New rules could improve 401(k) advice, but be prepared to ask


For years, employers have been replacing traditional pensions with worker-directed, 401(k)-like plans, placing the cost and responsibility of retirement saving firmly in our hands.

Yet many shied away from offering workers advice on how to invest their money, partly out of fear of being sued if participants were unhappy with the outcomes.

Late last month, federal regulators finalized steps aimed at getting rid of those excuses. The U.S. Department of Labor amended federal rules to make investment advice more available to 401(k) participants.

The move is part of an ongoing effort to improve 401(k)-like plans, the key retirement vehicle for nearly half of America’s workforce. But it’s still up to your employer to make advice available in your office. You could end up paying extra for it. And it’s still ultimately on you to seek out help and follow through.

Don’t you already get mailings, websites and occasional seminars about your plan? The ones touting the virtues of diversification, maxing out your employer’s match and using active versus passive funds?

That’s technically considered investor education — general vanilla info that applies to all investors. This rule change covers more specific advice tailored to your age, needs, savings rate and appetite for risk.

You’d think advice would come with the 401(k) account. Often, it doesn’t.

In some cases, plan sponsors flirted with violating the federal Employee Retirement Income Security Act. Part of that law tries to protect workers from falling victim to conflicts of interest among the parties managing the plan.

For instance, some plan sponsors get a cut of revenue from certain mutual funds in the plan. If that sponsor’s adviser recommends those funds over others, it’s not clear they have the worker’s best interests in mind.

This new rule gives plan providers two ways to get around that part of the Act.

First, they can provide advice based on an unbiased, regularly audited computer model.

Second, they can show that their income doesn’t change based on the funds they recommend. The fees must be disclosed and the arrangement regularly audited by an outside party.

“The lines now are very bright rather than very hazy,” said Francis Vitagliano, a visiting scholar at the Center for Retirement Research at Boston College who spent his career designing retirement plans. “As a result of that, we’re going to see more advisers willing to give advice.”

Many big names in the financial services industry — Fidelity, Morningstar and Vanguard — already offer or make available such computerized solutions to employers who choose to pay for it. I highlighted a couple of them in a column early this year.

But not all of you are hip on taking direction from a machine. You probably shouldn’t be, either.

Of course, cost is an issue. Scott Schiele, a retirement-plan consultant at Mercer in Portland, says participants might have to pay for the advice themselves. If so, I fear, many of you won’t seek it.

It’d be better if employers and plan providers realize that by offering more advice, they’ll improve worker savings habits and grow the money in the plan, which, under most plan designs, generates more income for them.

Then there’s employee retention. Preisz Associates Inc., which offers planning advice to 90 small retirement plans, works with a handful of employers that actually require their workers to attend one-on-one meetings each year with a Preisz financial planner or adviser.

“They look at it as a way to differentiate their firms from their competitors,” says Tom Davenport, retirement plan service manager for the Portland firm. “There are employers out there that realize how valuable human capital is, and they’re trying to do the right thing.”

The bigger point: Consider getting some advice, whether your employer offers it or not. Most of us are prone to investing missteps, from diversifying poorly to panic or inaction, either of which can be harmful at any given point.

The Labor Department estimates that such mistakes cost retirement plan investors more than $114 billion in 2010, foregone income that only compounds as workers near retirement. The new rules, the department says, could reduce those mistakes by at least $7 billion a year.

Whether you believe that savings estimate or not, studies show that when 401k participants get some level of investment advice, their contribution rates go up and, overall, their investment performance improves, Vitagliano and others say.

“It has, in other words, a calming effect.” said Rick Meigs, president of, a Portland-based research and consulting service.

These rules are a good attempt at removing many of the last excuses your employer has given for not offering one-on-one help more explicitly.

Which is to say you might also have to nudge your employer to provide the advice.

Published: Saturday, November 05, 2011, 7:00 AM Updated: Saturday, November 05, 2011, 12:05 PM
By Brent Hunsberger, The Oregonian

“They need to be asking their employer to provide something,” Meigs said. “There are no issues now other than potentially costs for employers not to provide some level of advice. And we desperately need it.”

— Brent Hunsberger welcomes questions about his column or blog. Reach him at 503-221-8359. Follow It’s Only Money on Facebook, Google+ or Twitter.

Related topics: 401(k), 401k, erisa, retirement, savings

Learn more about Ron Sloy.


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