Columnist Slams Bill That Would Allow 401(k) Advice

A bill pending in the U.S. House of Representatives that would allow fund companies to offer investment advice to 401(k) participants poses more problems than solutions for investors, according to MarketWatch columnist Thomas Kostigen.

U.S. Rep. John Boehner (R-Ohio) has introduced a bill that would allow fund companies to offer what Bohner has called much-need education about investing in an effort to overhaul pension laws.

"Proffering 'any advice is better than no advice' corrupts the pension system even more," wrote Kostigen.

Presently, the Employment Retirement Income Security Act (ERISA) bars 401(k) administrators from offering investment advice.

Companies can hire third-party advisers to counsel investors, but only 20% of plan sponsors do offer such a service to their participating employees, and Boehner claims that's because the potential liabilities entailed discourages sponsors from getting involved.

The result is that investors pick and choose their own portfolio compositions and often make bad choices, data from the Financial Research Corp. in Boston shows. 

Investors typically ignore the multiple materials plan sponsors provide, despite tens of millions of dollars spent producing pamphlets, sending e-mails and hosting seminars.

"This perceived failure is a major reason investment advice has become increasingly popular," Kostigen said. "After all, if participants do not seem to have the patience to 'get' the messages and apply them to their particular situations, perhaps we would all be better served by someone just telling them what to do."

But that someone shouldn't be fund companies, financial planners argue.

Even if mutual fund company-provided advisers try to give objective advice, the products they best know, and therefore will naturally push, will be the ones related to the complex they work for, Kostigen argues.

"It would replace ERISA's prohibition of conflicts of interest with a weak disclosure model that, we believe, is inadequate to protect retirement savings of plan participants," said Neil Simon, director of government relations for the Financial Planner Association.

For its part, the U.S Department of Labor Thursday issued a Field Assistance Bulletin offering guidance on how 401(k) and other plan administrators should distribute any money garnered to plans from settlements related to market-timing or late-trading enforcement proceedings.

Also Thursday, the Department of Labor Employee Benefits Security Administration issued a final rule and class exemption allowing financial institutions to distribute funds to 401(k) plan members and their families in instances where employers or sponsors have halted their programs. According to the department, each year, about 1,650 plans, representing 33,000 participants, abandon their plans. This rule eliminates the need for participants to go to court in order to claim their funds. Previously, the department had handled such instances on a case-by-case basis.   The rule takes effect after 30 days. "Based on public reaction to the proposed rules, we are very encouraged by the willingness of the financial and plan service provider community to work together to address the abandoned plan problem for the thousands of workers whose benefits are unavailable to them," said Assistant Secretary of Labor Ann L. Combs.