Want 401(k) Advice? Some Firms Are Getting Personal

One of the most frustrating things facing employees today is deciding among funds or other options in their 401(k) plans.

Fund companies--along with brokerages, insurers and other firms that manage the plans--acknowledge that there’s a need to provide more personalized advice to participants. Indeed, there are laws limiting their ability to give advice.

Fund groups typically supply only boilerplate investment guidance, such as standardized investment questionnaires that help people determine their risk tolerance and objectives so they can select a suitable mix of funds.

What’s missing is the kind of one-on-one assistance many investors want. That means investors must ultimately decide on their own what to invest in, and in what proportions.

“The need for better advice and guidance is becoming distinct,” said Peter Starr, a consultant at Cerulli Associates, a Boston research firm. “Every survey shows that 401(k) investors typically have a low level of knowledge and are uncomfortable making decisions.”

What’s preventing investors from receiving clear-cut personalized guidance? The biggest obstacle is the federal Employee Retirement Income Security Act. The legislation in effect bars employers offering 401(k) plans from making specific recommendations to their workers. It also prevents fund companies from self-dealing--that is, steering investors toward the funds in their families that charge higher fees. (With most families of funds, some funds will have higher fees than others.) Employers have also been reluctant to give much direct specific advice because of fears they could be held liable if the investments do poorly.

In addition, it’s not practical for a fund group to send a financial representative to meet individually with what could be thousands of investors in a plan. Employers, too, balk at this expense.

But a few companies, including Los Angeles-based Trust Company of the West, are pioneering a possible solution.

In October, TCW became the latest fund company to receive permission from the Labor Department to advise 401(k) investors in a more specific way on how to allocate their money among various TCW funds.

TCW’s plan is similar to the approach taken by Smith Barney, PaineWebber, Wells Fargo and Prudential Securities, which previously obtained the same type of permission from the Labor Department. These other firms, to avoid any appearance of self-dealing, charge a separate advisory fee, generally paid by employers, to help the employees make their choices. The difference with TCW’s plan is that TCW will not charge a new fee beyond its normal management fee.

Several features of the TCW program, which is scheduled to begin next year, are designed to minimize the risk of suggesting that investors choose high-fee funds.

For example, the advice given to 401(k) investors will be determined by their answers to a risk-tolerance questionnaire developed by outside experts, with a computer program scoring the answers. Of course, investors will, as always, be free to disregard these suggestions.

Are these advisory programs a harbinger of a trend to offer more specific advice or perhaps even to change the law? That remains to be seen.

“It won’t change the way we operate,” said Jim Norris, a principal at Vanguard Group, which manages $50 billion in 401(k) assets.

Vanguard doesn’t plan to start recommending specific funds, although it does help investors reach asset-allocation decisions through seminars and other means, including a risk questionnaire.

Putnam Investments of Boston, which manages $30 billion in 401(k) assets, provides generalized guidance on determining asset-allocation mixes and is “seriously looking at” the TCW ruling but has no current plans to provide more specific advice, says spokeswoman Nancy Fisher.

Fidelity Investments of Boston, the largest 401(k) manager, with $246 billion in such assets, this month unveiled an online program that analyzes the current holdings of plan participants and suggests various model portfolios.

Supplying specific guidance is “something we’re seriously thinking of doing,” said Jane Jamieson, executive vice president of Fidelity’s institutional retirement group. “It’s an issue of real concern that a lot of companies are working on.”

Although few fund companies or other financial firms have expressed a desire to offer specific advice, many have been inching toward it--and for good reason.

In general, investors’ desire for guidance grows as their wealth accumulates.

“The higher the average account balance, the greater the desire for advice and guidance,” said Starr. “There’s a definite consumer need to have someone knowledgeable and with good credentials watching over a person’s nest egg.”

Russ Wiles is a mutual fund columnist for The Times. He can be reached at russ.wiles@pni.com