Retirement > 401(k)s & IRAs

401(k) help is on the way
Two new bills in Congress could help you avoid costly mistakes.
August 4, 2003: 4:05 PM EDT
By Jean Sherman Chatzky, Money Magazine editor-at-large

NEW YORK (CNN/Money) - Ever felt you needed some help making your 401(k) investment decisions? Your employer could lend a hand by hiring a third party or someone on staff to advise you. Most employers don't, of course. Why?

First, cost. Plan providers, who would likely offer advisory services to your employer for free simply to keep its business, haven't been allowed to fill that role because they have a conflict of interest -- they could benefit by pushing your dollars into one fund or another.

Second, lawsuits. "Most companies don't offer advice because their lawyers have told them that if they do -- even if they go through a prudent process and hire a good adviser -- the company can be sued," says David Wray of the Profit Sharing/401(k) Council of America. "They say, what's the purpose?"

Now, of course, we have an answer to that question. Good advice might have boosted diversification among Enron's 401(k) participants, who kept 62 percent of their funds in company stock when the company's match amounted to only 11 percent -- or among employees at Lucent, Rite Aid and Kmart, many of whom rode their companies' fortunes down.

Advice might even change the fact that four of every five 401(k) participants never rebalance their retirement investments.

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More advice may soon be on the way. Two pieces of legislation pending in Congress address this issue: The Retirement Security Advice Act sponsored by Rep. John Boehner would allow plan providers to give advice as long as they disclose their conflicts of interest, and the Independent Investment Advice Act sponsored by Sen. Jeff Bingaman would limit employers' liability.

The Boehner bill has already passed the House with bipartisan support. The Department of Labor is in favor. So is the President. Every Washington insider I've spoken with recently says hard lobbying by the financial services industry practically ensures that we'll get Boehner or some hybrid of the two bills.

Is that a bad thing? Barbara Roper, director of investor protection for the Consumer Federation of America, thinks so. "With that bill, you kill any opportunities for independent advice to 401(k) participants," she says.

Say your plan provider's asset allocation has you putting 10 percent of your assets into an international fund. If the provider's international fund is a dog, will you be told?

Or perhaps you have a plan operated by a broker-dealer that offers in-house funds and some from other fund companies. Are you going to be steered into the in-house options? If your plan includes index funds as well as more costly managed ones, are you going to be maneuvered away from the inexpensive-to-run passive funds?

But even Roper acknowledges, "If I had to make a choice between no advice and biased advice, I'd choose biased advice because I think there is a desperate need for it."

No doubt we need advice. But do we want it? In my mind, the biggest question about the bills on the table is not which one will pass, or whether investors will be savvy enough to sort out the data from the sales pitch. It's whether investors will listen at all. Right now, about one-quarter of employers do offer advice, but surveys show only 8 to 20 percent of employees take advantage of it. Washington seems to be doing its part. Now it's our turn.

Editor-at-large Jean Chatzky appears regularly on NBC's Today. You can contact her by e-mail at  Top of page

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