While legislators have spent the summer debating a controversial bill that would ease regulations regarding who gets to provide 401(k) investors with financial advice, Ted Benna, the inventor of that investing vehicle, is issuing a stern warning to the industry: fix the way the plans are offered, or face obsolescence.

Benna, who sparked the 401(k) concept two decades ago, has waged a persistent campaign this summer to change the way the retirement plans are offered. He met with government officials and legislators, the American Association of Retired Persons, the American Benefits Council and others to promote a plan he thinks will provide advice to more investors and make it easier for companies to offer that advice.

Many, he says, were receptive to his ideas. But his plans have also attracted criticism from employee advocates and industry groups who say Benna's ideas limit choice and squelch the flexibility many in the 401(k) business have worked toward.

Meanwhile, in Washington this summer a House subcommittee approved what is known as the Retirement Security Advice Act, a plan that would allow 401(k) sponsors to contract fund companies to provide investment advice to workers. The bill is expected to pass the full committee and the Republican-controlled House by year-end. Its prospects in the Senate are less certain.

Should the bill be approved, Benna doesn't think it will make much difference in the way advice is provided because those services under are voluntary current structures. He thinks such advice should be provided automatically.

Alternative Plan Protects Participants, Sponsors

Benna said his plan is one of the only ideas currently on the table. And if that does not change soon, investors are going to become increasingly frustrated with the current system and more reluctant to invest, Benna says.

"We're heading to a more-open environment investment-wise. That's great for the participants who are used to making their own picks, but I am concerned in how we deal with the participants who are already having trouble when they pick something."

His plan involves offering employees "structured portfolios" that evaluate an investor's risk tolerance and then automatically reallocates assets in less risky investments as an employee reaches retirement age.

The plan would also protect plan sponsors and providers who provide investment advice from being sued if returns are poor, provided those companies offer a structured investment portfolio and guarantee a minimum 7% average annual return for participants who invest in the plan for at least 20 years.

There are other conditions for such "safe harbor" from lawsuits: Employers must allow participants to retain their portfolio when those employees change jobs. And expenses paid by employees for structured portfolios cannot exceed 75 basis points. In addition, fees to access the fund window can't exceed $150 and 100% of an employee's account must be transferable to that window.

The basic principal of automatically diminishing risk as investors age is similar to certain "lifestyle" funds offered by the likes of Fidelity, Benna said. The difference is that Benna wants them hardwired into the matrix of the 401(k) plans offered by providers and he wants the plan's risk tolerance to be diminished in shorter intervals, five years, perhaps, instead of the common "lifestyle" fund factor of 10 years.

Benna figures at least 50% of 401(k) investors would opt for these sorts of structured plans because they are easier to manage. And providers would find advice more cost-effective to deliver because that advice is built into the portfolio's management structure, he says.

Plan Criticized, Regarded Cautiously

Dallas Salisbury, a spokesman for the Employee Benefits Retirement Institute, meanwhile, calls the plan "paternalistic."

"It's taking away the choice (participants have) been given," he says. "It seems counter to public policy and the current labor force to move back in a paternalistic direction."

And David Certner, director of economic issues for the AARP, who met with Benna this summer, said his organization hasn't taken "any kind of formal position" on Benna's ideas, but he says "it's pretty clear that a large majority of people don't know enough about the markets to invest or don't want to take the time to learn."

Still, Certner said he is unsure how Benna's plan would fit into the current matrix of 401(k) offerings and he wonders, at least at first, how receptive investors would to the idea.

"Whether it's better or not, you still have this transition issue where people are used to an older system," Certner said. "If you're taking away choices or options that people had in the old system, people may be resistant to it even if the system is better."

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