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Trolling for 401(k) Treasure

If you haven't gotten your hooks into enough baby boomer clients those 70 million-plus Americans born between 1946 and 1964 who are now heading toward retirement Congress is about to give you a second chance. Sometime early next year, or perhaps even by year-end, Congress is expected to enact new pension legislation that would make it easier for financial advisors to work with participants in company

If you haven't gotten your hooks into enough baby boomer clients — those 70 million-plus Americans born between 1946 and 1964 who are now heading toward retirement — Congress is about to give you a second chance. Sometime early next year, or perhaps even by year-end, Congress is expected to enact new pension legislation that would make it easier for financial advisors to work with participants in company retirement programs. That advisory relationship, say reps who have worked the 401(k) circuit under today's rules, can lead to IRA rollovers, referrals and the capture of boomer assets.

Specifically, the legislation would free employers of legal liability for investment advice provided through their 401(k) plans. That legal liability is what has stopped the majority of employers from providing advice, lobbying groups and analysts agree. Angry employees who lost retirement dollars on bad investments have filed massive class actions against the likes of Enron and WorldCom in recent years. But an employer (plan sponsor) need not be a nefarious actor like Enron, which froze employee assets in company stock, to run into trouble. The plan sponsor has a very specific fiduciary responsibility under the Employment Retirement Income Security Act (ERISA); if the sponsor provides poor choices of investments or actual investment advice that backfires, employees can sue for losses. Under current law, the employer can bring in a financial advisor to offer advice — but the company is still liable if employees feel that they have suffered losses because of bad advice.

“Employers are particularly vulnerable to being sued for losses in 401(k) plans, and to the extent that they're providing investment advice, it broadens their liability even more,” says Vanessa Scott, legislative counsel for the ERISA Industry Committee, a lobbying group that represents Fortune 500 companies.

For years, the financial services industry has been pressing for a change in the rules that would ease the burden on employers and let reps offer advice to enrollees in company retirement accounts. That would make selling 401(k)s and other retirement plans far easier, and help brokers tap into retiree accounts.

Now, they may get their wish. Tucked into pressing pension legislation that would shore up the underfunded Pension Benefit Guaranty Corp. — a high priority for both Republicans and Democrats — is a rider that would get employers off the fiduciary hook. As long as the person the employer hires to provide 401(k) advice is a “qualified investment advisor,” or anyone who has agreed in writing to act as a “fiduciary” under ERISA, the employer can't be sued for bad advice. (The employer, however, could still be liable for selecting an inappropriate investment lineup.)

The move could double or triple the number of employers offering advice through their 401(k) plans, industry groups estimate. The ERISA Industry Committee's Scott says that just 10 percent of her Fortune 500 membership (113 companies) currently offers advice, but believes that number could jump to 50 percent once the legislation is passed.

Retirement in the House

A final version of The Pension Protection Act [HR.2830] passed out of committee in the House of Representatives in September, and the Senate's Pension Security and Transparency Act of 2005 [S.1783] was supposed to go to the Senate floor in early October. However, it was held up due to haggling over defense appropriations. Both the House and Senate bills would free employers of legal liability for individual investment advice provided to 401(k) participants as long as the advisor selected agrees in writing to be a fiduciary. Both bills would also require the advisor to make periodic disclosures of any fees or conflicts of interest to plan participants in plain English.

Where the bills differ is on who can provide advice about individual 401(k) investments. The House bill would allow 401(k) plan providers like Fidelity and Merrill Lynch to offer investment advice. The Senate bill would maintain the status quo, allowing only independent advisors, such as Morningstar or Ibbotson or an unaffiliated financial advisor, to offer advice to individual employees. This third-party rule, a halfway measure, was established in December 2001, when the Department of Labor (DOL) issued an advisory opinion in response to a request by Los Angeles-based SunAmerica. The insurer had asked whether, as a retirement-plan provider, it could hire an independent third party to provide employees participating in its 401(k) plans with investment advice. The DOL said yes.

Now the third-party restriction is “going to be a big sticking point in conference,” Scott predicts. But with or without it, industry lobbyists are optimistic that the advice piece of the legislation will pass. “It's very likely to pass,” says the American Benefits Council's Lynn Dudley of the legislation. “The timing of its passage is less clear, and that's because they have a pretty heavy legislation calendar. But, in general, this administration is pretty good at keeping their people in line, and, because they want to see it passed, they will end up passing it,” says Dudley, who is vice president and senior counsel for the Council, a Washington, D.C.-based advocate of employer-sponsored benefit programs.

401(k) Boon

In any case, that third-party rule won't stop financial advisors from getting more face time with participants, the ticket to winning their business. What matters is that more plan sponsors will want advice. Even now, many advisors provide third-party investment advice to the participants in small 401(k) plans. They charge a flat fee for the service, but the real payoff is the contacts they develop among potential clients.

Companies like Merrill or Ameriprise, which administer large corporate plans, also use their own advisors to run educational retirement workshops, help with asset-allocation decisions and provide ongoing monitoring and rebalancing of accounts.

Merrill Lynch, for example, which manages $350 billion in retirement assets, offers third-party advice through Ibbotson. Plan participants can choose from three delivery systems — online, call center or directly with a financial advisor. If the participant chooses to work with an advisor, a Merrill advisor then helps him or her with allocation decisions and implementation of the plan. Merrill pays the advisor a portion of the 12b-1 fees collected based on the level of service the advisor provides to that plan. (Merrill declined to disclose the payout schedule.)

