Finally, Help With Your 401(k)

By Daniel Kadlec

Here comes the cavalry, and with 37 million people having invested $1.7 trillion in 401(k) plans--well, it's about time. This treasure needs protection. From what? No surprise. Surveys routinely show that the enemies of wealth are the oft confused owners of that very stockpile. Example: many investors believe that their company's stock is less risky than a diversified stock fund and that a bond fund is risk free, John Hancock Financial Services finds.

Such backward logic didn't resonate with regulators or the financial-services industry not too long ago--before 401(k) plans had become the pillar of many people's retirement security. But Congress and Wall Street long have abided by a simple principle: follow the money. With so much nesting in 401(k) plans, two new initiatives aim to commingle plan administration with sorely needed advice. This is groundbreaking stuff. I'm talking not about generic investment education, like the flyers you get in your statement, but personal, account- and fund-specific suggestions.

Some daring companies have already entered this field, and many would like to. The hang-up is the Employee Retirement Income Security Act of 1974, or ERISA, which holds employers liable for bad advice even if supplied through a third party.

In recent years the Department of Labor, which enforces ERISA, has softened in this area, going so far as to offer guidelines as to how a company might offer 401(k) advice without running afoul of the rules. But now there's a full-on assault, spearheaded by Republican Congressman John Boehner of Ohio, who in mid-June introduced a bill that seeks to remove a company's liability should an employee take bad advice and lose a bundle. If all goes swimmingly, the bill could reach the President's desk by year end.

Yet even at that optimistic pace the measure may be rendered moot before it's law. SunAmerica, a financial-services giant with $142 billion of managed assets (though a relative upstart in the area of 401(k) plans) is sure to make a splash with its application last month for an exemption that would allow it to bring a third-party adviser to the plans it administers. I'm told that Labor is looking favorably on the prohibited-transaction exemption and could approve it by September.

The SunAmerica initiative is a bell ringer because it is an exemption and requires no change of law. If Labor approves it, other plan administrators, including mutual-fund powerhouses Fidelity and Vanguard, would probably go for their own exemptions, and conceivably within a year, access to full-service advice would be part of most large 401(k) plans, as well as 403(b)s for nonprofits and 457s for government workers.

There is no question that plan participants need advice. Some 13,000 401(k) accounts now hold more than $1 million each. The average account balance is $55,000, the Investment Company Institute says, and the typical balance for people in their 60s who have been working 30 years is $180,000. That's real money, and shouldn't be left untended.

There's another issue. More companies are automatically enrolling new employees in 401(k) plans. Those employees, to opt out, must fill out papers. Known as "negative election," this is a way for companies to boost plan participation, which after years of growth has topped out at around 80% of those eligible. Generally, when you are automatically enrolled, 3% of your income is taken from your paycheck and put in a money-market or stable-value fund. Brother, do such people need advice! Those are absolutely the wrong kinds of funds for long-term savings.

It's another question as to how many folks would take advantage of planning advice. "We have a free, personalized online advice component, and only about 5% use it," says Tom Schlossberg, CEO of Diversified Investment Advisors, which manages $46 billion in pension money.

Another question is how to police obvious conflicts of interest that arise when a financial-services firm supplies both the 401(k) investment options and advice on where to put your money. A trusting soul might wind up in funds with the highest management fees. The Boehner bill insists on safeguards such as full disclosure. But it wouldn't be hard for an adviser to justify, say, his firm's growth fund over a competitor's. We need advice, but it should come from an independent adviser.

Now sound the charge.

See Dan on CNNfn Tuesdays at 2:15 p.m. E.T. For more on 401(k) help, go to time.com/personal