Debate continues over law encouraging 401(k) assistance.

    A provision of the Pension Protection Act would directly impact the financial planning field by encouraging employers to provide advisors for their 401(k) participants. But who exactly will be doling out that advice, and to what extent it will be regulated, are among the questions being raised as the bill makes its way to final approval.
    "The best way to describe the advice provision is it's a first attempt by Congress to come to grips with the question of advice," says Steve Utkus, director of the Vanguard Center for Retirement Research. "It's the start of a long debate; it's not the end."
    The Pension Protection Act-passed by the House and Senate, and expected to be signed by President Bush-encompasses sweeping reforms covering a wide range of retirement savings provisions. But it is the area of advice that has sparked the most debate in financial planning circles.
    Attention has been focused on a provision in the bill that would allow 401(k) providers, such as mutual funds and insurance and brokerage companies, to provide investment advice to the plan participants-under the supervision of the plan's sponsor. The attempt to provide more advice to the nation's 401(k) participants is not the issue, as there is universal agreement that Americans are doing a poor job of planning for their retirements now that defined benefit plans are gradually disappearing.
    What has sparked controversy is the decision by Congress to allow plan providers to also provide advice-a scenario that critics say presents a stark example of conflict of interest.
    The Financial Planning Association (FPA), the nation's largest trade group representing planners, was solely focused on defeating that one provision during its lobbying efforts in Congress, says Neil Simon, the FPA's director of government relations.
    Not even the bill's requirement that advisors act as "fiduciaries" has eased those concerns, he says. "Even if this whole new population of so-called fiduciary advisors does comply with the admonitions, they are certainly going to be given a new opportunity to cross-sell other products," Simon says.
What the FPA would have preferred was a proposal adopted in the Senate version of the bill that would have encouraged employers to hire independent advisors for providing 401(k) advice, he says.
    Proponents of the plan cite numerous requirements written into the bill that specifically guard against conflicts. Sponsors, for example, will be required to select and review advice providers, and advisors will be personally liable for the advice they give. The bill also requires that the advice be given in a way that is "not biased in favor of investments offered by the fiduciary adviser or a person with a material affiliation or contractual relationship to the fiduciary." Advisors will also be required to fully disclose fees and any potential conflicts of interest.
    Utkus says the impact of the advice provision will ultimately depend on how the law is interpreted in written regulations, which will be enforced by the U.S. Department of Labor.
    It's likely Congress will eventually revisit the issue to determine if any changes are needed, he adds.
    "It's a good effort as a first start," he says. "Whether it will encourage employers to adopt advice programs remains to be seen."   
    Among some of the other key provisions in the bill are extensions of popular retirement savings rules that were due to expire in 2010, including the Roth IRA, catch-up contributions, 403(b) plans and 529 plan savings benefits.  Another provision would encourage employers to implement automatic 401(k) enrollment-which some say could provide immediate benefit to the overall retirement picture.
    "I think we know just anecdotally there are a lot of participants who out of sheer inertia don't sign up as early as they could," says Mark Smith, managing director of Russell Retirement Services.
    Automatic enrollment-which requires employees to opt out of a 401(k) plan, rather than opt in-often leads to increased enrollment, says Diana Jordan, vice president of Sikich Cozad Asset Management in Springfield, Ill., which does 401(k) consulting. Jordan says the reasons for workers not participating in company plans can range from simple neglect to lack of understanding of what the plan involves.
    When the company helped a law firm with 80 eligible participants implement an automatic enrollment plan, she said, the firm's participation jumped from 40% to 80% of all eligible workers. "There's a variety of reasons why they don't participate," she says. "This in fact takes that decision out of the employee's hands."
    There is, ironically, one thing that the Pension Protection Act doesn't do: protect pensions.
    Utkus of the Vanguard Center for Retirement Research notes that while the bill takes steps to shore up existing pension plans, it does virtually nothing to encourage companies to adopt defined benefit plans.
    That means the gradual fading of pension plans, and the increased reliance on defined contribution plans, can be expected to continue. About 44 million people in the private workplace currently depend on defined benefit plans, with about half of those people already retired, he says.
    "If you step back and said one of the objectives should be to encourage defined benefit plans, the bill doesn't do that," he says. "It solidifies the promises that employers will make but is not going to cause more employers to offer" pensions.