It seems a simple enough problem to solve. Rattled 401(k) participants crave sensible investment advice to ensure that their retirement savings will grow in today’s treacherous market. Plan sponsors would like to provide this service to their employees. So why don’t the sponsors just go out and get the best advisory services they can afford and start peppering their workers with helpful information?
Unfortunately, offering investment advice while remaining a responsible fiduciary is hardly a straightforward exercise. Plan sponsors worry about lawsuits, should participants’ investments head south. And plan providers have mostly avoided offering advice about investment vehicles on which they collect management fees, fearing their own potential conflicts of interest. As a result, participants today receive something like a smorgasbord of independent advice.
The financial services industry is fighting for the Retirement Security Advice Act, a congressional bill sponsored by Representative John Boehner, an Ohio Republican, despite the fact that both Republicans and Democrats are skeptical that it can pass Congress next year. The bill passed the House in November 2001 but faces tough opposition in the Senate. If enacted, it would for the first time allow plan providers to offer advice directly to plan participants, which they are eager to do.
Although the GOP’s electoral victory improves the prospects for passage of the advice bill, the continuing controversy over Wall Street research’s conflicts of interest, fueled by New York Attorney General Eliot Spitzer’s investigations, makes such a measure a much tougher sell.
“Bipartisan reluctance to take up the industry’s position in the Senate won’t be altered by the Republicans’ control of the Senate. After Eliot Spitzer the Boehner bill should be moot,” says one of its outspoken opponents, Damon Silvers, associate general counsel of the AFL-CIO.
An alternative bill, sponsored by Senators Jeff Bingaman, Democrat of New Mexico, and Susan Collins, Republican of Maine, would not allow providers to offer advice to participants. But it would offer greater protection to plan sponsors who would like their employees to receive more investment advice.
“We need to proceed cautiously on the investment advice issue,” says Senator Charles Grassley, the Iowa Republican who will chair the Senate Finance Committee next year. “We need a consensus position, and we don’t have that now.” Grassley refuses to support either the Boehner or the Bingaman-Collins bill.
Meanwhile, companies are expanding their advice offerings to both employers and employees -- always under the auspices of an independent advisory firm -- as much as current law permits.
“We hear from our participants that they are desperate for advice,” says Patricia Wright, the Nashville, Tennesseebased director of benefits for Broadcast Music, a company with a $35 million 401(k).
The financial services industry has a strong incentive to offer investment advice. At the moment, providers handle 401(k) portfolios at arm’s length, because ERISA prevents them from recommending any funds or services. But offering advice would give plan providers the valuable opportunity to strengthen their relationships with the 42 million 401(k) investors whose accounts they manage. Providers hope to attract new assets and in some instances guide customers toward products with higher fees.
At present, participants can only receive advice from independent third-party firms. (The largest players in this field: Ayco Co., Financial Engines, Ibbotson Associates, Morningstar, MPower and Scarborough Group.) The current statute reflects the assumption that disinterested parties, with no financial stake in the acceptance or rejection of any particular piece of investment advice, will better serve the interests of plan participants. If a plan provider also serves as the money manager of a 401(k), a common arrangement, the provider stands to earn more investment management fees if 401(k) savers, acting on the provider’s advice, invest in its funds.
The Boehner bill would allow plan providers to offer such advice as long as they are authorized by plan sponsors to do so and -- this is key -- provided that they disclose any potential conflicts of interest. The bill’s proponents argue that plan providers are best qualified to offer investment advice and that as long as potential conflicts are disclosed, a participant can make informed judgments.
“We haven’t found a single advice provider who can offer online counseling, person-to-person help on the phone and education materials,” says David Musto, senior vice president of Cigna Corp., which has alliances with Ayco and Financial Engines. Ayco’s fee-based financial planners will offer advice to 401(k) plan participants on the phone and in person, while Financial Engines will advise Cigna’s participants online. “With the Boehner bill we’d be able to integrate all these channels.”
Opposition in the Senate has been fierce. Despite the safeguards of disclosure outlined in the bill, “history has shown that if there are loopholes, some people will use them,” notes Glenn Melrose, North American vice president for human resources at Amersham Biosciences, a plan sponsor that recently hired an independent adviser through its plan provider.
For the moment, some 401(k) providers are forming new alliances with independent advice firms in an effort to offer more extensive advice to their participants without the blessing of the Boehner bill. In early October, for example, Merrill Lynch & Co., the sixth-largest defined contribution provider, with $68 billion in assets, announced a new advisory service, Merrill Lynch AdviceAccess, which will be offered by an independent firm, Ibbotson Associates, beginning in 2003. Plan participants can receive personalized advice based on their plan’s investment options through a Merrill broker, from Merrill’s call center or from the firm’s Web site. In each venue the advice will be formulated by Ibbotson and will recommend specific weightings among the investment options a plan offers.
Merrill’s approach, like that of other 401(k) providers, relies on a 2001 Department of Labor advisory opinion, known in the industry as the SunAmerica ruling because it followed a request from the Los Angelesbased insurer. The ruling, which is applicable to the entire industry, allows more detailed investment advice than was previously permissible, as long as it comes from an independent party. In addition, the ruling lets 401(k) participants direct the independent adviser to take over all the investment decisions for their retirement account. Finally, the ruling allows plan providers to roll the charges for advice into their management fees.
“Our approach is modeled on the SunAmerica ruling,” explains Mark Feuer, chief operating officer for Merrill’s retirement group. Still, Feuer adds, Merrill endorses the changes proposed in the Boehner bill. “We are very supportive of any bill that takes the advice business a step further and helps people achieve their investment goals,” he says.
Until a new law is enacted, more alliances like the Merrill-Ibbotson arrangement will take shape.
In September, for example, Melrose and his colleagues at Amersham Biosciences opted to make investment advice and education available to the 954 participants in the company’s $53 million defined contribution plan. Employees of Amersham, a division of U.K.-based biochemical company Amersham, will receive advice from Ayco.
Morningstar’s new advisory service targets plan sponsors instead of plan participants, and it has just been adopted by New York Life Investment Management. Morningstar has long had an active advisory business for plan participants, an online service known as ClearFuture that plan sponsors could purchase through their plan providers. But in its alliance with NYLIM, which began in September, Morningstar will help plan sponsors select their funds and will monitor those selections.
“This relationship is analogous to the SunAmerica template, except that the service is for sponsors, not participants,” explains Barry Schub, a senior managing director of NYLIM. Morningstar becomes a co-fiduciary with the plan sponsor and also helps plan managers formulate the intellectual framework for their investment options -- the so-called investment policy statement.
Says Schub: “For defined contribution plan participants to retire well, they must be offered the right funds to choose from. After that you can think about getting participants the tools they need to help their selection.”
The best tool, many in the retirement industry would add: solid, sensible advice, straight from the plan provider. But in the current climate, that seems a distant prospect.
