Although the Pension Protection Act permits 401(k) fund administrators to give advice to participants as long as fees collected from the advice remain constant, no matter what the investment choice, it doesnt address the problems that arise when the advice steers investors into funds run by the 401(k) administrator itself, The Wall Street Journal reports.
Facing off in a debate on the pros and cons of offering advice for The Journal recently were Nicholas A. Nicolette, president of the
The rules within the Pension Protection Act to permit 401(k) advice are as elaborate as they are ambiguous, Kudla said. Additionally, in an effort to provide easier access to investment advice, legislators have penned into law inherent conflicts of interest in that advice. Unfortunately, what the PPA has done is open the door to potentially conflicted advice for plan participants, thus eliminating the protections [the Employee Retirement Income Securities Act] had put in place.
Nicolette countered that as long as the 401(k) administrator receives a level fee for the advice they give and clearly discloses potential conflicts of interest, they should be permitted to give advice. But Kudla called that a naïve safeguard.
As far as the independent computer model is concerned, Kudla continued, that has inherent conflicts of interest, as well. Who pays the provider of the computer model and who certifies the model is unbiased? he asked. A mutual fund or insurance company providing investment advice for participants within a 401(k) plan they administerthat may even have that companys proprietary products as investment options in the planis very problematic.
Kudla believes the way around this problem is to return to the formula of advice from an independent third-party and to augment that with seminars, workshops and other methods.
But Nicolette countered that an unbiased computer model can achieve the same effect, cost-effectively, and even provide customized advice.