Sea Change

Companies now play a much more active role in guiding employees' 401(k) investment decisions.

The range of advice products designed to give people specific recommendations about portfolios is broader than ever, covering everything from interactive computer programs to independent financial consultants who meet with employees in person. Fifty-one percent of employers now offer online investment guidance, 39% provide online advice, and 30% offer phone access to advisory services, according to a recent Hewitt survey. Another 34% plan to add some form of advice this year. (At most companies, the retirement plan or the company itself will pay for a third party to provide this advice, in order to avoid the legal burdens that befall company executives who give it.)

While this sort of help sounds good in theory, there are several obstacles. For one, the perpetual debate about what kinds of advice can be offered, and by whom, has yet to be resolved. Pending regulations at the Department of Labor are likely to redefine what is and isn’t acceptable, and a bill in the House of Representatives (HR 2989) also seeks to put new boundaries around it. “Until the Department of Labor advice regulations are finalized — there’s some justifiable angst about what is conflicted advice and what is not” — many employers are sitting tight, says Lori Lucas, defined contribution practice leader at Callan Associates, an investment consulting firm.

The low interest level shown by employees would, some experts suggest, make an already high cost (an independent adviser could cost even a small company $60,000 to $70,000 a year) seem that much more burdensome. The problem, again, is inertia. Lower-cost approaches may not fare much better. With interactive online services, for example, “it can take 20 or 30 minutes to go through all the questions, and you need all sorts of financial information to fill them out, so most people don’t bother,” says Robyn Credico, senior retirement consultant at Towers Watson. “And even if you do go through the questionnaire, few people actually act on the advice, and even fewer go back and do it again next year.”

A recent study by Hewitt and Financial Engines shows that the people who are most likely to want advice, in any form, are those who are younger and who have relatively large account balances. The average participant using online investment advice in the study, for example, is 41 years old and has a plan balance of $69,057. The average participant overall has a balance of $41,072.

Or Do It for Them?

One way to overcome the legal questions surrounding advice, and employees’ apparent indifference toward such help, is to go a step further and offer managed-account services. A number of firms, including ProManage, Financial Engines, and GuidedChoice, will manage 401(k) accounts for fees far below those that wealth-management firms charge high-net-worth individuals.

Some 26% of employers now offer this option. Among them is Allergan, a $4.4 billion maker of pharmaceutical products. “A lot of people have come to me over the years and said, ‘I’d rather have someone do this for me,’” says Gary Prem, assistant treasurer at the company. Several years ago he enlisted Financial Engines (which offers both advice and management options) to do just that.

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