Push to Offer 401(k) Advice Raises Questions

Confusion among the nation’s 30 million 401(k) investors--who collectively invest more than $1 trillion--is fueling a growing industry of financial-advice providers that offer personalized guidance on investing retirement money.

However, this explosion of advice--much of it delivered online--comes while there’s still much debate over what “advice� really means, who’s ultimately responsible for the quality of the guidance, and how plan participants ought to use it.

These services represent “a quantum leap� in how 401(k) investors will go about their decision-making, says Dan Maul, president of Retirement Planning Associates in Kirkland, Wash. “This is an incredible tool for participants.� But, he adds, “this is clearly murky terrain.�

Two and a half years ago, San Francisco-based 401(k) Forum became the first company to give 401(k) investors specific, custom-fitted advice online. Today, depending on how you define the words “specific� and “advice�--not a minor point--there are 19 firms that provide, or are thinking of providing, such information, according to David Wray, president of the Profit Sharing/401(k) Council of America.

Recently, two heavy hitters in financial services joined the fray: fund tracker Morningstar Inc. and financial data firm Standard & Poor’s. Several large mutual fund firms, including Fidelity Investments and Vanguard Group, also recently began offering some of their 401(k) investors customized guidance. T. Rowe Price Associates is expected to follow.

“In four or five years, you might see hundreds, if not thousands, of companies offering advice,� Wray says. In fact, a 1998 Forrester Research study estimated that the number of 401(k) investors who use online advice would jump from 440,000 this year to 6 million by 2002.

You can see why. Recent employee surveys, along with 401(k) plan sponsors (who field complaints from employees), report a growing demand for meaningful--and specific--guidance on how to invest 401(k) money.

Nearly 1 in 4 plan participants in a recent survey by research firm Spectrem Group said they would be willing to pay for advice from an investment professional to help with their 401(k)s. And the number of 401(k) participants who actually do rely on professionals (such as brokers or financial planners) for at least some help has nearly doubled since 1996.

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Yet many companies that offer 401(k)s have been reluctant to provide advice directly, for fear of entering into a “fiduciary� relationship with employees. By giving direct and specific advice, firms could be held liable for the quality, and outcome, of that advice.

Enter companies such as 401(k) Forum and Palo Alto-based Financial Engines. These third-party investment advisors will ask 401(k) investors a series of questions to gauge risk tolerance and investment time horizon. Based on that information, they’ll provide participants with specific asset allocation plans--and then, based on the choices in the 401(k), will present a recommended portfolio of funds with specific percentages to allocate to each.

(Many advice providers will also alert you, often by e-mail, if circumstances warrant updating your plan. Financial Engines does something unique--it forecasts the probability that you’ll be able to meet specific financial goals based on various portfolios.)

In doing so, these companies take on the role of the fiduciary for the plan sponsors.

Of course, it’s not that simple. In 1996, the Department of Labor, which oversees traditional pensions and 401(k)s, noted that the duty of the plan sponsor “is to prudently investigate the qualification and the performance of the education and advisor, and to monitor their performance,� says Fred Reish, managing partner with Los Angeles law firm Reish & Luftman.

In other words, even if a third-party vendor is responsible for giving an investor bad advice, the company is still responsible for doing its job in selecting and assessing the financial advisors. Which is why Morningstar, for one, considers itself a “co-fiduciary� with plan sponsors.

The question is, what constitutes acceptable performance on the part of the advisor? And how closely must plan sponsors monitor that performance?

Because of the ongoing debate, there are still some 401(k) sponsors taking a wait-and-see attitude toward hiring advice-givers, says Mark Harbour, partner and area director for personal financial counseling for Ernst & Young in Los Angeles.

“None of this has ever been litigated,� said Alan Lebowitz, deputy assistant secretary for the Pension and Welfare Benefits Administration at the Labor Department. “In the context of some really major turnaround in the stock market where participants are going to be looking around for people to sue, I wouldn’t think they’d ignore the employer even though the employer just hired these [advisors] and has done things prudently to choose and monitor them.�

Even if the Labor Department did establish a detailed set of guidelines for advice providers, there’s another complication. Companies are still divided on where precisely the line is between education and advice.

When Vanguard recommends portfolios through its Navigator Plus program, “we believe this is advice,� says Jim Norris, a principal with Vanguard.

Fidelity offers somewhat similar services through its Portfolio Planner program. Yet, says Monica Chandra, vice president for Fidelity Institutional Retirement Services: “We feel very confident that this is not advice--this is education.�

Chandra notes, for instance, that Fidelity 401(k) investors aren’t bound to implement the model portfolio. As a result, Fidelity does not regard this as a fiduciary relationship, though it indemnifies 401(k) sponsors should a problem arise.

Of course, the very notion that a firm such as Vanguard or Fidelity could offer guidance that may lead investors to mutual funds run by those same companies creates a whole other set of complications. In fact, firms that advise investors are not generally allowed to steer investors to funds that they themselves manage. (Some firms, such as Los Angeles-based TCW Group, have sought and received exemptions by making certain adjustments to their plans to satisfy the Labor Department.)

However, Vanguard believes it is allowed to recommend its own funds because it runs all of its funds at cost (i.e., it doesn’t make a profit on management fees). Fidelity contends it is not offering direct advice, so there is no conflict. (Plus, both companies say their fund-selection processes are unbiased.)

Still, Financial Engines chief Jeff Maggioncalda argues that “consumers need to be made aware of potential conflicts of interest� in these situations.

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To be sure, many of these concerns have thus far been rendered moot by the bull market. But what happens if the markets turn down and investors who have used specific advice lose significant money? “If we do see a prolonged downturn, where people lose money, you may see more need for advice,� said T. Rowe Price Vice President John Doyle. “But at the same time, you may see this response from employees to employers: ‘I did this because you told me to and now I lost all this money.’ �

What’s more, “a fair number of participants will see the word ‘advice’ and will automatically think they can leave all of their investment decisions up to the advice-giver,� says Reish. “Then there’s some risk . . . that people will rely too heavily on the advice.�

Does this mean you shouldn’t take advantage of 401(k) advice? “Certainly, if it’s offered, you should use the service,� says Ted Benna, head of the 401(k) Assn., a consumer group. But “using� the services doesn’t mean blindly following and implementing the advice, he cautions. “This is a tool to help you make your ultimate decisions.�

Which means financial education is all the more important--not less--to investors who use advice.

Ultimately, says Dawn Pollard, vice president for human services for Alza pharmaceuticals, which gives its employees access to Financial Engines services, “the decision is yours.�

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Times staff writer Paul J. Lim can be reached at [email protected].