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Encore
A blog about living in and planning for retirement

401(k) Savers May Still Be Short on Good Advice

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Retirement plan administrators will be able to dispense investment advice under new federal regulations, but it’s unclear if they’ll be willing, experts say.

Under the new rule approved by the Department of Labor, advisers working for 401(k) plan administrators can offer advice as fiduciaries to plan participants. But the administrator must adhere to certain rules.  Among them: the administrator must use computer models, “certified by a third party as unbiased,” according to an article published by onwallstreet.

Alternatively, the administrator can agree to a “level-free” structure that would keep its compensation the same, whether an employee purchases its investment products or those of a competitor.

The new rules will go into effect on Dec. 27. Will 401(k) participants see a big increase in investment advice offerings?

The Labor Department clearly believes the answer is yes. “This rule will make high quality fiduciary investment advice more accessible, while providing important safeguards to minimize potential conflicts of interest,” said Phyllis Borzi, assistant secretary of the Labor Department’s Employee Benefits Security Administration, which issued the rule.

Lori Lucas, the defined contribution practice leader at consulting firm Callan Associates, is less sanguine. According to Ms. Lucas, a recent Callan survey found that plan sponsors cited a lack of clear regulations as an obstacle to offering advice. But even more were concerned about the cost of providing that advice.

“The number one reason was (a perception that advice is) “too costly to participants” says Ms. Lucas.

“To the extent that the investment advice regulation increases competition among advice providers, it could drive down advice costs,” she adds. “But some of the notification and certification provisions within the advice regulation might prove costly, making that difficult.”

Some companies may steer clear of an advice offering due to requirements in the regulation concerning company stock holdings. Under the regulation, says Ms. Lucas, “many investment advice models would require very low (or no) company stock allocations.” “That might be controversial for some plan sponsors.”

One thing is clear: 401(k) participants need advice. According to a recent study by 401(k) advisory service Financial Engines and 401(k) administrator Aon Hewitt Associates, between Jan. 1, 2006 and Dec. 31, 2010, participants enrolled in target-date funds, managed accounts, or online advisory services earned an annual average of 2.92 percentage points more, net of fees, than those left to their own devices.

“Across all age groups and a range of market conditions, participants using help experienced higher returns with lower risk than those not using help,” says the report.

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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

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