Access to advice may be a good thing: afraid to provide 401(k) investment advice to your employees? Congress wants to ease your fears, while advisory service vendors are expanding their offerings.

Author:Stolz, Richard F.
Position:Investment Education - Column

The world was a much simpler place in the early l980s, when the 401(k) plan began its steady climb up the employee benefits pop charts. With a few brief exceptions, the stock market went nowhere but up. The Worldwide Web didn't exist. Corporate accounting scandals, while not unheard of, weren't making daily headlines. And if employees could be taught the most fundamental principles of investing -- such as the difference between a stock and a bond, and the value of tax-deferred compounded growth -- nobody got hurt.

How quaint that all seems today.

Yet, as is so often said, "crisis" consists of equal parts of danger and opportunity. Today's danger is that few 401(k) participants, watching their stock investments get shredded in this summer's stock plunge, will accumulate enough capital to retire. But this dire prospect is matched by the opportunity for the opposite outcome to be achieved through the provision of legally protected, economical and highly specific defined contribution plan investment advisory services.

We have today's plague of corporate malfeasance, the bear market and the ever-expanding Worldwide Web -- not to mention the smart bets of a few entrepreneurs -- to thank for this resource.

While many 401(k) plan sponsors have been thinking a lot about the advice issue, most have hung back, worried about legal liability. But Congress, spurred by the Enron, WorldCom and related fiascos, is poised to try to ease employers' anxiety. Philosophical splits over just how to do so have impeded the enactment of legislation in this area so far -- but that could change soon.

One camp has rallied behind a proposal by Rep. John Boehner (R-Ohio), the "Retirement Security Advice Act." The measure, incorporated into the broader "Pension Security Act of 2002" passed by the House in April, has two key provisions.

First, it would make it possible for 401(k) plan providers that manage plan assets to also provide investment advice to plan participants, so long as they satisfy a series of disclosure requirements (including fees and commissions, conflicts of interest and limitations on the scope of the advice). Second, the measure lifts plan sponsor liability associated with the actual investment advice given to participants. Plan sponsors would remain liable for any fiduciary breaches associated with the actual selection and monitoring of the advisory services, however.

Rep. Boehner asserts that many former Enron employees, whose retirement accounts were bloated with now-worthless Enron stock, could have avoided taking the hit "if they'd had access to a qualified adviser who would have warned them in advance that they needed to diversify." An aide to Boehner adds, "Our bill says that a Schwab representative, for example, can provide advice on Schwab products. We think we have a fairly balanced proposal."

The Bush Administration agrees. "We're supportive of the legislation," says Paul Zurawski, policy chief for the Department of Labor's Pension and Welfare Benefit Administration. He predicts the Boehner legislation would be particularly helpful in getting investment advice to employees of small companies, most typically served by bundled 401(k) plans. In that market, "the employer doesn't want to have to sign up with yet another provider."

Might not these employees be damaged by the inherent conflicts of interest in such a situation? Zurawski isn't worried. He says workers are "probably more sensitive to plan design and returns than ever before...

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