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Readers Select Top Fiduciary Stories of 2009: #6 The Department of Labor’s Abrupt Shift on 401k Advice

February 09
10:52 2010

In 2006, the DOL allowed financial advisers to provide advice directly to 401k plan participants. As one of its last acts, the outgoing Bush administration set out the ground rules for such advice. Later in the year, the Obama administration abruptly 80376_7946_a_Mazing_game_royalty_free_stock_xchng_300reversed those guidelines, leaving not only financial advisers, but also plan sponsors wondering if they are now in violation of compliance regulations.

Assistant Labor Secretary Phyllis Borzi announced on February 2, 2010 the DOL will issue new guidelines by the end of the month. Borzi expects the new guidelines to be “a much more streamlined version” than the rules issued in January 2009. (see “New Labor Department 401(k) Advice Rules Set to Come Out Soon,” Investment News, February 2, 2010) Many in the administration and the industry felt those earlier rules allowed for too many potential conflicts-of-interest. She emphasized “The fiduciary duty of a plan sponsor under ERISA to prudently elect and monitor service providers with respect to the plan isn’t going to be waived on my watch.” (see “New 401(k) advice rules set to come out soon,” Pensions & Investments, February 2, 2010

Still, skepticism remains. Mark D. Mensack, AIFA®, AWMA®, Independent Fiduciary at Piedmont Investment Advisors feels, “401k investment advice as proposed is akin to speed dating with your doctor” since advice on selecting 401k investments represents just one aspect of an investor’s total financial picture.

Mr. Mensack, who also chairs a subcommittee of the Tri-State HR Management Association, echoes others when he suggests 401k plan participants might be better offer focusing on a Goal-Oriented Target (“GOT”) strategy (see “The Emperor Exposed,” Journal of Financial Planning, October 2005). By targeting returns, as opposed to retirement dates, a GOT strategy allows the investor to more completely understand the criteria needed to achieve their retirement objective.

“Right now the primary determining factor to a participant’s portfolio is their risk tolerance and time horizon,” says Mr. Mensack. He astutely points out neither factor is relevant “if the participant hasn’t saved enough in the past.” His concern is that any DOL guidelines would only encourage this “cookie-cutter” approach; therefore, doing the investor more harm than good.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Chad Griffeth
    Chad Griffeth February 09, 17:55

    Savings is something that can be automated, but will never ultimately be controlled by a plan sponsor, provider or advisor. What participants have done in the past when it comes to their retirement savings is not something anyone, including the participant, can control. What they can control is portfolio risk, their investment behavior and their contributions going forward. Having a “target return” approach dictate a portfolio’s asset allocation assumes the portfolio manager knows what the future holds. If a manager needs to double or triple someone’s risk to attain a desired return, then I fear that manager is playing with fire. Am I off base in how I understand this approach? Targeting return without taking heed of portfolio risk…a dangerous game.

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author February 09, 19:22

    Chad, thanks for commenting and making such an excellent point. What’s interesting is the CFA Institute does expect professionals to determine a return requirement as part of a client’s overall portfolio management (yes, they include risk and time horizon, among other things). But the point you bring up is akin to the S&L “gambling” scandal from the late 1980’s. That is, an investor has an incentive to increase risk exposure the farther behind he gets from the target return. This behavior works for both professionals and non-professionals. Maybe the ultimate answer lies in better defining risk in conjunction with focusing on target returns. Perhaps I’ll offer more on this in a future article.

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