Whose Advice Is It?

By Daniel Kadlec

Three years into the bear market, one kind of help is finally on the way: easy access to personalized, professional advice on how to invest the assets in your workplace retirement account. Somewhat suddenly, companies are tripping over themselves to provide this valuable service, and you should take advantage of it--after you sort out the potential conflicts of interest and the costs.

Advice from employers isn't a brand-new idea. Many big companies, including General Motors and Wells Fargo, have made 401(k) advice available to employees on the Web by contracting with independent firms like Financial Engines and mPower. The sites use software to help investors determine how much to contribute and how much to put in stocks, bonds and cash based on age, goals and risk tolerance.

These services cost little--about $20 a year per user. But only 21% of employees have ever tried out the service where it's available, according to the Profit Sharing/401(k) Council of America, a nonprofit group that promotes saving. "People just don't have the confidence to push forward without a real person walking them through it," says Richard Lindsey, a senior vice president at insurer AIG Valic. The firm is close to announcing that it will start providing financial planners to the faculty at Duke University later this year.

Before the Web services were available, employers refused to provide any personalized investing advice. They were worried that they would be liable if employees lost money. Now that concern has been turned inside out. Employees who collectively lost billions are suing, claiming that employers had a duty to help them. "In a way, it's been exactly the nightmare that plan sponsors feared," says Bill Arnone, a personal financial counseling partner at Ernst & Young.

So here's the good news: Republican Congressman John Boehner of Ohio has introduced a bill to shield employers from liability for third-party advice. The bill has broad support; fund companies, accounting firms and planners are rapidly rolling out advice and asset-management services aimed at 401(k) sponsors and participants. These services will provide one-on-one access to planners. At Duke University, planners will consider all of an investor's assets--retirement and otherwise--and recommend one of seven portfolios designed by the securities research firm Ibbotson Associates. Users will pay 0.6% of their assets annually, and portfolios will be reassessed periodically.

Harbor Lights Financial Group of Toms River, N.J., is marketing a service to manage, not just give advice about, 401(k) portfolios for a fee of as much as 1% annually. The firm is in discussions with Verizon, among other companies. Ernst & Young is offering a service, called eAdvisorPlus, that's Web-based but includes access to planners. And the giant fund company Fidelity has started a pilot program with the Victoria Advocate, a Texas newspaper. Fidelity charges as much as 0.6% of assets and funnels participants into one of four portfolios based on responses to a questionnaire; a Fidelity adviser customizes from there.

IF you smell a conflict, you're right. Any company that provides some of a plan's funds and also gives advice to participants has an incentive to steer investors into its own funds--especially stock funds, which tend to charge the highest fees. (It may not be a great idea going forward, but over the past three years, a sharp financial planner would have had you heavily in bond funds, earning a higher return at less cost.) If you find yourself in this situation, insist that the planner explain a recommendation of her company's funds over others, and of stocks over other assets. Another matter of concern is who pays. In most cases, it will be only users of the service. But some plans will spread the cost among all account holders. If your plan takes the latter route, you'll have even more reason to use the service: you'll end up paying for it anyway. Employees everywhere have been losing faith in 401(K)s--of those eligible, a smaller proportion participate today than in recent years. That's the wrong response to a tough market, as any good adviser will tell you.