`Free' 401 (k) investment advice may pose conflict of interest

Your Money

April 01, 2007|By Janet Kidd Stewart | Janet Kidd Stewart,Chicago Tribune

Long considered an executive perk, free financial advice may be coming to more 401(k) plans.

International Business Machines Corp. unveiled plans last month to offer retirement, tax and insurance planning services to its 127,000-member U.S. work force through third parties as part of a package aimed at curbing the chill from its pension changes.

Big Blue has weathered a storm of criticism and lawsuits as it switched to a cash-balance plan and later phased out its pension plan contributions for current workers.

The company said last year that it would stop contributing to the pension plan altogether for current workers at the end of 2007, a move expected to save the company up to $3 billion through 2010.

In its place, the company beefed up its 401(k) plan, kicking in 1 percent to 4 percent of pay automatically (depending on length of service) in addition to matching employee contributions dollar for dollar for up to 6 percent of pay. Nonexempt workers receive an additional 5 percent in contributions at year's end.

Now the company hopes its agreement with Fidelity Investments and the Ayco Co., a unit of Goldman Sachs, will be viewed by workers as an olive branch and as a challenge to other employers to follow suit, particularly since last year's Pension Protection Act seemed to give a green light to employers to offer advice.

Retiree advocates who opposed that piece of the legislation, however, continue to worry that advice coming from an investment firm providing a retirement plan will be full of conflicts of interest. The advice, they fear, will steer workers toward that company's funds, at a minimum.

"Employers are now able to provide advice as long as they disclose conflicts of interest," said John Hotz, deputy director of the Pension Rights Center in Washington. "It's basically a `Get Out of Jail Free' card on fiduciary responsibility."

For their part, Fidelity and Ayco are stopping short of making the claim that they are providing financial advice to the IBM workers, instead using the term "financial guidance," which carries more of a whiff of education than specific investment picks.

But the program clearly is intended to offer recommendations. For example, Fidelity reps will take IBM workers through the company's tools that check a future retiree's retirement readiness, suggest withdrawal and asset allocation strategies and recommend mutual funds to meet those goals.

Some big fund companies with similar services for clients recommend only their own funds, while Fidelity includes non-Fidelity funds in its recommendations.

Ayco reps will offer customized advice on other issues, such as estate planning, and will act as a second opinion on investment plans, but Ayco will take no payments from investment providers, company officials said.

Nevertheless, employees need to be careful and look out for their own interests, experts said.

"Any company thinking about [providing advice] must realize there is an extra hurdle because participants are going to be skeptical," said Herbert Whitehouse, chief fiduciary officer for Sentinel Fiduciary Services in Orlando, Fla., a unit of Bogdahn Consulting LLC that helps companies adhere to fiduciary standards.

A few days after the IBM program was launched, however, more than 11,000 workers or their significant others had signed up for financial seminars, said Randy MacDonald, IBM senior vice president for human resources.

Workers can receive unlimited one-on-one phone counseling with representatives from Fidelity and Ayco. Advisers typically will have at least a broker's license, while some will have additional credentials, officials said. IBM has committed to offering the service for at least two years.

Fidelity has trained about 1,200 of its representatives in the details of IBM's plan, which includes nearly two dozen fund choices, said a Fidelity spokeswoman.

But workers should not be lulled into thinking some fiduciary behind the curtain is necessarily looking out for their best interests.

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