401(k) education: how much should I say?

When employees seek investment advice, should employers put their two cents?

When the 401(k) law was passed, the intent was for employers to give their employees control - and responsibility - for their own retirements.

Today the question of whether this bold experiment in financial democracy has succeeded remains unanswered. Certainly, many of the 30 million Americans covered by 401(k) plans have benefited from the stock market boom, as they've watched their collective retirement cache grow to over $1 trillion.

Employers, and the vendors they've chosen, have done a commendable job in providing tools and education to employees, helping them to make appropriate investment decisions in their 401(k) plans. By and large, the education aspect of the 401(k) plan industry has been its biggest success. Via mass meetings, mailings, financial software, videos, audiotapes and the Internet, the 401(k) plan arguably has become the world's largest informal investment classroom.

Money Talks

And now, the industry is poised at the edge of an even bolder experiment. No longer should employees be left to figure out their own investment strategies, it's argued. They need help - beyond tools, beyond education, beyond teaching them how to invest. They need specific advice on which funds to buy, on exactly what investments they should make.

But there's an important legal distinction between providing "guidance" (general information about the plan; economic and investment commentary; asset allocation models using hypothetical scenarios; and interactive investment material where the participant is in control) and "advice" (investment counsel regarding the value of investments or investment recommendations for a fee or other compensation).

Offering advice has significant legal implications. Advising in the context of a 401(k) plan makes the advice provider a fiduciary, meaning he or she is potentially liable for inappropriate investment decisions, and is certainly responsible for ensuring all actions are prudent and solely in the interest of respective beneficiaries.

Legalities aside, though, interesting and ticklish business issues surround advice-giving. Should plan sponsors allow the advice to include non-plan assets? How effective is advice that focuses on a single goal - retirement - and a single account - the 401(k)? Would advice from mutual fund companies - the dominant providers of education and recordkeeping - be inherently self-serving? What should be the modes of delivery - Internet, paper or face to face? Who controls the advice in the event of inconsistencies or disagreements: the plan sponsor or the advice provider? And finally, how do you measure the appropriateness or effectiveness of the advice?

Now, too, investment information abounds on the Internet. Point your browser over to Yahoo!, search for "defined contribution plans" and you'll get nearly 23,000 web page matches. But the net is causing more than an information explosion. For the first time, it's enabling the cost-effective delivery of electronic advice. Thus, several innovative providers have begun offering exactly that: one-to-one e- advice to 401(k) plan participants, customized to individual risk preferences and using the specific investment options available within their company's plan.

These companies, often in alliance with recordkeeping or investment firms, contract with employers to provide their employees with investment advice geared to their 401(k) plan, at a cost of under $50 per employee charged on the basis of a plan's total number of eligible employees. Fund managers, too, are active in this hotly competitive arena.

Plan sponsors are reacting with mixed feelings. A small segment embraces the idea that their employees need advice - and are willing to risk potential lawsuits, as long as they conduct the appropriate due diligence in choosing the advice providers. Others - so far the vast majority - are seeking other answers.

Do You Have to Cross the Line?

Many industry leaders believe "next-generation education," using hitherto unavailable technology, is an attractive and powerful alternative to crossing the fiduciary line and providing advice. One such approach pro-actively gives participants the answer to their key question: "Am I on track to meet my retirement goals?" Using data available within the 401(k) plan, this practice informs participants of any potential shortfall between their value at retirement and their retirement needs. Seeing the numbers drives home the importance of retirement savings, especially to those who may need the most help.

It's clear, however, that some plan sponsors will want to go beyond "next-generation education" and offer their participants full-fledged investment advice. Many industry leaders believe that to be effective, it's imperative that the advisor consider the whole picture, not just a participant's 401(k) account. This would include everything from non-401(k) investments to more complex concerns like liquidity management, stock options, concentrated stock holdings in a single company, tax efficiency, risk tolerance and estate planning. Participants also seem to want their accounts monitored to reflect ongoing market and personal events.

Of course, as the advice becomes more complicated, the need for human interaction increases, as do the costs. Technology-driven solutions will soon be available, helping to alleviate some of the cost pressure; however, in this arena there's no such thing as a one-size-fits-all solution.

The advice industry is likely to be an ever-evolving work in progress, as providers adjust to the changing needs of participants and sponsors and the changing moods of regulatory agencies. But as long as participants demand increasingly specific information, it will be up to providers to find a way to get it to them.

Shiv Mehta is a vice president at J.P. Morgan|American Century Retirement Plan Services in New York. He can be reached at [e-mail].