401(k) Investment Advice as what is really is

I had an interesting discussion with a financial advisor who was inquiring about in-service distributions, when a participant can withdraw their retirement savings while still working for the employer. The financial advisor wanted a provision where a participant could move their salary deferrals from a 401(k) plan into an individual retirement account at any time. I told him the rule, that any in-service distribution of salary deferrals prior to age 59 ½ (except for a hardship) is a disqualifying plan provision.

Our conversation then segued into the new 401(k) advice regulations, where financial advisors can finally provide investment advice. He lamented that no matter what type of education and advice you give, participants still will make poor investment decisions.

While studies have shown that advice does increase the participant’s annual return by 3% annually, I see the use of an investment advice for what it really is and what is should be sold as, liability protection.

ERISA Section 404(c) will shield the plan sponsor from liability when participants exercise the control of his or her investments within a retirement plan. The regulations require the plan sponsors to provide participants with enough information so that they can be informed in the investment decision making process. So I see the use of investment advice as the ability for a plan sponsor to minimize liability by getting better Section 404(c) protection.

The use of investment advice reminds me of some old political arguments. Investment advice will create an equality of opportunity for all plan participants to use investment advice to better manage their plan investments. However, it can never create equality of result because people will be people and some participants will still make poor investment decisions or not participate in the 401(k) salary deferrals portion.

You can lead a horse to water, but you can’t make him drink. You can lead a participant to sound financial advice, but you can’t make him use it.