Your 401(k) Plan – New Rules for Getting Investment Advice
Most 401(k) Participants Need Advice on Selection of Investments
If you have received advice or are considering getting advice from a financial planner or adviser about in your 401(k) plan, there are some important rules on the horizon that Mr. ToughMoneyLove suggests that you consider.
Many if not most 401(k) plan participants, through no fault of their own, are clueless as to which of the multiple investment options in their employer’s plan is best for them. Consequently, they end up choosing the most conservative fund which is virtually guaranteed to not keep up with inflation, let alone grow enough to prepare them for retirement. Even worse, may employees invest way too much in their employer’s stock, which adds to their risk if the company fails. They lose their job and a big chunk of their retirement savings.
In many plans (like ours), the employees have almost unlimited investment options if they choose to place their 401(k) funds in a self-managed brokerage account. That is what I have done. In this situation, the uneducated investor would really benefit from professional guidance. Our plan provides this through investment advisors (for a fee) or through Financial Engines, a software-based system that analyzes the employee’s complete portfolio based on retirement income goals. The Financial Engines feature is provided to us for free. For others, it is a fee-based subscription service.
New Rules to Insure Unbiased Advice
The Labor Department has had two important concerns about employees getting investment advice about their retirement plan options. First, it does not want financial planners and investment advisors earning a fee that is dependent on what investment options are chosen, e.g., a commission. Second, if the plan includes a computerized advising feature, the Labor Department wants some assurance that there is reliable investment science at the basis of these computerized systems.
As a result, the new rules proposed by the Department of Labor provide as follows:
1. Any computer model used to provide investment advice to a 401(k) plan participant must be certified as “unbiased” meaning that (unlike Vegas slot machines), the advice it gives must not prefer certain investment products. The Labor Department is publishing procedures for implementing the certification process.
2. Any financial planner or investment adviser giving individual advice to 401(k) plan participants must do so on a “level fee” basis, meaning that the fees must not depend on the amount or type of investment selected. In addition, all of the fees must be disclosed to the employee.
What You Should Do Now
Mr. ToughMoneyLove thinks these are excellent rules and hopes that they will become final and will be vigorously enforced. I also recommend that employees who are in a 401(k) plan do the following:
1. If you are not a highly educated investor, get advice from your plan’s advisor or from an independent financial planner.
2. If you use, or if your adviser uses, a computer model to provide advice, get a written statement that the model is 100% unbiased.
3. If you decide to pay for advice, get a written disclosure of ALL fees that the adviser will earn if you make investments based on the advice.
4. Make sure that you are paying level fees, meaning that the fees do not vary depending on the investments you select.
Now get started on your retirement plan.