Confused by your 401(k) plan? You may be about to get some help. President Bush has thrown his weight behind a bill pending in Congress that would give many 401(k) investors access to professional advice. But there's a catch: The bill proposes that the people who'd give you advice might be the same folks who sell mutual funds in your retirement plan. Momentum for the idea is somewhat surprising, given public anger about conflicts of interest at Enron. In the case of the 401(k) legislation, the conflict of interest exists because advisers would have an incentive to hawk their own funds -- especially ones with fat fees. As a result, investors could end up getting shortchanged.
Amid the debate, though, no one disputes that the average investor could use some help with retirement investing. The market downturn over the past couple of years has revealed fault lines in many 401(k) plans. Far too many investors took on unnecessary risk, loading their retirement accounts with fat tech stakes that imploded. And more recently, the debacle at Enron, where some workers lost fortunes after snapping up too much company stock, suggests many still don't understand the need to diversify. "Given that the 401(k) is for most Americans the largest investment account they have and the primary retirement account, investment advice is tremendously important," says Lincoln Collins, chief operating officer for American Skandia, which markets mutual funds and insurance. "An adviser can preach diversification and show how to structure a diversified portfolio so people can balance their risk across investment cycles." But as it stands, companies that offer 401(k)s to their workers are often afraid to give advice, fearing they'll be sued if the investment turns sour. In a survey of 141 large member companies last year, the Profit Sharing/401(k) Council of America found that only 22% offered advice to their employees, mostly because of liability concerns. investment company, if they have a fund going south, from advising participants to go into the fund to beef it up? Or what's to stop them from pushing people into a fund that perhaps has a higher fee associated with it? There's no amount of disclosure that can eliminate the taint of that conflict." Another criticism: 401(k) participants may not grasp the significance of advisers' disclosures. Take fund fees, an area ill-understood by most investors. Even if an adviser discloses that the fund he's recommending costs more than an alternative fund (meaning he'd make extra profit), the average 401(k) investor may be inclined to think it doesn't matter much. "People just don't realize that a tenth or quarter of a percent difference in fund fees can have a tremendous impact on savings over someone's lifetime," says Hotz. Plus, disclosures and all, an adviser would carry an employer's implicit seal of approval, and that might make employees more likely to trust him. "There's still a sense that when the employer provides information to someone, it's fair and not conflicted," says Mary Ellen Signorille, senior staff attorney at AARP. She isn't comforted by the fact that investors could sue in cases of abuse. "You don't want to have to go to court," she says. "Who wants to pay a lawyer and waste all that time?" with the understanding that the investment companies are also providers of some of the options available. That would be an important piece of this approach." While it's too early to tell the prospects for the bill in the Senate, expect to hear more on the subject. 401(k) investors would certainly benefit from some professional guidance. But the tougher question is whether advice that might be biased is an improvement over no advice at all.