In case you haven’t been following the discussions – and let’s face it, you have way too much time on your hands if you have – there has been a quite a debate going on in Congress lately on how to and who should provide advice to 401(k) participants.
Let’s back up a bit and get some history: when 401(k)’s were first introduced (part of ERISA, back in 1974), the idea was that as traditional pension plans became more costly to administer, employers could provide these plans to employees to allow the employee to administer their own “pension” plan. It was not anticipated that these plans would become the primary retirement savings vehicle available to most folks – but that is exactly what has happened.
So, while the originally-anticipated participants in the plans were expected to have a financial advisor available to them (401(k)’s were expected to be primarily an executive benefit), the vast majority of 401(k) participants today do not have such an advisor. And the problem is, it turns out that it’s not so simple for the average person to manage their nest egg without advice. So this is why Congress has been discussing this recently.
This is not the first discussion on advice-giving for for 401(k) participants, it was most recently addressed in 2006, where it was determined that providers of the 401(k) plans (the custodians) could provide advice to the participants in the plan. Lately, though, the discussion has centered around the question of independence of the advisor: Congress is debating whether there is too much conflict of interest for the provider(s) of the plan(s) in also providing advice to participants.
This becomes a thornier issue when you toss in the “automatic IRA enrollment” idea that the Obama Administration has floated. With a self-directed IRA, the custodian of the account (the company that stands to gain in commissions from selling investments to the account owner) is in a conflicting position to provide sound advice to the invester.
So – it comes down to this: would you rather get objective advice about your investments from an advisor who benefits in no way from the recommendations that you follow (or choose not to follow) – or would you rather have advice provided by the guy (or company) who would lose out if you chose to not follow his recommendations?
Current thinking is that advice should be provided by third-party independent advisors (the first type from above) – although the big money mutual fund companies are pushing hard to keep things the way they are, arguing that they know more about the investments than an independent would. What do you think?
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I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
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