Guidelines for 401(k) advice

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Guidelines for 401(k) advice

The 401(k) investment advice that fiduciary advisers can provide under the new law must follow one of two approaches:

Computer models. Advice providers can make specific investment recommendations using a computer-generated asset allocation model appropriate for an individual participant based on factors such age, risk tolerance, and financial situation.

The models must be developed using objective information that’s generally agreed to have an impact on portfolio performance. That would include the historical investment return of different asset classes and the specific return on choices available in the plan. In addition, an independent third party must review and approve the software. There are some potential drawbacks to this approach. For example, it’s possible you might have questions about alternative choices that the adviser wouldn’t be in a position to answer before you make your final investment decisions.

Flat fee structure. An adviser can recommend an appropriate mix of investments from within your plan provided the fees he or she charges for all plan participants are the same fee for advice they receive, regardless of the investment choices they make. This rule is designed to discourage advisers from recommending investments that carry higher fees or commissions over lower cost options and from which they or their employers might benefit financially. This approach can be more personalized, which may be more appealing.

What is true, whether you get help from a computer model or a fiduciary adviser, is that you must still make the final decisions for your account. The goal of making advice available is that you ought to be able to make your decisions with more confidence.

While employers are currently considering alternatives for offering advice, there are many outstanding questions about both the computer model approach and the level fee approach that are likely to delay their adoption. You may want to ask if your company will be making either of these options available anytime soon.

© 2008 by the SIFMA Foundation for Investor Education and Lightbulb Press, Inc.