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Access to advice may be a good thing: afraid to provide 401(k) investment advice to your employees? Congress wants to ease your fears, while advisory service vendors are expanding their offerings. (Investment Education).

The world was a much simpler place in the early l980s, when the 401(k) plan began its steady climb up the employee benefits pop charts. With a few brief exceptions, the stock market went nowhere but up. The Worldwide Web didn't exist. Corporate accounting scandals, while not unheard of, weren't making daily headlines. And if employees could be taught the most fundamental principles of investing -- such as the difference between a stock and a bond, and the value of tax-deferred compounded growth -- nobody got hurt.

How quaint that all seems today.

Yet, as is so often said, "crisis" consists of equal parts of danger and opportunity. Today's danger is that few 401(k) participants, watching their stock investments get shredded in this summer's stock plunge, will accumulate enough capital to retire. But this dire prospect is matched by the opportunity for the opposite outcome to be achieved through the provision of legally protected, economical and highly specific defined contribution plan investment advisory services.

We have today's plague of corporate malfeasance, the bear market and the ever-expanding Worldwide Web -- not to mention the smart bets of a few entrepreneurs -- to thank for this resource.

While many 401(k) plan sponsors have been thinking a lot about the advice issue, most have hung back, worried about legal liability. But Congress, spurred by the Enron, WorldCom and related fiascos, is poised to try to ease employers' anxiety. Philosophical splits over just how to do so have impeded the enactment of legislation in this area so far -- but that could change soon.

One camp has rallied behind a proposal by Rep. John Boehner (R-Ohio), the "Retirement Security Advice Act." The measure, incorporated into the broader "Pension Security Act of 2002" passed by the House in April, has two key provisions.

First, it would make it possible for 401(k) plan providers that manage plan assets to also provide investment advice to plan participants, so long as they satisfy a series of disclosure requirements (including fees and commissions, conflicts of interest and limitations on the scope of the advice). Second, the measure lifts plan sponsor liability associated with the actual investment advice given to participants. Plan sponsors would remain liable for any fiduciary breaches associated with the actual selection and monitoring of the advisory services, however.

Rep. Boehner asserts that many former Enron employees, whose retirement accounts were bloated with now-worthless Enron stock, could have avoided taking the hit "if they'd had access to a qualified adviser who would have warned them in advance that they needed to diversify." An aide to Boehner adds, "Our bill says that a Schwab representative, for example, can provide advice on Schwab products. We think we have a fairly balanced proposal."

The Bush Administration agrees. "We're supportive of the legislation," says Paul Zurawski, policy chief for the Department of Labor's Pension and Welfare Benefit Administration. He predicts the Boehner legislation would be particularly helpful in getting investment advice to employees of small companies, most typically served by bundled 401(k) plans. In that market, "the employer doesn't want to have to sign up with yet another provider."

Might not these employees be damaged by the inherent conflicts of interest in such a situation? Zurawski isn't worried. He says workers are "probably more sensitive to plan design and returns than ever before; you can be sure that... the workforce will be watching very closely" for shady dealings.

That view isn't shared by Sen. Jeff Bingaman (D-N.M), whose more restrictive approach is reflected in the Senate's "Helping America's Pensions Act of 2002." The measure would create a safe-harbor model for plan sponsors to meet their fiduciary obligations. Bingaman's legislation also would maintain present law's ban on the providing of investment advisory services by entities that also manage plan assets. "The senator believes that simply disclosing conflicts of interest is totally inadequate," says Bingaman spokesperson Jude McCartin.

Bingaman's bill has been endorsed by, among other organizations, the AARP and Small Business Council. And Ted Benna, a former benefits consultant credited with creating the first 401(k) plan, also prefers the Bingaman model. "I think something stronger than disclosure is needed," he says.

Meanwhile, the world is not standing still waiting for Congress to resolve its internal differences. "Our basic view is that employees need help, sponsors need to provide it and anything the government can do to help sponsors get more comfortable is a good thing," says Jeff Maggioncalda, president of Financial Engines, a Palo Alto, Calif.-based pioneer and leader in advisory services.

In fact, last December the Department of Labor went a long way toward opening the floodgates when it issued its landmark "advisory opinion" (2001-09) on the matter. Specifically, DOL said it was acceptable for an investment manager handling plan assets to have participant advisory services built into their fee structure -- subject to several conditions. One is that the advisory service or system used for creating recommendations, even if packaged with the investment management product, be generated by an independent service provider -- i.e., a subcontractor.

