The rising demand for advice is changing the 401(k) business.

The past several years haven't been kind to the 401(k) plan. Paltry returns for many of the mutual funds and company stocks that comprise the bulk of 401(k) assets, lawsuits against 401(k) plan sponsors, and the current investigations into mutual fund industry abuses and their potential impact on retail investors have all reflected negatively on 401(k)s.

But as one of the workhorses in retirement planning, 401(k) plans will weather the storm, albeit with different expectations for investors whose shrinking portfolios and shattered confidence means they'll need more handholding and guidance. And it's a different world for plan sponsors, too, as high-profile lawsuits filed by employees over their 401(k) plans has more employers seeking third-party advice in running their plans and providing guidance for its participants.

Either way, the growing demand for help could translate into new business opportunities for advisors in the 401(k) market. "As people have lost a lot of money and confidence, they've throw up their hands and said, 'Ugh, I don't know anything about this stuff,'" says Malcolm Greenhill, a principal at Sterling Futures, an independent financial advisory firm in San Francisco. "So it makes sense they'll turn to people they think have competence in this area."

Greenhill offers fee-based 401(k) advice to Bay Area companies, some of who sponsor plans with unlimited choices from the likes of Charles Schwab & Co. Often, that's too much choice for employees to sift through and understand. Sponsors offering these plans are trying to do the right thing, he says, but they're opening themselves up to liability issues. "Those types of plans require a lot of education because it's easy for employees to make foolish mistakes."

Greenhill devises model portfolios and offers individualized advice for participants who want it. These types of arrangements aren't overly profitable, but they're a means to an end. "The reason I'm doing it is because it's wonderful positioning," he says. "What you want is for some of the executives and employees you're advising on their 401(k)s to eventually become your clients."

Increasingly, some of the people he advises are more than happy to hand over the keys to their 401(k)s to Greenhill and let him make the decisions. "I've definitely seen a trend over the past year or so where employees want me to do the allocation for them," he says.

Along those lines, one of the growing trends in 401(k)s is the demand for professionally-managed plans where plan providers enlist the services of independent third-party advisory firms to create actively manage portfolios for participants. NewRiver Inc., a financial data technology firm in Andover, Mass., predicts this option will be made available to at least 5 million plan participants in 2005, with about one million expected to sign up for these programs. In a survey of the 50 largest defined contribution plan sponsors, NewRiver found the factors behind greater interest in offering professionally-managed plans include increased participation and better asset-allocation for employees, as well as reduced fiduciary risk for sponsors.

Until recently, Employee Retirement Income Security Act laws forbade plan providers from dispensing advice to employees participating in a 401(k) plan because of conflict of interest concerns. Providers could offer online tools with generic advice, but that only goes so far with the majority of investors who lack the time, interest or knowledge to use them. And employers could enlist outside advisors to come in and provide education seminars and the like for their employees, but again, periodic financial pep talks often had little effect. Too often, the end result spelled trouble due to poor asset allocation and heavy reliance on company stock (a problem exacerbated by the fact that many companies substituted stock for cash as part of the company match).

When equities tanked, they took down with them the mutual funds and company stock that underpinned many employee retirement plans. Investor rage led to lawsuits against the like of Enron, Williams Co. and the former Worldcom, since renamed MCI. The notion of employer responsibility for maintaining prudent 401(k) plans is a pressing concern for many sponsors, and a 2001 decision by the U.S. Department of Labor opened the door for plan providers to offer direct advice to plan participants as long as it was done through outside independent advisors not affiliated with the provider.

"We're seeing more desire among sponsors for the use of advisory-type services," says Michael Butler, senior vice president at Nationwide Financial Services, which has written more 50,000 defined contribution plans (the majority being 401(k)s). "We've always offered tools such as risk-tolerance questionnaires and the like, but people tend to do them once and forget about them, and they often fail to rebalance their portfolio in changing market conditions. These management services are more actively involved."

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