New bills aim to get better 401 (k) advice to workers


EVEN before Enron Corp. collapsed, there was a push in Congress to loosen the rules for providing workers with investment advice on their 401(k) accounts.

Now, with widespread news reports of Enron workers whose retirement savings evaporated along with their company's stock price, there's a greater chance that individual investment advice will be coming to a 401(k) near you.

And, many agree, that's a good thing.

"Without question, they need advice. That's not even a gray area," said Michael Scarborough, president of the Scarborough Group in Annapolis, which manages 401(k) accounts for workers.

For example, Scarborough said, once workers select their 401(k) investments, they typically never make another change. "I don't think the way you are investing money at 25 should also be the portfolio when you are 60. Obviously, things have changed," he said.

Currently, employers can bring in an independent adviser to counsel employees on 401(k) investments, but many don't for fear of being sued if workers take the advice and lose money.

A survey by the Profit Sharing/401(k) Council of America last year found that just 22 percent of employers offered investment advice. The main reason others didn't was concern over liability.

So, rather than having advice individually tailored to an individual, companies typically offer broad-based investment education.

Several bills now before Congress deal with the issue of individual advice on 401(k)s.

A bill introduced by Republican Rep. John A. Boehner of Ohio and backed by President Bush and many financial service companies passed the House in November.

The Boehner bill doesn't require that an adviser be independent, as current law does. It would allow, say, an investment firm that already is managing a company's 401(k) or whose funds are in the plan to give advice to workers, provided the firm discloses fees and conflicts of interest.

That disclosure to workers has to be in plain English and given at the same time as the advice, said Kevin Smith, a spokesman for the House Education and Workforce Committee that Boehner heads.

The employer would not be liable for specific advice, and if the investment firm breached its duty of acting solely in the interest of the worker, the Department of Labor could seek civil and criminal actions against the adviser, Smith said. Workers, too, could sue.

On the Senate side, Democrat Jeff Bingaman of New Mexico and Republican Susan Collins of Maine introduced legislation in November that basically would absolve employers from liability over advice provided they hire an independent adviser not involved in the 401(k) and follow certain guidelines, experts said.

And this month, Representatives Benjamin L. Cardin of Maryland and Rob Portman of Ohio introduced legislation providing a tax incentive to help employees pay for retirement planning advice. Workers would be able to pay for advice on a pretax basis through payroll deduction, similar to how they now pay for child care or eyeglasses in flexible spending accounts.

Many consumer advocates oppose the Boehner bill.

"That bill doesn't have much to do with providing people with independent investment advice. What that bill does is eliminates the current prohibition on providing advice that's subject to a conflict of interest," said David Certner, director of federal affairs for AARP in Washington. He favors the Bingaman-Collins bill.

Allowing, say, companies whose products are in the 401(k) to give advice on their own products as well as others creates a conflict of interest, he said. "If you as an adviser have your own financial interests at stake, you will have divided loyalties," Certner said.

Certner and other consumer advocates worry that an investment adviser would steer workers into a mutual fund that generates higher fees for its firm and away from a competitor's low-fee fund. Some suggest an adviser may recommend a fund to workers in an effort to shore up its assets because other investors are bailing out.

Carl Londe, chairman of ProManage Inc., said he's concerned that written disclosure of conflicts of interest will be useless. "What we know is that a great majority of people in these plans aren't going to read what you give them," said Londe, whose firm is hired by companies to handle 401(k) asset allocation for workers.

But supporters of the Boehner bill say workers' interests would be safeguarded.

And the Boehner bill offers a practical pathway to get financial advice to participants, because the investment adviser could already be involved in the company's plan and know its workers, said Larry D. Zimpleman, executive vice president with Principal Financial Group in Des Moines, Iowa, whose company sets up and manages 401(k)s for employers.

"We are right there. We are working with the employers. We are doing the enrollment meetings and fielding questions from members," he said.

Some financial experts say using the services of a mutual fund company or investment firm already involved in the plan would be less expensive, making it more likely that an employer would provide the service.

Dana Muir, an associate professor of business law at the University of Michigan in Ann Arbor, said that, while she has some concerns about the Boehner bill, she is more concerned about workers' need for advice. "No advice is worse than some advice that comes with disclosure of conflicts," she said.

Though how best to supply advice to workers will continue to be debated, there may be another hurdle if any of the bills become law: How to get workers to take advantage of advice offered. The Profit Sharing/401(k) Council's survey also found that in companies that made financial advice available, only 30 percent of participants used the service.

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