Hire a Financial Advisor for Your 401(k) Plan?

Confused about what to invest in your 401(k) plan? Maybe a financial advisor can help.

I always thought that how to invest in my 401(k) is my sole responsibility. Even when sometimes it seems confusing in making the right combination (not to mention maximizing returns), I never thought about seeking professional assistance. First of all, I didn’t know whether or not I could; secondly, there’s noway my employer could offer any advice for whatever reason (conflict of interest? or being held accountable for the outcome of the advice?) So I was surprised when I learned this morning from an article in this month’s Kiplinger’s Personal Finance magzine that starting January 1, 2008, employees can indeed heir investment advisors for how to invest in their 401(k) plans.

Under the The Pension Protection Act of 2006, employees can obtain financial advice as long as the advice is either based on a computer model, or from an authorized advisor who’s commision is not tied to the investment products being recommended. On top of that,

… the qualified investment advisor can be paid out of the taxpayer’s retirement account (such as a 401k, IRA, or other plan) without incurring a penalty or tax for distribution from the plan.

Though I’m not going to heir anybody for my 401(k) investment any time soon, it’s nice to know that I have this choice.

Details about the next tax law can be found here, but the following is the portion that concerns 401(k) plan.

Individualized investment advice

Under a new prohibited transaction exemption, qualified “fiduciary advisers” are allowed to offer personally tailored professional investment advice to help employees manage their 401(k) plans, individual retirement accounts (IRAs), and other plans. The fiduciary adviser may be affiliated with the investment funds offered in a 401(k) plan but would have to meet disclosure, qualification, and other self-dealing safeguards. Further, if these conditions are met, employers or plan sponsors would not be obligated to monitor the specific advice given to any particular participant or beneficiary, though they would retain the responsibility to prudently select and monitor advice providers.

Individualized investment advice may be provided to 401(k) plan participants, without running afoul of the prohibited transaction rules, if fiduciary advisers provide investment advice under an “eligible investment advice arrangement.” Such an arrangement is one under which (1) portfolio recommendations are generated for a participant based on an unbiased computer model that has been certified and audited by an independent third party, or (2) fiduciary advisers provide their investment advice services by charging a flat fee that does not vary depending on the investment option chosen by the participant.

The Secretary of Labor, in consultation with the Secretary of the Treasury, has been directed to determine whether investment advice provided through a computer model would be feasible for individual retirement accounts and individual retirement annuities (IRAs), medical savings accounts (Archer MSAs), health savings accounts (HSAs), and education savings accounts (Coverdell ESAs). The DOL determination must be made by the end of 2007.

If the Secretary of Labor determines an appropriate model is available for such plans, a computer model, certified by the Secretary of Labor, will be an option for providing investment advice for such plans. If the Secretary determines that an appropriate model is not available, the Secretary has been directed to grant a prohibited transaction exemption that protects account holders from biased advice without requiring fee-leveling or a computer model. The exemption will sunset on the later of two years after an appropriate computer model becomes available, or three years after issuance of the exemption.

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