray of the PSCA. As a result of the
Sun America letter, that number could rise to more than 50 percent
over the next several years, he estimates.
Independence is key
The framework set out by the advisory
- An independent financial expert must develop the
- Plan participants must be given the option of ignoring
- The models must be developed in the best interests
of the participants in the plan.
The fact that the advice has to
come from an independent source is key. This is designed to help
protect you and other 401(k) participants from receiving
biased advice. The concern is that without such protection, a plan
provider may steer participants toward investments that benefit
Some are wary
Everyone agrees that having investment-savvy workers is
a good idea, but some are wary of the changes wrought by the Sun
America letter. The biggest concern is whether the advice would
truly be independent. Some financial professionals argue that the
relationship between the plan provider and the third party could
influence the advice offered.
"Overall, I think there's a need for advice to
be delivered," says Neal Solomon, a certified financial planner
and head of Solomon Associates, a financial planning firm in Gloversville,
N.Y. He questions, however, whether the relationship between the
plan provider and the outside investment expert might influence
the advice that's offered.
For instance, a large brokerage firm may run a manufacturing
company's retirement plan, and bring in an outside investment adviser
to develop model investment portfolios. The brokerage company may
suggest that the brokerage firm's own funds be given priority in
any recommendations the adviser makes. If they aren't, the brokerage
firm may hint, it will decide to work with another outside expert.
Others contend that adequate protections are in place.
"Employers are legally responsible for managing the plan for
the benefit of participants," adds Wray. In addition, the opinion
states that neither SunAmerica nor its affiliates will have any
say in the expert's investment recommendations.
Down the road, proposed legislation may bring other changes.
With Republicans now controlling both houses of Congress, it's more
likely that some version of a bill introduced by Rep. John Boehner,
R-Ohio, will become law, says Ted Benna. Benna, who heads the 401(k)
Association, a consulting firm in Jersey Shore, Pa., created the
first 401(k) plan in 1980
The proposal would allow employers to provide retirement
plan participants with access to professional investment advice,
including advice from the company managing the retirement plan.
However, the employer has to use reasonable care in selecting the
adviser, and any conflicts of interest on the part of the adviser
have to be disclosed.
Some lawmakers, and others, including Benna, argue
that the potential for abuse is too high. For instance, the company
managing the firm's 401(k) plan could steer employees
to investments in which it stands to gain financially. Thus, while
the proposal has been introduced before, it has failed to pass.
The change in the makeup of Congress could boost its chances, estimates
As a result, you may find it even easier to obtain
investment advice on the job. However, you'll want to take any advice
with a healthy dose of common sense and skepticism. That's especially
true if the individual or firm providing advice stands to gain or
lose from your investment decisions.
"See if the advice makes sense and if you're
comfortable following it," says Benna. "Don't just blindly
follow it. You need to ask, 'Does this really sound right?'"
Karen M. Kroll is a freelance writer
based in Minnesota
-- Posted: May 20, 2004