Just when the Labor Department thought it had buttoned up the final regulations governing the advice given to 401(k) plan participants, new questions are being asked about conflicts of interest and the quality of the advice.
After years of wrangling, the department published final rules Jan. 21 that gave the green light to investment firms administering 401(k) plans to offer investment advice to participants under the Pension Protection Act.
Then, hours into Barack Obama’s presidency, all last-minute Bush administration orders were frozen, leaving the rules in limbo.
Critics, including House Education and Labor Committee Chairman George Miller (D-Calif.), have long worried that the rules regarding investment advice would lead to conflicts of interest, including situations in which an investment firm was recommending its own mutual funds to participants.
Supporters argue that the rules require firms to offer the advice using strict guidelines, such as computer models that are certified to be free from conflicts or through advisers paid the same amount for each participant they advise, regardless of which investments a participant chooses.
The review of the rules, which experts say could toss out several key provisions, raises some issues for retirement savers:
*Computer models are fallible too.
Just because you receive advice in your 401(k) from a computer model that has been certified as unbiased doesn’t make it necessarily good advice.
Conventional portfolio advice has centered on diversification to boost returns in a long-term portfolio. But the stock market in 2008 and early 2009 has put that to the test, as virtually all asset classes imploded.
*Understand where your advice is coming from.
If your plan information doesn’t specifically tell you who is providing the recommendations to your 401(k), ask about it.
Then inquire about the description of the models used to generate the recommended portfolio. Do they use a few static portfolios that most investors are clumped into or are they customized?
And explore the basic philosophy on asset allocation that stands behind each model. Financial Engines, one of the largest providers of 401(k) advice, recommends about a 50-50 stock-bond mix for portfolios that were 65 percent stocks a year ago, said Christopher Jones, chief investment officer.
*Investment wisdom has been shaken.
Look for changes to investment recommendations in the coming year, said Dean Kohmann, vice president of 401(k) plans at Charles Schwab.
“I think companies [providing advice] will have to go back and revisit the computer models” after last year’s dramatic market drops, Kohmann said. “We use a Monte Carlo [computer simulation] methodology to give people expectations for a portfolio with 90 percent confidence, 67 percent confidence and so on. This past year was the 10 percent outlier,” he said.
Still, advice in general is working, he said, citing internal research showing participants who receive advice contribute higher portions of income to their 401(k) plans.
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But some experts fear that the advice most people have been given could simply be misguided, and they implore savers to come up with their own sense, if they can, of their risk tolerance.
“The recent financial crisis showed that a lot of conventional wisdom may not be right,” said Norman Stein, a law professor at the University of Alabama. “A lot of advisers have been advising even older people that they should still have substantial equity exposure.”
That may prove true, eventually. In the meantime, it’s up to you to listen to the advice, but ask questions and make your own decisions.
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