"That advisory opinion was monumental," says Ray Martin, president of CitiStreet Advisors LLC, a Citicorp unit that administers $200 billion in retirement plan assets. CitiStreet began fully integrating advisory services from Financial Engines into its product line in June.

"In our marketplace, investment advisory service is a requirement for being in the business," notes Ken Robertson, executive vice president of The 401(k) Company, an Austin, Texas-based plan provider with a national client base of middle-market plan sponsors.

Nevertheless, the specter of litigation still haunts many sponsors. But, to hear the advice providers tell it, the litigation threat may be precisely the opposite of what many plan sponsors would expect. "It seems like you could be at greater liability for not providing advice," suggests Michael J. Skinner, vice president of online advice for Morningstar Associates, LLC, the Chicago-based investment research firm.

His opinion is seconded by CitiStreet's Martin, who points to a string of class action suits filed by the Seattle-based law firm of Keller Rohrback on behalf of former employees of Enron, Global Crossing, Lucent Technologies, WorldCom and others.

According to the suit, WorldCom fiduciaries "breached their fiduciary duties... with regard to plans holding company stock... [by] failing to provide participant with complete and accurate information regarding the risks associated with investing in WorldCom stock."

However, Gary Howell, a partner and ERISA (the federal income security act) attorney with Gardner Carton & Douglas in Chicago, suggests this threat is being exaggerated. "I'm not aware of any decided case" in which an employer has been held responsible for failing to provide advice. "I tend to view the problem of significant plan asset concentration in employer stock as one of plan design rather than participant education," he notes.

In the Lucent and Global Crossing cases, for example, Howell says "the ERISA allegations seem to be intertwined with allegations of securities fraud, so I read phrases like 'failure to disclose' and 'information regarding risks' in the context of misleading statements or activities that are also actionable under securities law. It would be asking a lot of an investment education provider to be able, before the fact, to determine that such activity was going on and advise participants of it."

However real the legal threat posed by not offering advisory services, the major providers in that area are confident enough in their investment recommendations that they'll indemnify plan sponsors against any claims involving bum advice.

CitiStreet's Martin suggests that plan sponsors not only look for ironclad contracts, but to consider the financial strength of the organization. Adds Financial Engines' Maggioncalda, "There are certain types of services out there that look a lot like advice, but aren't, and nobody steps up and says, 'I'm the fiduciary, I'm the advisor, I take the responsibility.' But I think sponsors are less interested in playing in the gray zone today."

Where sponsors can't expect anyone else to take the heat for them, he adds, is in the selection and performance monitoring process for the advisory provider. Attorney Howell believes employers can "take comfort from the Unisys case," a landmark Supreme Court decision from an earlier era involving the selection of plan investments, in which the "focus is on 'procedural prudence,' and liability is judged on the basis of the procedures employed rather than the outcome."

In the case of an investment advice service, that means methodically reviewing alternative services available before picking one, then monitoring the service chosen.

Monitoring and measuring investment manager performance is easy enough; it's easily quantified. But how about the "quality" or "performance" of advice, when participants aren't obliged to act on it? "One of the best sources is the workers themselves," suggests the Department of Labor's Zurawski.

But instead of complaints, the biggest worker problem seems to be indifference. Although utilization varies widely, typically, only about 25 percent of employees use the services when they're offered. But the advice industry is hard at work to boost overall utilization.

Web Alone Isn't Enough

"Two years ago, advice in this business was synonymous with the Internet," says Morningstar's Skinner. "We've found that there's a certain type of individual who's willing to use the Web, but the majority want something else."

Morningstar is introducing a statement-based product that will offer customized investment recommendations. "The participant who says, 'That looks good to me,' can then go to [his or her] call center and speak to a representative," who will implement the recommendations.

Financial Engines has also moved beyond its origins as an exclusively Web-based provider. While the company supplements its Web-delivered advice with paper and phone-based delivery, it relies on companies like CitiStreet to furnish more comprehensive personal services. CitiStreet has a call center at its Quincy, Mass., headquarters staffed by 15 licensed financial planners who use the Financial Engines tool to work with participants over the phone. They also make house calls to plan sponsors' sites on occasion, says Martin.

