In the wake of the Enron collapse, 401(k) plan providers and plan sponsors have been in a quandry over whether to provide investment advice.

On the one hand, they worry that providing retirement plan advice will expose them to legal liabilities. On the other, they now fear legal actions if they don't provide it.

The debate is somewhat moot, however, since few 401(k) plan participants take advantage of advice or even basic education. A study released last fall by the Chicago-based Profit Sharing/401(k) Council of America found that less than a third of employees at companies that provide advice take advantage of information provided to them.

"Just because you give investors good tools, it doesn't mean they'll use them," said Jaime Punishill, a senior analyst at Forrester Research of Cambridge, Mass.

"We all know we're supposed to eat broccoli and use the treadmill, but we like to eat chocolate cake and park ourselves on the couch."

Still, employers who feel increasingly compelled to offer retirement plan advice are taking a closer look at ERISA Sec. 405(d). The rule stipulates that as long as employers conduct appropriate due diligence and continue to monitor their plan carefully, they can hire an investment manager as a co-fiduciary to invest retirement funds on behalf of their company and its employees. Theoretically, if something goes wrong, the co-fiduciary, rather than the employer, would be held responsible.

Co-Fiduciary's Responsibility

Lou Campagna, chief of the division of fiduciary integration at the Pension and Welfare Benefits Administration of Washington, points out that the employer must still properly select and monitor the investment manager by checking on qualifications and returns. That lingering duty may explain why more employers have not hired co-fiduciaries, although Campagna noted that a number of companies are taking advantage of this provision, including small employers that commingle funds.

Service vendors, meanwhile, are moving to fill the perceived market need. Among them, Chicago-based ProManage purports to be the first business designed strictly to manage employees' retirement funds for them. Hired by the plan sponsor, ProManage investment managers are charged with making the most prudent investments for their clients. They are not, says Carl Londe, ProManage's chairman and CEO, responsible for keeping the portfolios flying high.

"We're putting people in a well-diversified portfolio," Londe explained. "We don't want to do anything out of line with what the prudent experts do. ERISA is good at insulating you from a lawsuit as long as you're prudent," he added.

Reluctant Investors

ProManage's services, Londe said, are geared for those plan participants who neither know how to invest nor are particularly interested in learning to do so, which appears to be the majority of 401(k) investors, he added.

"There are two different audiences - the motivated investors and the reluctant investors," Londe said. "The motivated investors read the materials and go to the seminars, and they want to make their own decisions"

However, Londe said, these investors are not the majority. Most 401(k) participants are reluctant investors who prefer to leave the decision-making to others, he said. ProManage's hands-on approach seems to be resonating with the majority of 401(k) investors who would prefer to turn over their investment decisions to someone else, Londe added, noting that ProManage has an 84% participation rate.

Similarly, Punishill estimated that only about 15% of retirement plan investors fall into the "highly self-directed" category and are happy to make their own trades and their own decisions. The other 85%, he believes, are "less self-directed," ranging from those who need some help with their investments to those who are content simply to hand over their portfolios to investment managers.

Path of Least Resistance

Punishill's research appears to be supported by a report on defined contribution investor behavior written late last year by four economics professors from Harvard University, the University of Chicago and the University of Pennsylvania.

The researchers concluded that employees tend to follow the path of least resistance when it comes to their retirement plans.

They allow themselves to be enrolled automatically in their companies' retirement plans and delay signing up if their employers do not have automatic enrollment. While they plan to change their investment habits, very few do. And, although financial education does increase savings plan participation and leads to greater portfolio diversification, the growth is not terribly large.

That is not to say there is no place for financial education and advice. The self-directed members of the investing population, at least, could use a little expertise from investment managers so they can stay more informed.

However, concern that employees either will not use it or will not use it properly remains.

Punishill calls active participation by 401(k) investors "an idyllic world that just does not exist. How do we give people the tools to intelligently manage this stuff? We can only put so much in front of the consumer."

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