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401(k) Participants Get Education, Do They Need Advice?
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In spite of the fact that plan sponsors have spent hundreds of millions of dollars on participant investment education and communication programs over the past several years, it appears that most plan participants still lack a rudimentary knowledge of investment fundamentals. Given the complexity of investment principles and the emotional overtones of contending with volatile markets in applying those principles to optimize the performance results of their own savings and retirement assets, participants' lack of expertise is not really surprising. Nonetheless, it raises fiduciary issues for plan sponsors who may be faced with unhappy retirees and perhaps even law suits, according to some of the lawyers who spoke at the PSCA conference, as a result of participants having insufficient assets for retirement.

Is providing investment advice the next step? A number of plan sponsors and the growing number of investment advice service providers certainly believe it is. Computer based asset allocation models of varying sophistication are readily available from a number of different vendors, including over the internet. To be truly helpful to the participant, the model should include the specific investment options available to the individual participant through his or her plan rather than simply generic asset classes or investment styles. Unfortunately, some of these vendors do not yet understand stable value and do the participant a disservice by treating stable value in the same way as they would a bond fund, ignoring its ability to reduce portfolio risk through its low standard deviation and low correlation characteristics. Some asset allocation models include the participant's defined benefit plan, when present, and elicit information about other assets, liabilities and objectives including social security for both the spouse and the participant to provide as complete a picture as reasonably possible. Others look at a limited number of inputs and may lead them to an erroneous conclusion based on incomplete information. The best of these models will certainly lead the computer-comfortable participant to a better asset allocation strategy than they would have reached on their own. It will also guide them to periodically rebalance the portfolio in order to maintain the risk characteristics of the portfolio in the face of changing market conditions. However, some participants will need the face-to-face counseling of a financial planner rather than impersonal interaction with a computer.

The next question is by whom and how these services will be paid. Will the plan sponsor pay for investment advice? Will the individual participants who use the service pay for it? Will there be a fee for service dollar charge or an asset based fee or some combination of all of the above with a fee splitting between the plan sponsor and the participant? A corollary question is whether the growing number of wannabe investment advice service providers can actually offer a quality service at a price that will be bought and at which they can make a sufficient return to stay in the business. Clearly there is a need for investment advice, and therefore we believe that the marketplace will sort out these issues over time and will find a way to provide a spectrum of investment advice services on a reasonably cost effective basis.

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