In addition to moving beyond the Internet, advice providers like Financial Engines and Morningstar have expanded their scope beyond 401(k) assets, since 401(k) investment decisions shouldn't be made in a vacuum. For example, if an employee has a large portfolio of Treasury bonds outside his or her 401(k) plan, and the spouse is covered by a DB plan, those additional assets would color an investment recommendation for the 401(k). "It has turned into total retirement and total benefit advice," says Maggioncalda.

He adds that another important development in the evolution of Web-based investment selection tools is "ease of use." "We have found that if you ask for all the user's goals and assets, it takes a long time, and you lose attention pretty fast." So, instead, Financial Engines helps users address a very specific problem -- what it calls the "quick-solve" method. "Over time, you get to that grand plan," Maggioncalda says.

This approach has lowered the average time it takes for a user to plug in required information and get an answer from 17 minutes to four.

If this means more employees will take advantage of the service, it will please Natalie Bachman, assistant director of benefits for Principal Financial Group. The Des Moines, Iowa-based company not only packages the advice tool into the bundled 401(k) product it sells to its plan sponsor clients, but uses it for its own 15,000 employees.

Fewer than 10 percent of Principal employees have used the system after two years, but Bachman expects that number to rise after a new communication blitz this fall trumpets the financial successes enjoyed by those employees who have.

Indeed, such statistics -- avidly gathered by advice providers to help sell the service and help employers fine-tune their programs -- do make a compelling case. The advisory tools generate reports comparing pre- and post-advice forecasted asset accumulations when participants follow the recommended changes.

"We see lots of improvements in the 25-40 percent [range]," Bachman says. This pleases her -- and not solely because it will help employees afford to retire. The kicker for Bachman: Fewer employees are coming to her seeking advice she cannot give. "It does make my life easier," she concedes.

RELATED ARTICLE: Advisory Firms Making New Inroads

Screaming headlines about corporate fraud and earnings woes. A panicky stock market that slumped sickeningly in mid-summer. A developing malaise about corporate policies, ethics and financial reporting amid growing mistrust.

That's a frightening picture for a lot of employees being asked to chart their own paths to retirement through investing in company-sponsored 401(k) plans. Many are novice investors, unschooled in many of the common terms and assumptions used by professionals and unsure where to turn for advice.

All this has presented a real market opportunity for advisory firms like the ones mentioned in the accompanying article, Financial Engines and Citistreet. While Citistreet also handles investments and plan administration, both firms have a roster of companies for which they provide advice, hand-holding and navigation aids for confused or worried employees.

Another firm in the same arena, Financial Finesse of San Francisco (www.financialfinesse.com), is finding corporations eager to put in financial education programs to pare any legal liabilities and improve employee morale and productivity. "We have seen a tremendous increase in utilization of our products and services in recent months, largely due to the current economic environment and fallout from Enron," says founder and CEO Liz Davidson. "People are wary, and want a choice for financial information they can trust."

Financial Finesse runs a variety of services in the education area, ranging from on-site seminars to toll-free help lines to Web-based tools and calculators that help workers learn more about investing. It hires independent financial planners in specific regions to serve as advisors for employees. The Web product is robust, and can be incorporated as part of a company intranet if management so desires.

A siginificant point Davidson makes is that it isn't just the issue of creating a financial plan that can be difficult and distracting. Employees often need answers to specific financial questions involving mortgages, education loans or home care, and may lose considerable time worrying about them. "There can be a lot of productivity lost right there," she says.

Executives say Financial Finesse targets general corporations, healthcare companies, employee assistance programs and record-keepers. Part of its pitch relates to reducing the number of vendors a company needs to handle employee investment and retirement issues. "That message gets us in the door," says Darryl Reed, vice president for sales. "Web services can help cut costs."

But the independent nature of the services is perhaps an even more critical selling point.

"It's been nice to see that many companies now understand the inherent conflict of interest in allowing their plan providers, consulting or accounting firms to do their employee education," Reed says.

Financial Finesse recently formed an alliance with Associated Financial Services, a Minneapolis-based firm providing phone-based financial counseling and financial management seminars. Together, the two claim a client base of more than 10,000 companies with more than 10 million employees.

Jeffrey Marshall

Richard F. Stolz, who heads publishing Services & Strategies in Rockville, Md., has written extensively about benefits. He can be reached at 240.994.0076 or Richstolz3@aol.com.
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Author:Stolz, Richard F.
Publication:Financial Executive
Article Type:Column
Geographic Code:1USA
Date:Sep 1, 2002
Words:2531
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