GIVING 401(K) ADVICE A REAL HEADACHE

Two big questions for mutual funds and companies providing 401(k) retirement plans for employees: Should they also provide investment advice? And if they do, what liability do they assume?

For nearly 230 investment professionals and lawyers who attended a retirement planning conference in New Orleans earlier this month, the answers were about as clear as Mississippi mud. During the two-day conference, it became obvious that defined contribution plans are still riddled with questions, for both workers and employers.

At the conference, sponsored by the Investment Company Institute, a top agenda item was the issue of potential blame: How investment companies and their corporate clients can find ways to help advice workers on 401(k) investments, yet avoid legal liability if plan participants lose money based on the advice they receive.

The spectacular growth of 401(k) plans has made them an integral part of the American retirement system. According to the Department of Labor, 155,000 plans were launched between 1980 and 1994. By the end of 1996 — the latest year for which definitive numbers are available — 6.6 million workers participated in nearly 28,000 plans, with combined assets of almost $246 billion.

Industry representatives agree that tomorrow’s retirees remain confused over the investment choices they need to make today. And in too many cases, they say, 401(k) plan providers aren’t doing enough to educate workers who are woefully uninformed about investing.

“If you went to your doctor’s office and all they did was give you a brochure on a disease, you’d quit going,” said Scott Lummer, chief investment officer for the San Francisco-based 401(k) Forum Inc. While employee education is becoming more important, he added, defined contribution plans are becoming more complicated.

Yet companies that try to do more for employees may create a Catch 22. Increasing plan options will improve the level of employee satisfaction with a 401(k) plan, but also increase confusion.

“Their employers have told them, ‘We can’t help you with your investment decisions, but if you make the wrong decision, you may foul up the rest of your life,’ ” said Warren Cormier, president of Boston Research Group.

Still, employees tend to want help from their companies, instead of seeking independent advice from financial planners. Mr. Cormier said studies show that many workers are leery of hiring planners: “They expect to get sales pressure from financial planners, and they’re worried about objectivity.”

John Kimpel, deputy general counsel for Fidelity Investments, said the issue never arose with defined benefit plans, because all investment decisions were made by pension advisers. Now that employees hold their fate in their own hands, he said, “the question is, what is the line between education and advice?”

It could be a very thin and potentially expensive line, according to Catherine Heron, assistant general counsel at the Capital Group Cos. Inc. in Los Angeles. Offering investment advice can result in the employer or plan provider assuming fiduciary responsibility. Should employees get investment advice, follow it, lose money and then sue, she said, “surely, a court is going to want to find some liability, somewhere.”

One alternative is for mutual fund companies to hire outside financial experts to advise plan participants. “Then, the mutual fund can say, ‘Hey, I’m not advising anything,’ ” Ms. Heron said.

Nevertheless, she warned that plan providers should be careful about how such relationships are structured. In short, employers and plan providers alike should distance themselves from the advice process. “There are a number of issues relating to how the mutual fund company can structure a relationship with an independent adviser,” she said.

The conference dovetailed with release of a study on 401(k) plans conducted by the institute and the Employee Benefit Research Institute at Philadelphia’s Temple University. It found that millions of investors have surprisingly low asset levels.

According to the study, the median account balance among 401(k) participants is $11,600. Nearly half have less than $10,000 invested, while almost 10% have more than $100,000. Not surprisingly, workers with the smallest amounts in their plans are younger people with less job tenure.

Jack VanDerhei, research director of the Temple institute’s Fellow’s Program, said investment professionals shouldn’t be misled by the low median balances. At the other end of the spectrum, workers in their 60s have average balances of about $135,000.