401(k) Advice Sorely Needed but Unlikely: Providers Hesitate to Make the First Move
December 10, 2007
NEW YORK-Millions of Americans will be looking for 401(k) investment advice as they prepare for retirement, but until gaps are filled in relation to conflict-of-interest liability, most 401(k) administrators and sponsors will remain reluctant to offer guidance.
"The new regulations have lot of holes right now that haven't been cemented," said David Cesareo, director of product strategy for CNA Financial, at a Marcus Evans conference, "Market and Product Development in Retirement Services," here last week. "This opens up liability in an enormous way."
The Employee Retirement Income Security Act of 1974 (ERISA) was designed to help individual investors and enable the switch from the traditional defined benefit pension plans to defined contribution plans, Cesareo said.
Employees were required to opt-in to their plan to take advantage of building their own retirement savings, but it soon became clear that most employees did not have the drive to do this on their own, Cesareo said.
Last year, the Department of Labor passed the Pension Protection Act to bring ERISA up to date and allow employers to automatically enroll employees in a 401(k) plan, he continued. Employees can choose to opt-out of the plan if they wish.
"The Pension Protection Act made auto' the answer to everything," said George Revoir, senior vice president of distribution for John Hancock. "It built a very systematic approach to retirement. Now it's virtually impossible to lose a lawsuit, but does it really solve the problems?"
Although lifecycle funds are gaining traction in 401(k) plans, the automatic, default option typically puts an investor into a very conservative plan with a low contribution percentage, Cesareo said, regardless of the investor's age, income or risk tolerance.
At that rate, most 401(k) participants' balances won't be nearly enough to retire on-the average 401(k) account balance at the end of 2006 was $66,500, according to Fidelity- but the rationale is that at least it will be something.
But as accounts grow, participants in default plans will eventually need personalized investment advice, speakers stressed.
Before the PPA, only independent, third-party advisers were allowed to give investment advice.
"A major change the PPA made is that now fiduciaries can give advice," Cesareo said. They have two methods by which they may provide this advice, first, directly, as long as they disclose potential conflicts of interest and the fees they receive from the advice remain level, regardless of which investment they recommend, or second, through a neutral, computer-generated model.
Conflict of Interest
Allowing a fiduciary to give advice may seem natural due to their financial knowledge and contact with the client, but it's inherently problematic for a mutual fund or insurance company to provide investment advice when they offer their own products as investment options in the plan, speakers said.
In fact, David Kudla, chief investment strategist at Mainstay Capital, recently outlined the predicament. The rules within the PPA to permit 401(k) advice "are as elaborate as they are ambiguous" and faulty, he said. Thus, because the potential for litigation is enormous, most fund companies have yet to embrace 401(k) advice.
On top of that, there is the added problem of who will foot the bill for this advice, whether it is the administrator, the 401(k) sponsor or the investor.
Many in the 401(k) industry believe the DOL needs to provide further interpretive guidance to protect fiduciaries from liability and return to the formula of providing advice from an independent third party, speakers said.
"No one wants to take a stand until the DOL does, and the DOL doesn't want to," Cesareo said.
But advice is crucial to the well-being of Americans in retirement, speakers stressed. Automatically enrolling employees into 401(k) plans is a great start to improving the problem of Americans not saving enough for retirement, but at some point, the employee needs to take the initiative and customize their portfolio.
"From a human resources standpoint, auto enrollment really works well," Revoir said. "But auto plans without an auto type of goal aren't going to work for everyone."
Getting employees to take an interest in their own future will also require educating them in plain language about plan provisions and benefits through seminars and workshops, speakers said.
"Leadership should come from senior management, not HR," said Donald Mazzella, chief operating officer for HSAfinder.com. "Providing a retirement plan is smart in terms of adding profitability, because employees are happier if they have a plan. The industry should be educating leaders in the company as to the value of planning to increase employee morale. A happier workforce stays longer and works harder."
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