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Fidelity Deal May Spell End of 401(k) Advice Bill

The proposal has struggled in Congress for the past couple of years.

June 29, 2005
Related Topics: Latest News
Fidelity investments’ recent deal with Ibbotson Associates may be a sign that legislation allowing 401(k) plan providers to offer investment advice directly to employees is dead.

The Boston-based fund company was a holdout--the last of the major 401(k) providers to offer investment advice to participants through an agreement with a third party. Although the majority of its competitors have signed such deals, Fidelity has been campaigning for legislation that would allow the company to provide advice on its own.

According to 2001 Department of Labor guidance, plan providers can only offer specific investment advice if it is through an objective third party. The bill Fidelity has been pushing, sponsored by Rep. John Boehner, R-Ohio, would allow 401(k) plan providers to offer investment advice on their own as long as they disclose any fees they may generate as a result of the advice. The bill, however, has struggled in Congress for the past couple years because of the conflict-of-interest issues that such arrangements might raise.

“The fear is that there will be the tendency to advise participants to buy expensive funds instead of cheaper funds because it would make money for the plan provider that gives the advice,” says Sherwin Kaplan, an attorney with Thelen, Reid & Priest.

Fidelity’s decision to team up with a third party to provide investment advice should signal to plan sponsors that the Boehner bill may be dead after all, says Ted Benna, COO of the Malvern Benefits Corp., a retirement plan administrator, and founder of the first 401(k) plan 25 years ago.

Steve Deschenes, executive vice president of Fidelity Institutional Retirement Services, says that the company finally decided to offer investment advice through Ibbotson in response to demand from plan sponsors who wanted more specific advice. He concedes that with the focus on Social Security reform, the “legislative environment is relatively unclear” on the question of investment advice. Fidelity will continue to support the Boehner bill, a Fidelity spokesman says.

With the Ibbotson-Fidelity partnership, employees will be able to get specific investment suggestions online, over the phone and, in some cases, in person. Fidelity is in talks with Ibbotson about offering the service in workshops, but details are being worked out, Deschenes says.

Telephone and in-person advice in particular may make Fidelity’s service more attractive than what’s available through other providers, says Fred Barstein, CEO of 401kExchange, a Lake Worth, Florida-based consulting firm. The problem with online advice, he says, is that most people don’t feel comfortable using it.

A 2003 survey of plan sponsors conducted by the Profit Sharing/401(k) Council of America found that 54 percent of sponsors offered online advice, but only 30 percent said their participants were using it.

Still, some plan sponsors are hesitant even to offer investment advice through a third party because they do not want to be liable if the employee loses money as a result of that guidance. Nothing short of legislation clarifying the issue would put these companies at ease. But such legislation doesn’t appear to be on the agenda for now.

“I think the only value of the Boehner bill was to the financial institutions, and most of them have made their own accommodations to offer advice,” says Kaplan. He says he doubts that it would help companies much if it passes, “or end the world if it doesn’t.”

Jessica Marquez


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