However, only 87 of Merrill's 30,000 plan-sponsor clients, accounting for $12 billion in assets, use the advice service. And just 365 advisors of the more than 14,000 advisors in Merrill's network work with Merrill's 401(k) clients. “We've found that plan sponsors tend to fall in two camps. Those who think advice is absolutely needed, because of all of the evidence that employees want and need this advice. And those who feel the fiduciary burden of offering service outweighs the benefit they see,” says Diane Talbot, director of the employer plan retirement solutions group at Merrill.

Passage of the House or Senate bills would jumpstart the advisory action, she predicts. “It would really open the floodgates for offering the advice more broadly,” Talbot says. Merrill is not planning on making any changes to the way its 401(k) program is structured, because the firm expects that the third-party restrictions will remain in place. But it is expecting a lot more 401(k) business, both for its advisors and itself.

Courting Clients

Even with the looser rules on advice, however, advisors will not be able to simply recruit plan participants to become clients. ERISA forbids fiduciaries from soliciting further advisory business from plan participants. But reps who work with plan participants often win rollovers and additional clients from these relationships. How many is difficult to say; no industrywide or firm-specific data are available on how many 401(k) clients go on to become clients.

But advisors say the looser law — and those legions of retiring boomers — will make providing retirement-plan advice a worthwhile marketing activity. Even a little free retirement counseling can pay off. Matthew Kardesch, an advisor for Ameriprise out of Houston, currently provides education and guidance on a number of Ameriprise retirement plans free of charge, and says it has won him a lot of additional business over the years. “It's just about building relationships. I always get several requests for additional meetings after each of the workshops. In the 10 years I've been providing 401(k) education in the workplace, I have yet to do a presentation and not have somebody ask for outside financial planning help afterwards.”

If the legislation passes, “I think there would be an initial reaction of people wanting to buy more advice,” he adds.

Like Merrill, Minneapolis-based broker/dealer Ameriprise uses a third-party advice provider — Morningstar — and gives the participant choices for how to implement the advice — online, call center or face-to-face with an advisor. Again, the advisor provides no individual investment advice, but rather education, allocation and implementation help. The difference at Ameriprise, which has $25 billion in 401(k) assets, is that the advisors don't get paid for this service. But it's still worth it to the Ameriprise advisors who work with the firm's 401(k) clients, says Rusty Field, vice president of Ameriprise Financial Education and Planning Services. “If they can deliver trust, they can win clients,” says Field.

Chris Guanciale, ERISA attorney at Plan Member Financial Corp., a defined-contribution and defined-benefits administrator in Carpinteria, Calif., also notes that the majority of 401(k) participants are likely to stick with an advisor who handles their 401(k) investments when it's time to head into retirement. This is what happens today with defined-benefit, or 403(b), plans, where advisors and employers aren't constrained by ERISA laws, he explains.

It is by now no secret to anyone that 70 million baby boomers will retire over the next 20 years, representing some $1.7 trillion in retirement rollovers alone through 2010, according to Boston-based Cerulli Associates. Many of the wealthiest of these baby boomers may already have a financial advisor. But many others do not. And even relatively low-paid workers, who have been paying into a 401(k) with a company match over a long period, can have a nest egg that would be worthwhile to manage. “Someone making $30,000 a year and maxing out his 401(k) could have $400,000 by the time they retire. And they might never have thought about needing financial services,” says Guanciale.

The Fiduciary Gamble

Even if the House plan becomes law and allows providers like Merrill and Fidelity to provide advice, the firms may opt to leave that fiduciary role to the third-party providers. And, some industry experts say, it's the advice-giving fiduciary, not the plan administrator, who has the best chance to win client trust and business. “It's a great opportunity for the investment advisory community that is willing to take the exposure,” says Guanciale.

Indeed, most b/ds, Merrill Lynch included, do not want their advisors to become ERISA fiduciaries because of the liability that entails. In fact, one Merrill advisor says his firm recently sent out a mass email to its reps, warning them against inadvertently becoming fiduciaries. Some advisors feel the same way. In a recent survey, Fidelity found that advisors who work with 401(k) plan sponsors want to have the option of using third-party advice. The firm, which works with Ibbotson to provide advice to its 401(k) clients, will roll that tool out for them in 2006, says David Liebrock, executive vice president of Fidelity Investments' Advisor 401(k) platform.

Ameriprise's Kardesch, for one, says that even if the third-party restriction were lifted, he would continue to provide only allocation and implementation on third-party advice to his 401(k) clients. “I'm really careful about what kind of advice I'm providing to make sure I'm compliant, not acting as a fiduciary. I think I would still lean toward the allocation end of it until someone is engaged in formal planning,” he says.

Says Guanciale, “For your regular investment advisor out there, they might look at that and say, ‘I'm not sure what I'm really getting into. When I weigh the benefits versus the burdens, it might be too burdensome to risk this possibility.’”

401(k) Advice Today

A fraction of employers provide investment advice through their 401(k) plans today. Most of them provide more than one kind of advisory service.

Employers providing:

Outside (third party) investment advisory services: 37%

One-on-one investment counseling: 19%

Seminars or workshops: 19%

Online guidance (investment recommendations at asset level only): 16%

Online advice (recommendations made at the fund level): 15%

Source: Survey of 400 Fortune 1000 companies by Hewitt Associates.

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