Financial advisers likely to increase role as fiduciaries for 401(k)s, study finds

WASHINGTON — More financial advisers will specialize in becoming fiduciary advisers who work with 401(k) plans in coming years, according to a retirement executive who worked on a white paper on the issue. The Pension Protection Act of 2006 reduces the liability for employers providing investment advice for employees in their 401(k) plans. “It will lead to a degree of specialization,” predicted Dennis Long, vice president of retirement and investor services at The Principal Financial Group of Des Moines, Iowa, which manages $282.1 billion. White paper available The Principal manages 401(k) plans in addition to other financial products, and it recently published a white paper titled “Pension Protection Act of 2006: Is an Expanded Fiduciary Role the Right Choice for Financial Professionals?” The landmark law tightens funding requirements for defined benefit plans and makes it easier for companies to enroll workers automatically in defined contribution plans such as 401(k)s.
This “gives a definitive road map of what one must do to conduct business in this environment,” Mr. Long said of the provision encouraging investment advice. Few companies are offering investment advice so far, and the Department of Labor still has to come out with regulatory guidance to steer companies and advisers through the process. The Principal’s white paper lays out the requirements for advisers who want to participate in the growing 401(k) business. They “will realize this act validates the growing need for advice,” Mr. Long said. “Participants want it and need it. Employers want a way to provide it,” he said. However, Mr. Long added, some advisers will conclude that “the risks and the additional liability and the process isn’t really worth it. They’ll go in another direction.” Employers who hire investment advisers must go through a rigorous selection process, and they must audit the advisers annually under the requirements of the Pension Protection Act, according to Mr. Long. Advisers who work with plan participants will either have to charge “flat fees” that are the same regardless of what investment participants choose, or they will have to use advice from an unbiased computer model. Many companies offer computer websites that can be used by employees to decide on their investments, but few employees take advantage of them, said Michael Flower, managing partner of Financial Principles LLC in Fairfield, N.J. “Most people who don’t have time aren’t going to do that on their own,” said Mr. Flower, who plans to become a fiduciary adviser for 401(k) plans when the Labor Department issues final regulations this fall. His company works with some 40 401(k) plans containing about $40 million. Computer versus adviser The computer model provision raises the question of whether financial professionals are expendable, according to the report. “Eliminating investment advisers is not the intent of the new law, as the PPA clearly acknowledges the reality that many individual participants lack the necessary knowledge, resources or ambition they need to actively manage or save retirement funds,” it stated.
Allowing automatic enrollment and automatic increases in plans will lead to increased participation and the flow of more money into 401(k) plans, the report noted. That, in turn, “may put participants in a position where a growing nest egg may help them decide whether they may want to seek advice at some time in the future,” it said. More than half of surveyed workers indicated that they would likely take advantage of professional investment advice offered by companies that managed investments used in their plans, according to the report. It will be worth the extra liability risk for advisers who work with 401(k) plans to become fiduciary advisers, Mr. Flower believes. “You have more access to more people to build your business,” he said. In addition, Mr. Flower said, “it can be used as a way to promote yourself in your community, in your state.”