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.