The Pension Protection Act, which both strengthens employers’ existing pension obligations and discourages them from undertaking new obligations, also makes a broader point to US workers: “The overall message of the bill is, you’re on your own,” says James Lange, a lawyer, CPA and author of Retire Secure.
Even so, the 2006 law has also made it less daunting for workers to shepherd their retirement funds -- now most commonly in the form of a 401k plan -- to a successful end, whatever their investment time frame.
What Does the Law Say About 401k Investment Advice?
A key provision of this pension law is that it enables employers, through their 401k plan providers or third parties, to give investment advice to plan participants without substantial fear of being sued by employees displeased with the investment results they get.
“Now it has become more clearly legal for these fiduciaries to provide advice,” says Stephan Roche, vice president and general manager of the small business group at Web-based brokerage ShareBuilder.
Competition for top talent should spur employers to offer retirement investment advice as a component of their 401k plans. “Plans that don’t offer investment advice going forward will be the exception rather than the rule,” says Tim McCabe, vice president of PMFM, the investment advisor to 401k Toolbox, a provider of advice to retirement-plan participants.
This advice could help fill a gap in participants’ knowledge of investment planning. “Most 401k plan participants have received absolutely no advice on how to structure their retirement portfolios,” says Wayne Schultz, an attorney, financial advisor and vice president of Your Money Matters Brokerage Services. “Participants who otherwise had no financial counselor can now have someone to guide them through their financial lives.”
Are 401k Providers a Source of Good Counsel?
If your employer’s 401k provider does offer investment advice, should you trust it, given that the provider may be affiliated with, for example, some of the mutual funds the plan offers? The consensus is that substantial protections are built into the pension law, chiefly these:
- Investment recommendations must be made by an unbiased computer program.
- Advisory fees must not be linked to specific investments.
- The advisor’s sources of income must be transparent.
“I think the protections are sufficient,” McCabe says. “However, there will always be a very, very small minority of financial professionals who will break the rules.”
Also, if you’re seeking comprehensive, ongoing advice, you may not find a good alternative on your own. If you have less than $500,000 to manage, many advisors won’t work for a fee computed as a percentage of those assets, because it may not be profitable, Lange says. In those cases, advisors prefer to charge a commission or other fees that could bias their advice.
Does the Advice Come at a Reasonable Price?
If your employer’s 401k provider or a subcontractor offers to manage your investments for a fee of half a percent or less of your 401k account balance, you’re getting a reasonable value, according to industry insiders.
With third-party retirement-advice providers like Financial Engines and GuidedChoice, “you pay half a percent per year,” Roche says. “I think this will shrink to [one-quarter of a percent], and that is absolutely worth it.”
With these arrangements through your employer, you’ll likely be paying less than you would if you sought advice elsewhere. “All too often I see advisors who charge between 0.75 percent and 2 percent per year [with] results [that] constantly trail the market,” Schultz says.
Couldn’t you manage your own retirement investments? Sure, but individual investors have a poor record when it comes to long-term returns; they usually trail the annual returns of major indexes by several percentage points per year. If you’re a middle-class earner, that could easily add up to a difference of hundreds of thousands of dollars by the time you retire.
“Advice will now be available to everybody,” McCabe says. “But how many participants will take the proactive steps to use it? That remains to be seen.”