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A Few Words on 401(k) Advice: Don't be First

BOSTON-Provisions within the Pension Protection Act that allow 401(k) plan administrators to offer investment advice to participants at first had many abuzz with the possibilities of marketing add-ons to plan sponsors and building longstanding relationships with employees.

But when it comes to advice, many 401(k) administrators now find themselves biting their tongues.

"Most people are interested in the concept, but as they begin to understand the details, it gets daunting," said Dan Besse, vice president in charge of marketing retirement products for Fidelity Investments Institutional Services.

"Everyone has a strong desire to help the participants be more effective," Besse said. In fact, in a survey of 350 Fidelity-affiliated financial advisers, the Boston-based company found that 90% at first saw the ability to provide investment advice to their clients as a marketing tool to help differentiate their services from those of competitors.

But only one-third understood the fiduciary responsibilities attached, Besse told 160 National Investment Company Service Association members at the East Coast Regional Meeting here last week.

In another instance, he said, a room of 40 registered investment advisers who had come to learn more about the provision thinned out to only four after he began explaining the requisite steps.

"This is one of the most complicated pieces of the [Pension Protection Act], and the one with the least clarity around it," he said.

As a result, plan providers typically consider the requirements, and costs, associated with offering advice and typically decide to stick with educational tools they've already got from unbiased, third-party sources, such as Morningstar and Lipper, that provide descriptions and historical data about available funds and their peers, along with simple, generic online calculators. Thus, decisions about allocation, product choice and rebalancing remain in the hands of the plan participant.

"These new provisions come with a lot of baggage," said Larry H. Goldbrum, general counsel of The Spark Institute in Simsbury, Conn.

For one thing, whether they are broker/dealers, 40 Act investment advisors, banks, third-party consultants or affiliates, before giving advice, the provider must have an agreement with the client. That agreement must specify a battery of terms including how advice will be delivered, how often, how much it will cost, who will pay and whether it will be computer-model based or face-to-face.

The provider must then keep records of all interactions, document how they were chosen by the plan sponsor, keep a log of all materials exchanges and conduct annual audits. All records must be stored for at least six years.

Then there are the disclosure requirements to be reflected on participant statements.

"There is a lot of liability at stake here," said Todd L. Leszczynski, senior product manager for retirement and annuities at Pioneer Investment Management in Boston.

Yet there is little guidance from federal authorities, including the Department of Labor, on information as rudimentary as who the "client" is-the plan sponsor or the participant.

Service providers are less concerned about the details of what the guidance would say than about the fact it is clear and comes quickly, Goldbrum said.

Other questions that plague providers include what type of information about each participant the advisor would need to provide guidance that is at once helpful and in line with his or her obligations as a fiduciary, added Jeffrey M. Croke, assistant vice president and senior product manager at MFS Retirement Systems in Boston.

"Initially this drew a lot of excitement, but I don't see anyone taking the lead," he said.

The rush to be first-to-market with a solution is further delayed by the fact the safe harbor provisions included in the act are not in effect until Jan. 1, 2008, he added.

"No one is acting until there is more guidance," Croke said.

Like others, AST Trust Company Relationship Leader John Randall said the marketing teams at the open-architecture 401(k) plan administrator American Stock Transfer & Trust, ASR's parent company, were immediately enthusiastic about the opportunities to reach out to investors, build relationships, and develop more comprehensive financial plans addressing issues beyond retirement-such as college planning, for which investors may, ultimately, consider other products.

"The general counsel said, No.'" he said flatly. The risk manager had a similar response.

"The question is, What would we do that we aren't doing today, and would we be making more money?" he said. The answer is, not much.

At least, not now.

"We're not doing the right thing as an industry if we don't help these people take action," Besse said.

But when the cost of administering the millions of low-balance employee accounts is weighed against the risks associated with administering advice, what is right, exactly, remains unclear, panelists said.

"We just want someone else to go first," Randall said.

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