Something is better than nothing when it comes to investors seeking advice, retirement market watchers agree. Even if that advice is conflicted.

If signed into law by President Bush, the Pension Reform Bill allows not only retirement plan providers to offer advice to investors about their products, but also for the potential for endless conflicts of interest.

"But, for the vast majority of 70 million Americans, this is better," said Michael Case Smith, president of Zacks IFE, in Chicago. Smith's company provides independent audits of plan models, and the computer systems advisers use to help participants divvy up their 401(k) dollars.

Right now, most 401(k) participants, many of whom are novice investors, are ill equipped to choose good, diversified investments. What's worse, intimidation keeps many others from enrolling at all.

But how helpful the advice this legislation leads to will be for investors, or what types of legal risks providers and sponsors may face, remains to be seen.

"The inability of the [investment] advisor to offer advice to a participant of a 401(k) plan is ludicrous," said Lynn R. Siewert, president of Advanced Corporate Planning, a pension and defined contribution plan consulting firm in Vancouver, Wash., that is affiliated with Raymond James. "It really puts the 401(k) participant at a huge disadvantage," he said.

And while plan sponsors are free to hire non-partisan, third-party advisors to help counsel employees, few have. "When you deal with a small business where maybe he has 20, 30 or 40 employees, generally [the employers] don't have the time, nor the inclination or the funds to seek an expert for those employees," he said.

Eliminating the advice embargo is valuable to employees and sponsors, he said. More importantly, they're ethical professionals with strong knowledge of the underlying funds.

"[The advisor] can pick not only the best providers for that situation, but can help the plan sponsors pick and choose the investments that best suit their workforce," Siewert said.

The bill, introduced by U.S. Rep. John A. Boehner (R-OH) and championed by the fund industry, shifts most liability from plan providers to the sponsors, instead.

For plan providers, who were looking for legal protection against the threat of lawsuits from every investor whose portfolio stumbled, the bill allows a "get-out-of-jail-free card," Smith said.

So, while the number of lawsuits filed against providers by investors whose portfolios flounder may increase, their liability actually will go down, according to Jeff Robertson, an attorney with Bullivant Houser Bailey in Portland, Ore. This is especially true as advisors rely on computer models that assess an employee's self-determined risk tolerance, age and contribution rate, to determine which products they should include in their portfolios or in the case of automatic enrollment, in a default plan. Even if the value of the investor's retirement account tumbles, Robertson said, "It's hard for a juror to say, I think that was a bad decision.'"

The protection that the bill, in its current version, offers to plan sponsors is less generous, Smith said. "Nothing takes away the reasonability to select and monitor advice programs," he said.

And that's where the real conflicts lie, according to Jeb Graham, a retirement plan consultant with CapTrust Advisors in Tampa, Fla.

"At the plan level, you're talking about the [sponsor company investment] committee getting advice," Graham said.

If an independent advisor puts together the menu of investments included in the plan, it will probably include a hearty mix of products from an array of sources. "At the participant level, the menu is set, and the advisor can't inflict that much damage," Graham said.

Whereas if the plan provider is the one telling the sponsor what products to offer, the majority of those products may come from the same source: the provider's fund family, Graham said. "The potential negative impact is much greater," he said.

That's where companies like Zacks IFE come in. Its Independent Financial Evaluator (IFE) program works something like an investor-ready seal of approval. Plan providers hire Smith's company to review the computer allocation models that provider-affiliated advisors use. If Zacks IFE finds that the company's model reflects the type of advice that an investor of the same age, income and risk tolerance might be expected to receive from any other source, the plan provider may then use that endorsement as a selling point when pitching to sponsors.

In order to ensure Zacks' service itself is not swayed by any high-power plan providers, Smith has pledged that his company will never derive more than 5% of its revenue from any one fund provider, following the model set by the U.S. Department of Labor's SunAmerica Advisory in 2000, the development for which Smith took part.

Likewise, sponsors may hire Zacks as an independent consultant to help assemble the plan options. "We want to help rebuild trust," Smith said.

And that's important in an era when many are skeptical of the asset management industry, and don't particularly want to invest, but have been forced to act as mini-portfolio managers through the 401(k) system, said Don Cassidy, executive director of the Retirement Investing Institute in Denver. Rather than help employees better prepare for retirement, programs that seem deeply conflicted might actually drive already skeptical investors away, he said.

Cassidy recalled attending one 401(k) meeting designed to help employees understand their defined contribution plan. "They were overly skeptical, kibbutzing among themselves, saying, Oh boy, they're just here to sell us their funds.'"

Such skepticism is no surprise to providers, Cassidy said. As a result, the pending law will likely result in plan providers offering watered-down guidance, rather than actual advice, he said. For example, a provider will tell an employee what type of product might best suit his or her age, style and risk tolerance, but will stop short of listing specific funds or suggesting what proportion of one's plan that investment should account for.

"That's really the advice part, and that's crossing a line nobody really wants to cross," Cassidy said.

To protect their interests further, plan participants can expect to be asked to sign a slew of forms and disclaimers before advisors say word one, Siewert added.

Cassidy agreed that most providers will err on the side of caution. "These are smart folks, and they've been dealing with the lawyers and the Securities and Exchange Commission for years," he said.

The letter of the new law makes it essentially impossible for investors to blame providers that offer advice for poor performance, short of absolute negligence.

But it doesn't mean they won't sue. So, plan providers will likely err on the side of caution when giving advice, protecting their credibility and their pocketbooks. While such cases will have little hope before a judge, it will still cost providers money to address them.

That brings much of the risk back to the sponsor.

"The trustees need to have someone in the job of selecting a good plan and negotiating reasonably and fair expenses and so on," Cassidy said.

But the true responsibility remains with the participant himself, according to Siewert. "The real decision the individual investor has to make is what level of risk he's willing to take, and then find someone he trusts who can help him match that," he said.

(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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